Healthpeak Properties Inc (PEAK) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. morning, ladies and gentlemen. Welcome to the 1st quarter 2004 Health Care Property Investors conference call. My name is Patrick and I will be your coordinator today.

Initially all participants will be on listen-only with a question and answer session to follow at the end. If you do anticipate asking a question at this time, please key star followed by one.

If anyone requires assistance during the call, key star 0 and one of our operators will assist you. I would now like to hand the call over to Mr. Jay Flaherty, CEO. Please go ahead, sir.

Thanks. Good morning, and to those of out east coast, good afternoon.

At this time, I would like to ask my partner, Ed Henning, our Senior Vice President and General Counsel to read the forward-looking statements.

Some of the statements made during this conference call will contain forward-looking statements subject to risks and uncertainties which are described from time to time in press releases and SEC reports filed by the company.

Forward-looking statements reflect the company's good faith belief and best judgment based upon current information, but they are not guarantees of future performance.

Projections of earnings and FSO may not be updated until the next announcement of earnings, and events prior to the next announcement could render the expectations to fail. I'll turn the call back over to Jay.

Thanks, Ed. Let's get right to the results.

This morning, ACP reported FFO of 41 cents per share for the quarter ended March 31, 2004. This compares to 32 cents of FFO in the comparable period of a year ago, and 40 cents of FFO per share prior to impairment charges taken in Q1 of 2003.

For the full year 2004, HCP continues to expect FFO to range between $1.76-$1.81 per diluted share, excluding the impact, if any, of future impairment charges.

Digging into the numbers a little bit more, our affirmation of prior 2004 year guidance reflects a property acquisition and development volume for 2004 of approximately $400 million.

I would note that we have closed on approximately $175 million of acquisition and development commitments. So with one third of the year behind us, we are slightly ahead of the acquisition target necessary to achieve our 2004 guidance.

In addition, this guidance does include the dilutive impact of the following items. One, the February 28th, 2004 closing of the portfolio disposition for approximately $130 million of non-core medical office building and clinics.

Two, an impairment charge on an assisted living facility purchased during the quarter by a sub lessee, and, three, a charge relating to subleasing our former space as part of the company's relocation from Newport Beach to Long Beach. Taken together, these matters represent approximately 3.5 cents of FFO dilution for 2004.

In addition, relative to our 7 acute care hospitals leased to tenant recall that the first quarter of each year is the quarter in which SAB 101 adjustments are recognized. For the most recently completed quarter, this adjustment resulted in a reduction of $3.8 million in revenues. When compared to our fourth quarter of 2003, this reduction was $5.0 million in revenues.

Lastly, I would note that the achievement of the $400 million in property acquisition and development targets for 2004 requires 0 in the way of additional equity financing by HCP.

Let me now turn to my normal review of the impact of the capital markets, our portfolio and our people on HCP.

And let me start with the capital market impact. The recent selloff in the bond market has been substantial and swift.

About a year ago, we had prepared the company for an interest rate environment with a targeted yield on the 10-year treasury of 5%. Since that decision, we have financed just over $700 million in the capital markets for our own account and in addition, closed approximately $300 million in mortgage financing related to our Med cap joint venture acquisition just this past January.

This billion dollars in financing activity allowed us to refinance 3 separate issues of high cost preferred stock as well as term out debt incurred with our property acquisition activities.

In addition, last May, we launched and closed just this past February, a portfolio disposition of 17 non-core medical office buildings and clinics. This portfolio was acquired by a leveraged investor of medical office buildings.

I would note, for those of you that like to dig into the footnotes in our most recently filed 10-Q, you will note that the number of properties held for sale in discontinued operations at 3/31/03 was 50 properties. As of 3/31/04, the number of properties held in classified as discontinued operations had declined to 6.

Finally, as part of the company's relocation, we entered into a 10-year lease commitment of space vacated by Boeing at the Long Beach airport at attractive rates that will allow us to reduce the cost of our operating real estate needs by approximately 20%.

We believe it is very significant to note that none of these transactions could be executed in today's interest rate environment on the terms we're able to achieve.

Furthermore, at March 31, 2004, our $500 million bank line where the company does have interest rate exposure is now drawn down to only $90 million, and our debt to market capitalization adjusted for the current stock price is 25%, both of which provide HCP with ample financial wherewithal.

Now let me move to our portfolio.

The 2004 acquisition volume to date of approximately $175 million in acquisition and development commitments, compares to a negligible level at this time in the prior year.

It is interesting to note that the three transactions range from a $40 million acquisition of lab and office space located in San Diego, leased back to a biopharmaceutical company, to a $61 million acquisition which will occur in two separate traunches of recently constructed skilled nursing facilities located in the state of Virginia. To $67 million of newly developed medical office buildings located on the campus of HCA hospitals.

These four newly developed medical office buildings had originally been intended for acquisition by our joint venture with GE. We will now be retaining 100% of these properties going forward.

Of our four principal property sectors, I would observe the following comments.

One, medical office building, a number of you may have seen the New York Times article yesterday, which discussed the medical office facility environment and featured both our acquisition of Med cap and our management team at Med cap. This team continues to do a fantastic job for us and is ahead of budget.

In the MOB space, valuations continue to be white hot with significant competition from traditional and non-traditional investors.

In the hospital sector, this is a sector that has been under a fair amount of pressure recently, largely triggered by uninsured patient driven increases in bad debt expense.

In addition, our largest operator, Tenet, continues to be prominently featured in recent news head lines. Our seven Tenet hospitals represented 12% of our total revenues less operating expenses for the quarter. Tenet's recent challenges are reflected in the coverage ratios of our properties.

For the year ended 2003, the aggregate coverage ratio of our 7 Tenet hospitals was 2.9 times after management fees, compared with 5.1 times in 2002.

As an aside, for the years 1999, 2000, and 2001, the coverage ratios for these 7 hospitals were 4.1, 4.5, and 4.7 respectively.

In addition to the well detailed challenges that confronted Tenet during 2003, our 2003 coverage ratio of 2.9 times includes 3 years of prior year adjustments relating to certain Medicare settlements. If you exclude two of the three years of Medicare settlements, the 2003 cash flow coverage of 2.9 times would be adjusted to 3.2 times.

Thirdly, the assisted living and retirement center sector, this group continues to make slow, but steady progress as the coverage ratios have remained at 1.1 times after management fees in the most recently completed quarter.

Of particular note here, American Retirement Corp., which represented 11% of our total revenues for the quarter, continues to perform particularly well. Having just announced yesterday its second consecutive quarter of positive free cash flow, of particular note, their CCRC's occupancy is currently tracking at 94%.

Finally, skilled nursing facilities, the favorable reimbursement environment has resulted in our coverage ratios after management fees, increasing from 1.1 to 1.2 times in the most recent period.

Now let me address our people. HCP's professional team welcome the addition of Mark Wallace as Senior Vice President, Chief Financial Officer during the quarter. Mark brings a wealth of accounting, information technology and six sigma discipline to accounting and internal control processes.

Mark's addition to the seven-person management team of Paul Gallagher, Executive Vice President-Portfolio Strategy, Talya Nevo-Hacohen , Senior Vice President- Strategic Development and Treasurer, Ed Henning, Senior Vice President and General Counsel, Stephen R. Maulbetsch, Senior Vice President-Property Acquisitions and Dispositions, Chuck [Elcan], Executive Vice President-Medical Office Operations, and myself, completes the senior management team responsible for leading HCP forward in the period ahead.

During the quarter, HCP's former Executive Vice President and Chief Financial Officer filed a lawsuit against HCP, our Chairman Ken Roath, and myself. He resigned from HCP effective March 30th, 2004. The company did accrue an immaterial charge during the quarter related to this claim. The company believes his claims are without merit and we are contesting them. In light of the ongoing litigation, I will have no further comment on this matter.

I would make the following comments relative to the current property environment. As I stated in my letter to shareholders dated March 2004, the HCP management team had expected a significant increase in interest rates and had undertaken specific financing and property disposition activities in anticipation of this event. It is possible, possible not probable, that we are at an influction point with respect to property acquisition activity.

In my remarks during the two previous quarterly earnings calls, I have noted that the favorable reimbursement environment for health care facility operators was both good news and bad news for our sector.

Good news in the sense that the credit quality of our portfolio was improving. Bad news in the sense that many of these operators were able to finance themselves on terms that were more attractive than those available from the health care REIT industry.

In addition to cautioning on an impending increase in interest rates, our March letter to shareholders also warned that the federal and state deficit situation was likely to have a dampening effect on Medicare and Medicaid reimbursement levels in the years to come.

The baby boomer in the United States is aging.

The health care industry in the United States now represents 15% of gross domestic product and that percentage will go higher. Hospital expenditures alone have increased from $209 billion in 1988 to a projected $532 billion in 2005.

We are likely to be in a rising interest rate environment for the foreseeable future and the best near-term increases in reimbursement levels are behind us.

In light of this changing landscape, the management team at HCP is very mindful that the formula for continued success in the future may be different than the successful approaches of the past. Thank you for your time today, and now I'd be delighted to take any questions.

Yes, ladies and gentlemen, at this time, if you do have any questions or comments, please key star followed by one on your telephone keypad. Star two to withdraw your questions. Once again, star one for any questions or comments. Our first question today comes from AJ Rice with Merrill Lynch. Please go ahead.

Thanks. Hello, everyone. Couple questions, if I could.

First of all, Jay, maybe as you mentioned that you have $400 million target for acquisition and development volume in 2004. We look at what you've done thus far. Do you think the mix of asset class will stay pretty much the same as you fill out the rest of the year on acquisition development or will it likely move in a different direction?

I actually think, AJ, it will potentially expand to include other sectors. I, I think-- again, if you look at where we have expended the funds to date, it's in skilled nursing facilities. It's in medical office buildings, and it's in the lab pharma space. We do like the hospital space right now. You know, it's a little down.

It's under pressure because of this uninsured patient increase that's driving bad debt expenses, and then, you know, Tenet itself has a unique set of challenges, so that's a space where we're big believers in hospital so that's a space we're particularly intrigued with.

But I think you saw no representation in the retirement center or assisted living sector to date in the first four months of the year and it's possible that you could see us target some funds in that area as well.

So I think to answer your question, if anything, I would see as-- us expanding potentially into some of our other core sectors as the year goes forward.

Okay. You mentioned the four medical office buildings, that there was one at one point thought about putting those in the joint venture and you ended up taking them on to your books completely.

Can you just sort of walk us through what's the thinking and how that works, whether you decide to put them in one place versus the other?

Yeah. Again, these are four development properties that at the time we closed the Med cap acquisition in the fourth quarter of last year, there was a minimal amount of commitment at that point in time.

So the majority of the funds expended will occur during 2004, and as we spent more time with those properties. They-- they're fabulous properties.

Our management team down in Nashville has, who is doing a fantastic job, has convinced us that these are very high quality properties. The lease-up is ahead of expectation, which obviously helps when you're deployed there on some of the better campuses of HCA's hospital system. So that's, that's one, that's one issue.

With respect to how we see, you know, maybe going in that bucket, the development bucket versus the joint venture bucket, here again, we're guided by, you know, watching other successful management teams in some of the other regions, in particular, [Kimco], I think has, has done an interesting job in terms of playing the various buckets and allocating properties.

If you haven't read it, I would encourage everybody to read in the most recently available annual report, the letter to the shareholders written by the CEO of [Kimco], Milt Cooper. In particular, he talks about the development of a management business. I would just like to quote from that letter. He says when property prices rose to a point where investing became uneconomic, based on our cost to capital, we started on a program of coinvesting with other investors. While this business is people intensive and demanding, there is a reasonable profit margin in it, and it does lead to other opportunities and strengthens our relationship with their tenants. The information and economies of scale gathered from managing such a large portfolio are important to us for investing and enhancing our value for the future.

As we have gotten into the Med cap transaction and some of this was made reference to in yesterday's New York times article, both management team and the portfolio are performing above expectations and we feel we have a platform now that we can grow, and it may well be that we grow in different directions.

So I think Chuck was quoted in the New York Times article yesterday as saying that somewhere between $50-100 million of development property each year might be a number that we could look to. We think the returns on the development properties are particularly attractive.

Perhaps more attractive than returns on portfolios that are acquired sometimes in a more competitive, particularly in the environment we're in right now, and I guess our thought is that we would like to realize as much of the benefit for our shareholders as possible. So that's a little bit of the thought behind why we're doing that.

Okay. Interesting. Thanks a lot.

Thank you. Our next question today comes from Jordan Sadler with Smith Barney. Please go ahead, sir.

Good morning. Or afternoon. Just wanted to follow up on the guidance. I know you're affirming your previous guidance, but it now dilution of 3.5 cents or so, which is offset by the acquisitions you're now expecting, is that about right just to clarify?

Yeah, I think that's what I said, yes.

Okay. I guess I was just curious what the-- just I need some greater clarity on the actual acquisitions. Is the $40 million in lab space and the $61 million of acquisitions that closed in [two traunches] are those included in the $400 million? Of guidance that you gave? 400 of acquisitions and developments?

Absolutely. What I said was that we had-- the range we are affirming of $1.76-1.81 includes a total of approximately $400 million in acquisition of stabilized properties or development properties coming on line and where we sit today, we are done on about $175 million.

So we're roughly a third of the way through the year today and slightly ahead of a third of the way through the target of $400 million.

Right, but that 175, you say you're done with that. Is that comprised of the 40,the 61 and the 67?

Yes, sir.

Okay. So I thought you just said that the acquisition-- the $61 million were going to close in two traunches.

Oh, yes, yes. Excuse me. The $61 million, $46 million are closed and the other $16 million are scheduled to close right at the end of the second quarter.

Okay. Those are [Synapses] right?-

Right. Located in the state of Virginia, a CON state, the chairman of our investment committee who happens to be the chairman of our company indicated as we got the investment committee's approval for that transaction about two weeks ago, that he felt this was the highest quality portfolio of skilled nursing facilities the company had ever acquired. They are recently constructed, about three years old and the payer mix, felt that it was very attractive to us.

That's reflected by the cap rate because at 93 level, it seems on the low end, would you say that's sort of right, at about the low end?

I think that's reasonable. We have, we have a couple of points of annual escalators in there and we love the properties.

Can you give us the cap rate on the sales you did during the quarter? Was there one?

Yeah, it's actually in two traunches. We had some-- if you take a look at just the medical office building portfolio, because recall we had some clinics in there, some of which were, you know, had some issues associated with them.

If you take a look at the cap rate on the medical/office buildings of which there were a total of 7, the cap rate would have been kind of in the mid nines.

Okay, and what portion of the 127 was that?

Oh, that was-- those 7 MOBs represented about $105 million of the $128 million of total proceeds. So that was the vast majority. I would say that was about 80%.

In addition as part of that transaction, we had some secured debt on that portfolio. The secured debt was $31.3 million and that was at an interest rate of 7.67%. So that went away as well as part of the transaction. That number, by the way, is included in the $127.5 million total transaction value.

So the other $20- 25 million of assets were vacant properties and the like?

Yeah, they were-- again, the whole portfolio was, you know, an economically viable portfolio, obviously, but it just didn't-- particularly if you take a look at some of the quality of properties we've been able to bring into the company in the last 12 months, they didn't really kind of fit our strategic footprint.

They were absolutely categorized as non-core, not on the campus of any hospitals, which is one of our, you know, our pet bug-a-boos if you take a look at medical office buildings. In any event, it seems like it was a good move. The lease rate, by the way, on the, on the 7 skilled nursing facilities is 9.3% and the cap rate there is 14.5.

That's on a straight line basis?

On EBITDAR.

The 14.5 is on EBITDAR?

Yes, sir.

Okay. And then I just wanted a little bit of clarity on one of your final comments about the inflection point, I guess in the current environment. Does that mean that you guys will be looking less at doing sort of portfolio transactions, or that there are less opportunities as it seems possibly right now?

Gee, I wouldn't conclude that.

Or more? I mean--

I think, you know, I think-- again, direct you back to some of the last earnings calls. I mean if you were a treasurer of a leading operator of health care facilities in the last 6-9 months, it frankly, and you were charged with the task of financing your management team's acquisition or development pipeline, it just didn't get any better than the last couple of quarters. I mean you had interest rates at all time lows.

You had, you had the health care REIT sector reasonably well financed, trying to put money out. You had non-traditional health care real estate investors rotating into the health care sector. I mean it was a lot of fun to be a treasurer at a leading health care facility operator in the last several quarters. Not unlike I think some of the health care REITs to their credit, they understood what the industry, interest rate environment we were in and they got a lot of that financing done.

So right now my point is you have had-- you saw the 10-year treasury today hit a two-year high. You've got another job report coming out tomorrow.

I think where we go in the next several quarters, you know, you'll probably need a quarter or two for all this to settle down and for new expectations to settle in, but I, I would say that our company in particular is relatively advantaged in an increasing interest rate environment.

We've got multiple ways to tap the capital markets. You can see where we are with respect to our financial wherewithal right now. It's never been better, quite frankly.

A rising interest rate environment will, should allow us to put out capital going forward in the form of property acquisitions at higher levels than perhaps we've been able to achieve for the past couple of quarters, so we find the period of time we're in right now very intriguing.

Okay. Thank you.

Thank you. Our next question today comes from Jerry Doctrow with Legg Mason. Please go ahead, sir.

Hi. Couple question-- things. Just one or two details on yields. What was the yield on the lab space that you bought?

It was 9%, Jerry, and again, we've got, got some nice escalators there as well.

Okay.

By the way, we've got an agreement at least for the time being to not disclose the name of that operator, but that was, you know, again a negotiated transaction.

It's fabulous real estate and for those of you that are familiar with the Sorrento Mesa Torrey Pines area of northern San Diego county, it's one of the three largest centers for lab and pharma space in the United States, and it's a company whose fortunes have, since we closed the transaction, have materially improved just one data point, its stock price alone has quadrupled since we closed the transaction.

Great. How about the-- what do you expect to get from the yields from the development stuff you're bringing on board? Are we talking north of 10 here?

I think those four properties ought to be in a range of 10-10.5, Jerry.

Okay. And then--

That really sells short, you know, some of the story with respect to those four particular properties.

One in particular is on this new hospital that opened up in Denver, it's the fastest opening hospital in the HCA system and the thing is just knocking the cover off the ball. It's really good stuff.

And then just-- one or two other things. There seemed to be a big drop in mortgage interest income like from about $14 million down to $9 million something, you know, from last quarter to this quarter.

I was trying to understand what was going on there because I didn't see anything that was, you know, that you got rid of mortgages or whatever.

I was just wondering if there was some kind of one time item and what the run rate is going to be?

remember in the fourth quarter we had a reversal of a tax accrual relating to the merger of American Health Properties back in 1999.

Okay.

That was driving that. That I think goes to the specifics of your question where it kind of had a big decline from Q4-Q1. As a general matter, by the way, that number was about $3 million, Jerry.

Okay.

As a general matter, recognize that, you know, our mortgage portfolio is down substantially from where it was at this time last year in large part because of us effectively converting a good chunk of that American Retirement Corp. loan into those four lease backs we closed in the third quarter of last year.

Okay. Okay. Yeah, and-- but-- okay. I'll come back to you off line. I didn't see quite through the swing from fourth to first, but that's fine.

And any other-- in terms of keeping stuff on balance sheet, you didn't have any obligation from GE to sort of leave those assets in the joint venture, you didn't have a commitment to do that?

No, we had taken those four properties down ourselves and, remember, we had three components of that transaction.

We had the component which was the largest, represented by 80% of the total purchase price of $575 million, went into the GE joint venture, so that was $460 million worth.

Then we had a component that was just under $50 million and that was the comprised of the down REIT that we set up to represent the interests on the part of the owners and some of the management team. And then the remainder was this piece which was small at the time, but obviously as we continue to fund the construction, so that's the way that works.

Okay.

I think with respect to the GE joint venture going forward, you should assume that we'll probably use that vehicle much the way that you know, Mr. Cooper there in the-- as I read from the shareholders letter used.

It's an attractive-- it's a vehicle that we can take down portfolios in size. We think that advantages us, maybe not as much of an advantage as it did a year or two ago before it seems like a lot of the world woke up to the economics of medical office buildings. But I think that's how you would apply that joint venture going forward.

Just to maybe restate what I heard do you in terms of acquisition strategy, it sounds like you're shifting to be a little bit more opportunistic looking at real hospital assets as posed to just MOBs, and maybe getting, relying a little less on sort of these competitive bake offs particularly coming out of the not for profit systems, and also relying, focusing more on development than have you in the past. Is that--

Well, let me-- you know, I think you know our strong preference to stay away from auction environments. I think it's interesting to look at our company over a period of couple quarters. If you look at the last four quarters, we've closed five property transactions. Four were acquisitions. One was a disposition.

The four acquisitions we closed were the American Retirement Corp. deal in September, the Med cap deal in October, the biopharmaceutical acquisition which closed in January and the portfolio of [sniffs] in the state of Virginia we just closed on. All four of those were either negotiated or in one case, a very limited auction sort of environment.

Now, take a look at the disposition we did. We, we went out to-- think initially we went out to 56 folks and we were able to have a competitive environment for that.

So that, that does drive our thinking, not to say that we, we're going to have a moratorium on at this time-- participating, but wherever we can-- our value with the depth of the managing team with the real estate expertise, the tax expertise, the legal, the structuring, the track record they've got, our real value add is to go in to a situation, bigger the better, and try to customize a result for the folks on the other side of the table and to date, we have found that our ability to customize some of these solutions is recognized on the part of the folks on the other side of the table and, you know, so far we like that approach.

Okay. All right. Thanks.

Yep.

Our next question today comes from Robert Mains with Advest. Please go ahead.

Thanks. Good afternoon. Mass question first, what was the interest add back that we need to calculate the EPS and FFO?

I'm sorry, the interest add back to--

To the, to get the right numerator for calculating EPS?

I'm sorry. I'm not sure I understand your question.

Hang on. I'll come back to it. I got a spreadsheet I can pull up.

Second, hospital acquisitions, haven't seen any of those in a while. What kind of cap rates are you seeing on the market? What's the range?

Well, it's kind of a tale of two cities. You got the hospitals that got real issues related to them. Then you've got economically viable hospitals.

Hospitals, frankly, the hospitals that are in the second category, they just don't trade very often.

The last real example in any sort of size, was the 14 property disposition that Tenet did last year and ended up being bought three separate operators in strategic transactions.

We are very fortunate in this company, given the direction of my predecessor, Mr. Roath, that we've got 7 acute care-- we have a number of hospitals, 7 of are which with Tenet and those are great properties. We'd like to get more properties like that and they just don't come around terribly often. When they come up, you kind of-- if they come up, you need to kind of be ready to take them down.

As you point out, we haven't really done that since 1999 when we acquired 6 of them as part of the American Health Property merger, but were that situation to present itself again, particularly right now, with this sector, and we tend to like to gravitate where the sectors where there could be some issues at a particular point in time, with the bad debt expense, kind of rippling through this hospital sector, from our standpoint, this is an interesting time to be allocating property acquisition dollars to that space.

Are you seeing very much that's out in the market that is a type of asset you would be looking for?

No. Okay.

The [sniffs] that you acquired, is that an operator you can disclose?

I think-- not at the present time. I think you should expect us, maybe I think the way to do it is after we close the second traunch, which would be I guess on this call, a quarter out, we would be delighted to take you through that, but for now, we would assume not to disclose that.

Okay. Thanks.

Thank you.

Our next question today comes from Rich Anderson with Maxcor Financial. Please go ahead, sir.

Yeah, thanks. Back to the medical office development properties just to clarify, did GE have to sign off on that not being in the joint venture or is that entirely your decision?

That was our decision. Again, they weren't part of the GE joint venture at the time. I thought I took you through that.

Yeah.

-- transaction down, the GE joint venture received $460 million of properties. Those other four were always on our balance sheet and we-- the commitments to complete those were HCP's.

I, I understand, I looked back and I notice I was wondering if GE had a desire to have a piece of those $67 million at the beginning when they first announced.

I, I think, I think what I would say to that is that GE has historically has not done development properties.

If you take a look at some of the other ventures in the REIT sector, including others, you see a strong preference for up and running, stabilized cash flow generating properties that they can put a reasonable amount of leverage against, so development is a little, a little outside the box.

I, I think it's fair to say, given the results to date and again, only 6 months into this, of that joint venture, they-- they're increasingly getting comfortable with not only that transaction, but also the possibility of doing development.

It may well be the case, Rich, that down the road, development properties that are developed on our balance sheet, they may find their way into, into the joint venture in exchange for some additional sort of development fee or economic arrangement like that, but for now, we like each property a lot and we will complete that and intend to own them going forward.

I was looking at your disclosure, first of all, on the topic of disclosure, did I not get a full press release or did you not include a lease expiration schedule and debt maturity schedule this time?

That is not in the press release. You will see that in the 10-Q though.

Okay. In terms the disclosure and looking at the investment per square foot for the medical office specifically in-house in the HCP house, $139 a foot in the joint venture, $88 a foot, is there any reason why there is sort of a, you know, maybe a lower valued type of medical office building in the JV versus what you guys have in-house?

No, I think if you go back-- I direct you back to both the special call at the time we had at the time we announced the Med cap acquisition as well as the, the next call that came after that, there was an awful lot of discussion on that earnings call.

It got down to very specifics about square foot for the various portfolios. I think a lot of that goes to location of the various properties and things like that.

Okay.

There was-- I think there is a lot of discussion on that particular topic.

Any FIN 46 issues with the JV?

With the GE joint venture?

Yes.

Absolutely not.

Okay. Turning to the, the med financing with ARC, $76 million outstanding. What are you accruing that at these days?

We're accruing that, again, at 16.5. We adjusted that, Rich, at the time we converted the transaction on September 17th. I think we had been accruing it at about 13. Current pay, there was 9. As part of that transaction--

13.5.

13.25, I believe. As part of that transaction, the cash pay increased from 9 to 9.5 and we bumped the accrual sfr 13.25 to 16.5, recall that economic transaction has cut at 19.5.

Right, and that's still subject to repayment 2005, the $76 million?

There were no changes with respect to the remaining [messman] as part of the September 17th transaction.

Last question is on your discussion about protecting yourself against rising interest rates, and the expectation to do hopefully $400 million this year and the availability on your line related to that.

So I guess what you'll do is you'll sort of use the line initially and then term that out, but when you do term out those investments, won't you then be exposed to a rising interest rate environment down the road?

Yeah, I think what I said was with respect to our current exposure to a rising interest rate environment, I think we're feeling pretty good about the fact we've only got $90 million drawn down on our line.

Obviously to the extent we were to do more property acquisitions, most notably going from hopefully the $175 million to the $400 million or even higher, that's going to require capital.

Although I think I would observe that I think our ability to-- while we undoubtedly will have to pay a higher cost of money on that increase going forward, our expectation would be that we would be getting that back hopefully and then some, with respect to the terms on which we put that new money out.

Okay. Got it.

Thanks.

Thanks very much.

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, or make a comment, please key star followed by one on your telephone keypad. Our next question today comes from Robert Belzer with Prudential Equity group. Please go ahead, sir.

Yes, a few questions today. First you showed a positive same center comparison of 2.1% in the triple net lease portfolio. Can you detail what drove that comparison?

Well, you got-- I don't think I've got the specifics, Robert, right now. You got a couple of things going on there.

Realize that for starters, we've cleared out some of the properties that would have been in the prior year numbers. These are the properties that were held for sale.

There has been an enormous accomplishment by moving those discontinued operations which were a-- included in all those numbers, 50 down to 6. So part of this is addition by subtraction.

Obviously you should assume that the properties we're moving off much like the properties that were in that property disposition we closed in February while they may be economically viable properties, they are not necessarily, got the growth profile that we're trying to increasingly bring in to the company.

So part of it is addition by subtraction. Then part testify is just resets for the contractual increases. The reimbursement environment for both Medicare and Medicaid. As we have noted, has been good.

I would also caution everybody that while I don't think it's going to go down any time soon, I think we've seen the best of these increases for some period of time.

Okay. My next question relates to your recent acquisitions, Jay. Is there a straight line rent component in the acquisitions you have closed?

You mean for the transaction we've just closed this year?

Correct.

There is a-- with respect to the, with respect to the biopharmaceutical transaction, there is a very small component of the straight line there, but it's nothing that would, you know, make it to the level of materiality.

Then the same is true for nursing homes?

Yes, yes.

Could you indicate the rental coverage on the nursing homes?

Yeah. It's 1.5 and that's after management fee. I think that goes to how pleased we are with this portfolio of skilled nursing facilities and you can obviously see that's tracking significantly above the coverage levels for our overall sniff portfolio. It's a great management team. We're very pleased with that transaction.

I assume 40-50 basis point management fee would be appropriate?

We always tend to use 50 basis points.

Okay. Great. Then just a question on the medical office buildings that you will be wholly owning. Did GE have the right to acquire those facilities for the joint venture?

No. No.

They did not, okay.

Historically they have not done development. As part of that-- we took that down 100% on our balance sheet. There has been no change in any of that. The only change was that originally the intent was to have those upon stabilization in the third quarter I think this year have them migrate their way into the joint venture.

But there is no exclusivity there and the joint venture in particular did not allow for development. So that's why-- where we are on that. Again, we feel very good about that.

Okay. Then my last couple of questions are on your current guidance. That would include net investment volume of $270 million, is that a correct assumption?

$270 million, well, I think what we said was we got hopefully $400 million is what we are-- hopefully that's what I communicated, 400. We've done about $175 million, so I think that's a net of $225 million still to go.

I-- when I say that, I mean net of disposition. In other words, net of the medical office sales.

Yeah. I think you should assume that the lion's share of the property disposition for 2004 is behind us at this point.

Again, I would point you to how we have worked down the assets held for sale in the last 12 months and point you to the MOP disposition, not that we won't do more property sales, but I think the bulk of that is behind us at this point. The $225 million necessary-- maybe this is the answer. The $225 million necessary to get to the $400 million, not only is it a net number, but likely to be the gross number as well.

Okay. Then my final question with regard to the 3.5 cent charge, could you break, I mean the 3.5 cent dilution to your current guidance, could you break out the amount of that which is, would be the charge for the corporate relocation and also the impairment.

Yeah, well, I tell you of the 3.5 cents, the majority of that is the disposition of the portfolio. Again, I think that was 2.5 cents. Again, that really gets into just kind of mismatch of reinvestment rates and things like that, some of that is more short-term oriented. So the other two, the impairment and the charge aggregated a penny.

Again, the way, it's the way the accounting conventions work, which is fine, but the-- on the relocation, what we did there, we were very fortunate, we were able to identify a tenant in our building in Newport Beach to come in and take our space. So what we did there was we subleased that space to an existing tenant and then the rate on which we went into the old Boeing space in Long Beach is about the same. So net-net, that's a push on the economic side.

But we had just over two years remaining on our lease in Newport Beach and when we cycle through that, you'll see a dramatic drop off in terms of the cost per square foot, round numbers we were paying about $2.50 a square foot in Newport Beach and we're into this Long Beach space at like $1.80.

For those of you who don't know, it's fair to say Long Beach is a little more low profile location than Newport Beach. It's the home of the port of Los Angeles and Jet Blue, the airline, right out at the airport. So it's actually spaced, very, very efficient and in addition, very, very economically attractive and to that point, we were able to lock in very attractive costs here for the next 10 years.

Okay. Good. That's all my questions today. Thanks.

Thank you.

Thank you. Our next question today comes from Carey Callaghan with Goldman Sachs. Please go ahead.

Yeah, just a quick follow-up on the $67 million for the MOBs. The 10--10.5% you've quoted, is that a stabilized yield and when does stabilization happen and what kind of occupancy does that assume?

That's return on cost, Carey, and those properties come on line at various points in time, but they are all scheduled to come on line in either the third quarter of this year or actually by the third quarter of this year. And just to give you some flavor, you know, the preleasing at some of these is like 90%, 70%, so I think that speaks to the attractiveness of these properties.

So they will start achieving that kind of return maybe in the fourth quarter or early 2005?

Yes.

Okay. That's it. My other questions have been answered. Thanks.

Thank you. Our next question today comes from Scott O'Shea with Deutsche Bank. Please go ahead, sir.

Yes, good morning. Question on the Tenet leases, the decline in the lease coverage rate from I think a peek of 5.1 you mentioned down to a proforma 3.2, can you split the decrease there between the roll off and the out wire payments and just how much bad debt has impacted the coverage?

We're, we're not going-- we're not prepared to disclose that today.

Okay.

I would say the following, Scott. I would say if you go back and look at the five-year trend of those coverages, I think you can see.

It would be interesting to chart the coverages on those five properties, then overlay, you know, the top line same-store revenues for the Tenet hospital chain, I bet you they track or maybe they are a quarter lagging, but I bet there is an awful high correlation there with respect to the Medicare outlier payments that have been obviously well chronicled.

I will say, Scott that, in 2003, in addition to having multiple years of Medicare settlements in those numbers, in the fourth quarter in particular, Scott, you had, a not insignificant amount of bad debt expense that has been symptomatic of the entire hospital industry rolling through those sorts of numbers, so that does reflect that.

Okay. Looking to 2004 and maybe just the current performance of the hospitals, do you think the coverage is going to come in below the 3.2 number? Are you still seeing pressure on that coverage?

Well, you know, I direct you to-- we actually are not in receipt yet. Our numbers-- recall that our numbers trail a quarter. So the most recent set of numbers we have for these 7 properties are for the period ended 12/31/03. So we are not yet in the possession of any '04 information.

I would direct to you a lot of the, you know, the comments that were made in the last couple of days since they've announced their results. In particular, I direct everybody to the sentence that was intended Tenet's SEC filing, I'm quoting directly, we do not anticipate significant operating performance or margin improvement to be achievable in 2004 and potentially in 2005 because many challenges will require time to work through.

Okay. Looking at the current coverage ratios, if you were-- going to underwrite this portfolio from scratch today, what kind of going in coverage would you want to see, you know, just on a pure market basis?

Are we talking-- Scott, are we talking about the Tenet portfolio specifically?

Exactly. If you were looking at kind of a, a new market rate for these, what kind of coverage would that kind of--

I think we would be in the 2-3 sort of zone.

Okay. So the leases would still be at market, potentially a little bit above at this point?

Oh, absolutely.

Okay.

As you recall, these are very mature leases and please recall that of these 7 hospitals, 6 of them are viewed as absolute core to the Tenet hospital chain. The one that's not is really-- it's got-- it's not because it's got unique issues. This is the [Tarzana] property that's got the seismic issue. We're-- were it not for that, I think we've talked previously about the location of that particular property. That's a property that we are very comfortable with in terms of ownership stake in that company.

Okay.

That property.

Okay. That's helpful. Thank you.

Thank you. Our next question today is a follow-up from Jerry with Legg Mason. Please go ahead, sir.

Yeah, just two quick things. What's the drip running these days? Are you adding much out that have?

Well, Jerry, as we had expected, that has fallen off the cliff. Data point, we did $150 million in 2003 on the drip. Right now, we are tracking an annual run rate of 25. So you can see as we had predicted with some of the changes we made, right at the end of the fourth quarter, you know, it's gone from 150 to 25 on an annual run rate.

Okay, and where do these charges actually show up, the impairment charges you're talking about in-- some in this quarter?

Yeah, there's just one. It'a related to an assisted living property that was leased to a sub lessee and the sub lessee had a purchase option which they exercised during the quarter. If you go to the, the detail under discontinued operations, Jerry, you will see a line that says gain/loss and impairments on real estate disposition.

Okay. Okay.

You'll actually see it in there.

Okay. Okay. Thanks.

Yep.

Thank you. Our next question today comes from Phillip Martin with Stifel Nicolaus. Please go ahead, sir.

Good morning, gentlemen. A question on lab space, and that sector or asset class within the health care market, what types of opportunities do you see there and what initial going end caps returns would you expect to see there?

Well, that's a little all over the map. We have two chunks of real estate in that sector. It doesn't-- it's not of a size that we consider parts of our four primary operating sectors. We have some properties that are triple net, located on the campus of University of Utah, which are performing very well, very well.

Now we've got this property that we bought in northern San Diego county. You know, here again, you got to be a little careful. If you go around the country, you can look at pockets of where this sort of activity is concentrated.

In general, in those pockets, you're going to have better operating environment than in places where, you know, maybe it was because of some state sponsored initiative trying to get some biotechnology investment, what have you, and it wasn't, you know, it wasn't clustered around a large research effort or maybe a biotechnology company, but as a general matter, we're looking at cap rates that are probably in the range of 8.5 -9.5 depending on the build out and the credit of the underlying tenant.

Okay. Okay. And what percentage of-- I mean right now as you look at your pipeline and the remainder of this $225 million in new investments, you know, is that going to be-- with lab space be considered a pretty large focus for you or minimal at this point, or it's to be determined?

The latter.

Okay. Okay. Thank you.

It would seem, Mr. Flaherty, that there are no further questions in the queue, so I will pass the call back to you.

Ladies and gentlemen, thank you. We very much appreciate your time and your interest in Health Care Property Investors and we look forward to talking to you again after the second quarter. Thank you, everybody.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. You may now disconnect.