Healthpeak Properties Inc (PEAK) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Health Care Property Investors financial results conference call. By name is David and I will be your operator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I'd like to now turn the presentation over to your host for today's call, Laura Catalino, Assistant Treasurer and Director of Investor Relations. Please go ahead, ma'am.

Thank you and good morning. I'm here with Jay Flaherty, our Chief Executive Officer, and Mark Wallace, our Chief Financial Officer. Some of the statements made during this call will contain forward-looking statements subject to risks and uncertainties which are described from time to time in our news releases and SEC filings. 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 FFO may not be updated until the next announcement of earnings, and events prior to the next announcement could render the expectations to fail.

Now, I'll turn the call over to Jay Flaherty.

Thank you, Laura, and good morning and good afternoon everyone. On behalf of the management team at HCP, welcome to our mid-year report. It has been 11 weeks since we've spoke with you last, and we've had a productive couple of months. I will review activity within HCP's real estate portfolio, as well as the Company's initiatives with respect to its balance sheet and people resources. HCP Senior Vice President and Chief Financial Officer, Mark Wallace, will then take you to a report on HCP's second-quarter results. I will then finish up with comments on the current environment before opening the session up to questions.

Let me begin. On June 1st, we closed the second tranche of a total of 9 skilled nursing homes located in the State of Virginia operated by Tandem. The total portfolio amounted to $63 million with an initial lease rate of 9.3 percent and annual escalators of 2 percent. The portfolio was mass released and covers its rent by a ratio of 1.53 to 1. We are particularly impressed with the quality of Tandem's management team, the portfolio's young age, and its payor mix. On June 10th, we closed a $22 million purchase of an MOB located in Las Vegas, Nevada. This MOB acquisition was taken down on HCP's balance sheet at a cap rate of 9.7 percent and is 100 percent occupied. On July 15th, HCP converted the remaining $83 million portion of its mezzanine loan investment in American Retirement Corp, ARC, into 10-year sale leasebacks on 3 continuing care retirement communities and one assisted-living facility for a total transaction value of $113 million. The sale leasebacks have a 9 percent initial lease rate, are master leased, and have a participation in future topline growth of the properties, approximated at just over 3 percent annually. This transaction is also notable in that it closes one chapter of our ARC relationship. I will have more to say on that later in the call.

Yesterday, we agreed to acquire 11 assisted-living facilities in a transaction with Emeritus, whereby we converted a $17 million mezzanine loan into ownership in the form of 15-year sale leasebacks. This portfolio has a 9.25 percent initial lease rate with CPI escalators up to 3 percent annually. In addition, we have modified our existing investment in Emeritus, so as to have all of our 36 properties, including the 11 properties we agreed on yesterday, into a master lease. This master lease is presently covering its rents with a 1.10 coverage ratio and has an overall occupancy of 86 percent. We will assume $56 million of debt as part of this transaction, which we anticipate retiring before year end.

At HCP's Board meeting last Thursday, the Company's directors approved increasing our medical office building joint venture with the General Electric Corporation from its initial $600 million size to $1.1 billion. Recall that in June of last year, we had announced the creation of the joint venture during NAREIT, and had indicated that we anticipated deploying that capital over a 3-year time horizon. With the transaction closed to date and the forward-looking pipeline, we anticipate achieving this goal in approximately 15 months, significantly ahead of our original time horizon.

Let me now turn to our balance sheet. After giving effect to property transactions through July, our bank line will be drawn to approximately $135 million. The mini rally in the bond market allowed us to take down $87 million of term financing via our medium-term note program during the last 45 days. A 10-year fixed piece was done at 6 percent while a 10-year floater was priced at 90 basis points over LIBOR. Our DRIP program continues to function at modest levels following the changes we made at the end of last year. Currently, the DRIP program is tracking at an annual run rate of approximately $20 million.

Our bank line is set to expire in October 2005 and, therefore, becomes a current obligation in October of this year. Last week our Board authorized the Company to launch a new bank deal under the leadership of our Senior Vice President, Strategic Development and Treasurer, Talya Nevo-Hacohen. I would anticipate Talya being in a position to provide a report to you as to our progress on this financing at our next quarterly report.

People. The big news here is that there is not much news. The second quarter of this year was the first quarter during which there were no changes in the senior management team since my arrival at the Company. As the senior management team settles in with their various responsibilities and rounds out their respective teams, we are beginning to reap the benefit of a complementary set of health care, real estate and technical professionals working together. This effort will receive a further catalyst when we switch over the Company's technology infrastructure to the MRI platform over the next 2 months.

With that, let me now turn our program over to our Senior Vice President, Chief Financial Officer, Mark Wallace.

Thanks, Jay, and good morning. Today we reported FFO per share for the second quarter of 44 cents compared to 33 cents for the same period in 2003. On a dollar basis, FFO was 58 million compared to 40 million last year. However, last year included a $12 million preferred stock redemption charge. As you know, we now include the impact of impairment charges in FFO for comparability. Excluding impairment charges, FFO this quarter was 45 cents per diluted share. We made acquisitions totaling 133 million in the first half of this year, including 85 million during the second quarter. About one-half of our year-to-date acquisitions were in the skilled nursing sector, with 31 percent in lab pharma and the balance in medical office buildings.

Our quarter-over-quarter results were favorably impacted by our investment activities, as well as 4 medical office building development properties that came online in the second quarter. While these properties are currently at occupancies between 50 percent and 90 percent and slightly reduced our MOB occupancy rate for the second quarter, all of these properties are under operations and support agreements with affiliates of HCA and contributed 1.1 million to FFO in the second quarter. Interest and other income increased 1.3 million due to asset management fees, as well as additional income recognized in connection with the payoff of certain notes. For the second quarter we recognized equity in earnings and asset management fees of 1.6 million related to the GE joint venture.

You'll recall that sequential quarterly comparisons are difficult due to the accounting for additional or contingent rents under SAB 101, principally related to our Tenet facilities. Relative to the first quarter of 2004, rental income increased approximately 6 million as a result of the SAB 101 effect. On the expense side, G&A cost increases reflect relocation costs associated with the move from our Newport Beach office to Long Beach of about $700,000, income taxes related to activities in our taxable REIT subsidiary, and higher costs associated with our MRI system conversion and other initiatives. You'll also notice that weighted average common shares used in diluted FFO increased 5.4 million during the quarter. This reflects the assumed conversion of operating partnership units, but had an insignificant impact on FFO per share due to the add-back of related dividends.

During the second quarter we incurred impairment charges aggregating 2.5 million, 1.2 million of which is reported in continuing operations. This amount relates to a flood-damaged skilled nursing facility in Indiana and represents the excess of our net book value over insurance and expected sales proceeds. The balance relates to revised estimated selling prices on properties previously held for sale and, therefore, is reported in discontinued operations. At quarter-end, we had 7 properties held for sale that are either under contract or actively being marketed. Our balance sheet at quarter-end includes total debt of 1.3 billion, only 15 percent of which is at floating rates. Under our dividend reinvestment program, we issued 200,000 shares in the second quarter, bringing the total for the first half to over 400,000 shares or about $11 million. Looking forward, we continue to expect investments of about 400 million this year. Additionally, as a result of the ARC transaction, we expect to be able to recognize in the third quarter about 4.5 million of interest income related to the ARC mezzanine debt that was previously reserved.

With those comments, I'd offer that we expect net income per diluted share for the full year to range between $1.14 to $1.17. At that level, FFO per share should be between $1.74 and $1.79. Excluding impairment charges, FFO is expected to range between $1.76 and $1.81. With that, I will turn the call back over to Jay.

Thanks, Mark. Earlier I mentioned the ARC transaction was notable for one additional reason. Let me now elaborate. In October 2002, HCP invested 125 million in the form of a mezzanine loan obligation secured by 9 communities operated by Nashville-based ARC. This was part of an overall recapitalization of the company. The negotiated rate on the mezzanine loan was 19.5 percent; the current pay portion was 9.5 percent; and HCP initially accrued interest at the rate of 13.5 percent. That differential between the contractual rate and the current pay rate raised discussion and questions as to the ultimate realization of the 19.5 percent return. Between the partial conversion of the mezzanine investment last September and the final conversion of this month, we are now in a position to review the investment with the benefit of 20/20 hindsight.

All totaled, 100 percent of the original loan investment was recouped, and we realized the entire 19.5 percent return for the period of time the loan was outstanding. More importantly, we now own, via 10-year sale leasebacks, 15 different communities that have lease rates of between 9 and 9.5 percent, with annual escalators or the equivalent of between 2.75 and 3.25 percent. The payor mix in these communities exceeds 95 percent private pay and Medicare, and the average occupancy for these communities is 94 percent. In addition, many of these communities have significant waiting lists.

Now, that's not the real story of what occurred here. Since October of 2002, Bill Sheriff and his team at American Retirement Corp have knocked the cover off the ball in operating this company. Bill and his team are first-class partners, and we have the highest regard for this relationship. American Retirement Corp now represents 9.5 percent of HCP's revenues, placing them second to Tenet's 14 percent of revenues as our 2 largest partners. Since October 2002, Bill Sheriff and his team have increased ARC's stock price more than threefold.

Let me now spend a moment as to the overall health of the operators in our real estate portfolio. As a point of reference, I pulled out HCP's 10-Q from the first quarter of 2003, just over one-year-old at this point. In that filing under a section entitled Selected Operators, which was 3 pages long, there was a discussion of 5 specific operators; Centennial, Sun, Tenet, HealthSouth, and American Retirement Corp. Fast forward to today's earnings release. There is no such disclosure. Here is why. One, the skilled nursing sector continues to benefit from favorable Medicaid and Medicare reimbursement metrics. While the related state and federal deficit situations are rather daunting, it is unlikely that you will see much change in this environment before October 2005, the start of the 2005-2006 fiscal year for the government.

Our skilled nursing facility portfolio is covering its rents at 1.3 times after management fee, and our occupancy is 81 percent, up from 80 percent in the prior quarter. The Centennial and Sun portfolios are resolved and behind us at this point. Two, the assisted-living and CCRC sector of our portfolio -- by the way, please note that this changes from our prior designation of assisted and retirement living -- also continues its slow and steady improvement as to fill-up. Importantly, we have not seen any evidence of significant new development. Our assisted living and CCRC portfolio covers its rents at 1.17 to 1, and the occupancy kicked up to 82 percent from 80 percent in the prior quarter.

Three, the hospital sector continues to encounter a challenging environment, most notably the impact of the large uninsured population in this country, which is creating enormous bad debt expenses on the books of the hospital operators. Notwithstanding this, HealthSouth's fortunes have improved significantly with the arrival of a new management team in the persons of Jay Grinney and Mike Snow from HCA and the successful resolution of their debt covenant obligations. While Tenet continues to deal with a number of company-specific issues, Tenet recently demonstrated its continued liquidity by raising $1 billion in the capital markets. Our portfolio of 9 HealthSouth in-patient rehabilitation hospitals and 7 Tenet acute care hospitals continue to perform well.

Finishing up, during our last call I speculated that the rapid rise in interest rates that occurred during April might lead to an inflection point in valuations for health-care real estate. Well, 2.5 months later, we have still have not inflected. Nowhere is this more evident than in the medical office sector where I characterized valuations as being white hot in our last call. I'm not sure what comes after white hot, but we are now there. We just backed away from a portfolio of MOBs that will change hands at a cap rate in the low 7s. In fact, we have seen cap rate compression for new property acquisitions across our entire portfolio.

Even in the challenged hospital space, you have seen significant institutional money come into the sector with the recent LBOs of Iasis and Vanguard by TPG and Blackstone respectively. So, with all this health-care real estate deal fever, how are we responding at HCP? We continue to stick to our 3-prong investment triangle. One, we will invest opportunistically. Example, whenever possible, we attempt to avoid auctions of property acquisitions. Of note, the lab pharma, skilled nursing facility, assisted-living facility, CCRC and MOB investments closed this year were all negotiated transactions.

Two, we will have a diversified investment approach. Example, if you roll forward our 2004 property acquisition activity to include the month of July, we have now invested $320 million in the former property acquisitions, which is net of $100 million of mezzanine loans that have been redeemed. This activity is spread across the following sectors; 25 percent in MOBs, 20 percent in assisted living, 20 percent in skilled nursing, 20 percent in CCRCs, and 15 percent in lab and pharma. Now, look at our acquisition activity over the past 2.5 years by product type. Out of a total of $1.5 billion in gross investments, HCP has deployed its shareholders capital as follows; 10 percent in the form of mezzanine loans, 11 percent in the form of development properties, 47 percent in the form of sale leasebacks, and 32 percent in the form of joint ventures. Effectively, what we have done at HCP is stretch our definition of investment diversification to expand beyond the health-care sector so as to include real estate products. We now have a matrix approach of investing across the continuums of both health-care and real estate products. And with the conversion of our ARC mezzanine loan and the increase in our MOB joint venture with GE, we have now reloaded significant wherewithal in these 2 buckets.

This is obviously only a viable strategy if the management team is skilled in a range of health-care, real estate, and technical capabilities. Fortunately, this is an investment that is now complete at Health Care Property Investors.

Three, we will continue to maintain a conservative balance sheet. At quarter-end our debt, our outstanding debt that Mark referred to earlier, represented about 25 percent of our total market capitalization. With that, we'd now be delighted to open the forum up and take any questions you might have. Operator.

(OPERATOR INSTRUCTIONS) Jordan Sadler from Smith Barney.

I just wanted to touch on the gains you're expecting to realize, I guess in the third quarter or booked in the third quarter of $4.5 million. Was that in your original guidance and is it still, or is your guidance on top of -- is it 4.5 million on top of the range now?

No, the 4.5 million was in our original guidance. We were anticipating this transaction, so it was in there.

So you thought that it would come to fruition then? So it's based --?

And I would add on that, recall that we took the first bite at the apple, if you will, last September. This was a mezzanine loan that became prepayable next October, October 2005. And given the quality of these properties, the performance of these properties and the operating team at ARC, we were very interested in not seeing these properties leave our portfolio but instead be able to structure long-term investments so we could continue to reap the benefits for our shareholders.

Great, got it. Now, during the quarter, the second quarter that is, did you accrue at the 16 percent that you were previously accruing at, or did you accrue at the full 19.5 percent?

At the 16.5 rate.

And timing wise, you'll get about a third of it in the third quarter, of the ACR (sic) stuff from the mezzanine?

I'm not sure I understand the third reference?

You took it out in the end of July, was it?

July 15th the transaction (indiscernible).

Jay, maybe you could bridge for me the transaction value that you guys quoted of 113 million versus the one that ACR was out there with of 154 million? Are those not apples and apples?

Yes, this is Mark. Let me run through the numbers with you. They are; you just have to reconcile a few things. The partnership interest that we purchased, we paid $110 million toward the partnership, for the partnership interest. Now, we also had a minority interest in those partnerships already. That was valued at about $8 million. And then we had our share of debt, which would add an additional 24 million. So if you add all those numbers up, you come up to roughly 141 million for our share of the gross assets. And then you have to then factor up our share for the minority interest that ARC retains, and that would get you up to the 151 million.

Now, the cap rate on the -- or the lease rate of the 9 or 9.25, whatever it will be, it's on the $150 million number or the $110 million number?

It's on the equity portion.

It's on the equity portion. Thanks for clearing that up. And then on the Emeritus deal that you guys mentioned that happened yesterday, what was the rate on that mezz piece that will come in?

Hold on just a second. We had 13.75.

Then just looking through some of your supplemental schedules, it looked like occupancy on the MOB portfolio, while the same store seemed to hold flat at quarter-end at 94 percent, I guess in your more detailed schedule it looked like it went down to 91 percent from 94 percent. Is that anything you should point out?

I think as I said in my comments, the biggest change there was the development properties that came online in the second quarter. So they were added in, and this schedule here is based on the physical occupancy.

Mark, just for the benefit of the listeners, the range of occupancy on some of the development properties, given that they are still in lease-up, is --.

50 to 90.

50 to 90, but again I'd add the importance of Mark's comment that those properties are all operating with operation support agreements running to affiliates of HCA.

What would be the incremental dollars you'd expect from those 4 MOBs and (indiscernible)? I assume they'd be a full (indiscernible) for you if they're all the HCA. Did you get a full quarter of them in Q2 -- income?

Yes, pretty much. No, I don't think you'll see a big -- an incremental contribution to FFO from the development properties, from 2Q to 3Q.

And then on the impairment charge, you said that the 1.2 million was -- I heard it was from that nursing home, I guess, that you had some water damage.

That's correct.

And the balance was -- I couldn't hear you on that.

We had some other property that has previously been held for sale and we've updated the estimated sales price of those properties. So it's just an adjustment of what we expect the ultimate proceeds to be.

And then lastly, Jay, maybe you could give us a little bit of color on the GE deal. I know you said 15 months would be the expected timing -- that's still going to be an MOB portfolio, right? And is it based -- I mean, based on pricing right now? I'm just curious as to why the timetable has been moved up or how you're able to move up the timetable.

I think what I said was when we announced the transaction last June we had indicated that we anticipated deploying that $600 million over a 3 year timeframe. Now 13 months into the transaction we anticipate deploying that $600 million in a far shorter period of time, 15 months. And as a result that was the catalyst to our sales in GE to go back and revisit, resize the transaction so that we had significant wherewithal to take advantage of opportunities as they come up.

But I would add that that is 100 percent focused on medical office building product in that joint venture. So we now have, subject to final documentation, $1.1 billion joint venture. Again, we continue to anticipate that that will be financed with roughly secured debt at a rate of 70 percent loan to value and then the remaining 30 percent would come in the form of equity. And just to refresh people's recollections, that equity component is two-thirds GE, one-third HCP.

So it's another 40-50 million of equity for you guys?

About 50 million, yes.

Are you expecting -- do you have anything keyed up right now or do you think that would be a portfolio deal like something you did with HCA or would it be more like one offs?

No, I think you should expect that what you'll see in the joint venture will be portfolio sorts of deals whereas one off properties like the one in Las Vegas where we've got an attractive cap rate, we've got other properties in Las Vegas, we're familiar with that market, we like that market. And that particular property we view as a long-term hold. So that property we took down on our balance sheet.

And there's no right of first refusal or anything on the JV, just refreshing my memory?

No, it's a mutual non-exclusive, it's a good working relationship for both organizations and we're very pleased with the results. It's obviously way ahead of schedule which is what brought us to bump the size of the venture up ahead of schedule.

But the venture didn't get a look at the Vegas deal?

As a general rule we will talk about what's going on. We have an executive committee that's got representatives of GE and HCP on it; they did look at the transaction. It's a single market, this is more of a long-term hold asset which is a little bit of a different perspective that GE has with this particular joint venture; I can't speak to their objectives with respect to their other joint venture. So this worked out that there was a good investment for us and we took it down on our balance sheet.

A.J. Rice, Merrill Lynch.

Hello, everybody. A couple of things real quick for clarification. On the HCP Medical Office Portfolio, sequentially you're down about 4 properties. Is that properties that moved to the joint venture or what's going on there? From 100 last quarter I have to 96 this quarter.

Well, I think a couple were sold and I think one are two of them found their way into discontinued operations which I think then were associated with the impairment -- part of a portion of the impairment charge that Mark spoke of.

Okay. On the cash flow coverage, I noticed versus last quarter the hospital business is down about 30 basis points. Is that -- what is that? Is that Tenet or is that --?

Yes, that's Tenet. I think I talked about that the last call. You had a bunch of things going on last year, the most significant of which was a -- kind of a onetime catch up and update of the coverage ratios owing to the settlements they made which were -- I think were multiple year settlements that all flowed through the coverage ratios in one year. So that decline is almost exclusively a function of the performance at the Tenet hospitals.

Right. But I guess it actually moved down from Q1 to Q2 as well --.

Remember, A.J., our statistics lag by a quarter. So in other words, what you're seeing -- it's a quarter delay to the operating statistics. So we watch that pretty carefully and they've absolutely bounced back from where they were.

Okay. On your 400 million number for property investments this year, you quoted I think in your comments 320, and I know in the presentation it talks about 133 million of aggregate costs acquired year to date. Is -- the 320 is the relevant number and so is that the right way to think about it or is --?

Well, 320 is effectively through the month of July, if you will. I think the number that Mark talked about was what we reported in the second quarter. But with the American Retirement Corp and the Emeritus transactions, both of which by the way were representing as only the net net amount. So we've netted out the mezzanine loans that were redeemed in both those transactions. We're at kind of 320 through 7 months of the year.

So you needed 80 million more to make your goal for the year is basically -- is the way to think about it?

Right, right.

And then finally, just in light of some of your comments on the medical office building market and so forth. How long do you think the -- you gave that mix of where the investments have been year to date, do you see that changing materially if you look ahead either from now to year end or maybe even the next 12 months?

Are you talking by healthcare sectors or by --?

Right, by healthcare.

Or by real estate products?

No, more by healthcare sectors. What will go up, what will go down percentage-wise?

That's spread pretty evenly across those 5 sectors. I don't see any reason to directionally change that and we like staying diversified. So there's a couple lumpy things in the pipeline right now, but you really can't predict whether they're going to get across the goal line or not. But I think for now our perspective would be that we're going to continue to invest across our sectors. I think you may see us in one or two of those sectors that are particularly competitive that may well be that -- not an equity sort of investment but maybe a joint venture or a mezzanine investment depending on which sector it is might, in our view, be a better way to deploy our shareholders' capital.

(OPERATOR INSTRUCTIONS) Terry Callahan, Goldman Sachs.

Just on the disposition side looking forward, you've got these 7 properties held for sale, can you just update us on your disposition guidance for the year?

Well, I don't think we have disposition guidance. Let me take a step back. About a year ago we reviewed our entire real estate portfolio, tried to take a look at where we felt we wanted to deploy shareholders' capital. And we concluded that the medical office building sector was worthy of a relook. For the 18 months prior to a year ago we had actually bought a grand total of zero medical office buildings. One of the things that was going on there was the change in the competition and with the more leveraged structures which gave rise to creating the GE joint venture which then gave rise to MedCap transaction.

Following that we drilled down some more and we developed -- the strategic footprint we wanted was a particular type of MOB. And coming out of that we concluded that we had a number of properties, I think 17 in total, that didn't fit that strategic footprint which led us in the fourth quarter of last year to package them up, take them out to market which resulted in the transaction closed in February of this year. That has resulted in about 2.5 cents of dilution with respect to FFO for this year. So that's what we did with the medical office building sector.

Now, then what happened as part of the organizational restructuring we elevated the asset management portfolio strategy function to be in a direct report to myself. And in the fourth quarter of last year we were fortunate to attract Paul Gallagher from GE Real Estate into the Company. He has in turn built out his team and, armed with the additional benefits of this new technology infrastructure which we're in beta testing on right now and starting to see some of the benefits, we are continuing to look at the remainder of our portfolio which, of course, at that point is triple net portfolio and reviewing everything we've got in there with an eye towards having a portfolio that is not just very strong today but it's going to be very strong 2 and 3 and 4 years from now.

We are continuing to take a look at everything in the portfolio, as you might expect with a relatively new management team and the like. So, that's what we're doing internally. We spent a lot of time on this process. But we've got no disposition guidance away from that.

So the properties held for sale then, should we anticipate that those will probably go at the value on the balance sheet?

Well, or in the case of a couple of the ones that Mark referred to, the adjusted balance sheet owing to the -- any impairment charges that have been taken against this.

Rich Anderson, Maxcor Financial.

Can you explain a few modeling questions for me? G&A was up substantially. Can you quantify that for me?

I think as I said in my comments, there's probably about $700,000 if you look at this quarter versus the first quarter which had to do with the relocation of our office from Newport Beach to Long Beach. We also have -- as you know, we had the development properties are in a taxable REIT subsidiary and so the G&A line also includes -- for the quarter it also includes about $500,000 related to taxes on the income in the taxable REIT subsidiary. And then there's probably another half million dollars or so in there that's related to what I refer to as our MRI conversion project as well as some other initiatives, Sarbanes-Oxley and some other things going on in the Company that have caused it to increase over the first quarter.

And as a follow-up to that. How is it that Tenet increased as a percentage of your NOI and ARC considering all the activity in the acquisitions actually went down relative to the first quarter?

You've got to keep in mind also, the Tenet -- in terms of our percentage of revenue, the Tenet -- Tenet is affected by the SAB 101 adjustment. So when I said that there was a $6 million increase, that has to do with the contractual billings that we recognized in the second quarter that we didn't recognize in the first quarter because of that accounting effect.

Okay. What should we expect for SAB 101 for the next 2 quarters?

Probably -- you'll probably see less of a -- you'll certainly see less of an effect quarter-over-quarter than you did in the first quarter or second quarter, and I'd say probably less than half of that effect from second quarter to third quarter.

Jerry Doctrow, Legg Mason.

I just have a couple things. The lease that you did on the nursing home portfolios with Tenet was a 5 year lease and I was curious as to why the shortened term and whether the customer has an out at the end of the term?

Yes, that was an existing lease that we were working with there, Jerry.

So you bought in on existing lease, okay. And I guess I've been -- I've heard a couple rumors -- that would be all they were at this point -- that the Swedish hospital, Swedish Medical Center portfolio in Seattle that you're a finalist in. Can you confirm or deny, and would that go in the JV or would that likely go on balance sheet if it happened?

I think what we're probably most comfortable with, our position is until transactions are closed, we'd just as soon not say anything further than that. But obviously, as you saw with the ARC and Emeritus transaction this month, as soon as they are closed we are delighted to share anything and everything with you.

Robert Mains from Advest.

Good morning, good afternoon. The tandem portfolio, can you remind us what's the quality mix on those?

I think the Medicare private pay mix, I want to say, was high 20s, low 30s.

Then just sort of following up on one of the previous questions. The American Retirement mezzanine, getting that paid off, that hits in Q3. So if I am right, interest and other income, that gets to like 13 range for the quarter, then goes down to normal run rates after that?

Yes, that's correct. The 4.5 I referred to will hit in the third quarter.

Okay, that's all I needed. Thank you.

Rob, on the tandem portfolio, I didn't add in the private pay. The Medicare and the private pay together represent 55 percent of revenues for that portfolio. So that's really a terrific portfolio.

That's across the portfolio?

Yes, those 7 properties that we acquired. So it's a first-rate portfolio.

You're right, that is very high. Thanks a lot.

(OPERATOR INSTRUCTIONS) Rich Anderson from Maxcor Financial.

Can you break out the medical office revenue from the total?

Sure.

Before I get snagged, what was straight-line rent for the quarter?

I think if you look in the release, the breakout is back in the supplemental information, but of the rental income for the quarter, triple net (ph) was 67.9 million and medical office buildings was 27.4 million.

And the straight line rent?

Straight line rent was -- well, income from straight line rent and interest was 1.9 million. The rent piece of that is probably less than half of that number.

Yes, Rich, we have very little in the way of straight line rent.

Steve Swett from Wachovia Securities.

When the mezzanine loan is repaid, what will be the outstanding mortgage loan balance in the portfolio and the average interest rate on the outstanding loans?

The pro forma for the American Retirement Corp, I think we're now down to about $10 million in our mezzanine loan portfolio. The rating agencies kind of like to see that overall balance, roughly no more than say 5 to 7.5 percent of our invested real estate portfolio. So at the peak, which would have been about a year ago, we were approaching -- we were not at, but we were approaching the upper limits there. And as I said in my remarks, (indiscernible) this transaction, the chapter on this American Retirement Corp transaction being closed and a couple other things now, we've really got virtually all of our potential wherewithal in that particular product bucket available to us, much like we've now reloaded the joint venture with GE. As it relates to the actual interest rate on the remaining $10 million loan balance, I apologize, I don't have that at my fingertips, but we can certainly get that information to you.

That's okay. Just one follow-up on the other income items that you mentioned in the quarter, are those decent run rates in terms of the fees and the interest and other income?

Yes, the only thing I'd say is I also said that we have -- we probably have in that interest and other income for the quarter, we probably had about half a million dollars that was related to some notes that got paid off that had previously been reserved for. So the only thing I'd say to take out of there is about half a million dollars related to that for our run rate.

Jerry Doctrow from Legg Mason.

The one thing on the same store sales at the very end, you show actually a slight decline year-over-year if I'm reading it right in your MOB portfolio. I'm curious as to what's going on there. Same store, I assume that does include the development stuff. Are you seeing occupancy off, or is it rent roll-downs? I'm just curious about that.

Again, on -- the same store is at 94. The development properties have brought the reported occupancy down to 91, but that is not obviously included there because this is the same store calculation. Our MOB port polio is performing pretty well. I think we've got 1 or 2 situations where we've got some space that we've opened up in anticipation of recruiting a couple of good-sized doctor groups into some of the space. So it's like we're kind of by design, if you will, but there has been very limited rollover with respect to the tenants in our portfolio this quarter, very limited.

So you're not really seeing rent roll-downs. As it hits even here, it's sort of a marginal occupancy issue; is that what I --?

Right, absolutely, Jerry. Our performance there is very, very good.

Jordan Sadler from Smith Barney.

Just following up on Rich's G&A question. Is 7.7 million a good run rate for G&A going forward, just backing up the moving expenses more?

I'll let Mark -- I would just say you've got this year. You've got a lot of several onetime things going on here. So we will, as part of our budgeting process for next year, be looking at that quite carefully. Mark mentioned 3 or 4 or maybe 5 different things that are somewhat onetime in nature this year. And I don't know if we've actually projected out a specific dollar amount for G&A, Mark. Do you have anything on that?

I guess what I'd say is, yes, with one caveat that as -- in the third quarter, our MRI system is -- we're on schedule to go live. And then in terms of some of the other projects, Sarbanes-Oxley, the expenses tend to be not very predictable and weighted towards the back half of the year. So with those 2 caveats, I'd say yes, but there is some uncertainty in what the actual cost will be.

It would be up about 30, 35 percent over last year?

Right.

But remember now, you've also -- this is where you've got maybe -- (indiscernible) having too many things going on. What you're also seeing there is a different profile with respect to the management team in our medical office building space which, of course, is to a certain extent offset by the management fees we're generating from an asset management standpoint off the joint venture. So a lot of different things kind of cutting both ways there, Jordan.

Got it. Just the dollar amount on the SAB 101, do you know it? It would sort of help for modeling purposes.

The change from first quarter to second quarter was 6 million.

Mark -- this is a question -- I think what happens here, isn't it -- net-net over the course of the year it all reverses out, right? We're under at the beginning; we're over at the end?

Yes, that is correct.

I'm with you, I got it. Thank you.

Now, I'd like to turn the call back to Mr. Jay Flaherty for some closing remarks. Please go ahead, sir.

My only closing remarks are thank you very much for your interest and have a great rest of the summer. Take care. Thank you very much.

Thank you, ladies and gentlemen. Thank you today for your participation. This concludes your conference call. You may now disconnect. Have a great day.