Healthpeak Properties Inc (PEAK) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2004 Financial Results Conference Call. My name is Will and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance please press "*" followed by "0" and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Laura Catalino, Assistant Treasurer and Director of Investor Relations. Please proceed.

Thank you and good morning. I'm here with Jay Flaherty, President and Chief Executive Officer, Talya Nevo-Hacohen, Senior Vice President Strategic Development and Treasurer and Mark Wallace, Senior Vice President and 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 new releases and SEC filing. 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 our call over to Jay Flaherty.

Thank you, Laura, hello everyone and welcome to the third quarter earnings call for Health Care Property Investors. I will begin with comments on our people, our balance sheet and our portfolio as it relates to the most recently completed quarter. Turn the program over to Mark to provide detail on our third quarter performance. And then have Talya provide an overview of the $500 million refinancing of our bank line, which was finalized earlier this week. I will then finish up the call with some perspective on the current operating environment.

On the people front at HCP, the Company is continuing to benefit from a stable senior management team that is focused on a number of upgrade and process improvement changes that are expected to be completed by year-end. We did welcome a Vice President of Financial Planning and Analysis Steven Roby (phonetic) from GE Real Estate and a Director of Human Resources, Karen Fret (phonetic) from the Law Firm of Gibson Dunn & Crutcher, where she held a similar position during the quarter. As it relates to our balance sheet I will defer to tie-up with my only commentary being that our credit metrics continue to track at historically strong levels.

Our portfolio, during the quarter we completed the bottom-up, property-by-property review, I had spoken of on previous calls. The impetus of this initiative was the establishment last year of an asset management group under the leadership of Executive Vice President Portfolio Strategy, Paul Gallagher. Paul had previously enjoyed a long standing, successful career at GE Real Estate. Initially we focused this portfolio review on our MOB sector and results of that review are now in the history books.

Fourth quarter 2003 acquisition of MedCap Properties from HCA; consolidation of HCP's then existing MOB portfolio with the MedCap portfolio, leadership for the combined effort under the direction of Executive Vice President, Chuck Elcan and his team in Nashville, Tennessee, and then disposition of a portfolio of MOB properties executed in the first quarter of this year. Paul and his team then undertook a similar review of our triple-net portfolio in the second quarter this year. This review was aided by the upgrade of our IT platform in the MRI system, which allowed us to view our portfolio on a property-by-property basis. This review was completed in the current quarter and the decision was made to dispose of 11 properties and the related impairment charges totaling $13 million were taken.

As an introduction to Mark's report, I would suggest that when the books are closed on 2004 at HCP, a look back will likely asses the year as a period in which numerous actions were taken to generate long-term strategic value for our shareholders that had a current year earnings impact.

These actions would include one, the $130 million disposition of non-core MOB properties closed in February of this year allowing us to recycle capital into more attractive investments. Two, the impairment charges relating to the triple-net portfolio I have just spoken of. Three, relocation cost associated with moving our corporate headquarters from Newport Beach to Long Beach at attractive long-term lease rates. Four, cost associated with converting our IT platform during the year. Five, conversion of certain staff functions that had previously been outsourced by the Company. Six, charges relating to refinancing the bank line 1 year ahead of its maturity, to take advantage of the current favorable bank financing market. Seven, taxes incurred relative to development properties in our taxable REIT subsidiary pursuant to the decision to own 100% rather than joint venturing this attractive real estate. Eight, the mezzanine debt recycling involved with converting higher yielding, short-term mortgages into lower yielding long-term sale leasebacks for both American Retirement Corp and Emeritus. Nine, settlement of outstanding litigation with our former CFO and ten, expenses related to Section 404 Sarbanes-Oxley compliance. Suffice to say a number of these actions have the unintended affect of making our 2004 results somewhat challenging to sort out. And with that as a segue, I will turn the program over to Mark.

Thanks, Jay, and good morning. Today we reported FFO per diluted share for the third quarter of 37 cents compared to 42 cents for the same period in 2003. On a dollar basis, FFO was 49 million compared to 53 million in the third quarter of last year. However, the prior year included a $7 million preferred stock redemption charge.

Excluding impairment charges of $13 million this quarter FFO was 46 cents per diluted share. During the third quarter, we made investments aggregating $215 million, primarily, to sale leaseback transactions with American Retirement Corporation and Emeritus that we discussed in last quarter's call with the total of $100 million of mezzanine debt being repaid upon closing. These transactions bring our year-to-date gross investment to $420 million or $320 million net of mezzanine debt repayments.

Our quarter-over-quarter rental income was impacted by our investment activities, as well as, four MOB development properties that came online during the second quarter of this year and are under operating and support agreements.

Equity and earnings of our GE joint venture was a negative $600,000 for the third quarter. The loss reflects a catch up adjustment related to purchase price allocation revisions from the acquisition of MedCap in October 2003. Essentially, the revised allocations attributed more cost to leased intangibles that are amortized over a short life. We would expect future results to return to more normal levels.

Interest and other income in the third quarter reflects about $800,000 of asset management fees related to our GE joint venture, the reduced level of mezzanine debt from ARC and Emeritus repayments, as well as, a gain of $4.6 million from the recognition of previously reserved ARC related interest income.

G&A cost for both the third quarter and year-to-date results are higher relative to prior periods so let me take you through some of the items causing the increase. First, $1.7 million of year-to-date expense is related to the settlement of litigation with our former CFO; $900,000 of which was recorded in the third quarter.

Second, G&A includes $1.4 million of income tax expense related to activities in our taxable REIT subsidiary $900,000 of which was incurred in the third quarter. We have recently moved certain properties out of our taxable REIT subsidiary, which should substantially reduce taxes going forward.

Third, we incurred $700,000 of relocation cost associated with the move of our corporate office from Newport to Long Beach during the second quarter. And finally, we have incurred approximately $1 million of expense this year related to other initiatives primarily, our MRI system conversion in compliance with the requirements of the Sarbanes-Oxley Act. Our new information system was implemented in August 2004 and both our financial and asset management data has been successfully migrated to the new platform.

During the third quarter, we incurred impairment charges aggregating $13 million, $6 million of which is reported in continuing operations. The charge results from decisions to sale certain properties, as well as, revisions to estimated selling prices on properties previously held for sale.

Our balance sheet at quarter-end includes total debt of $1.4 billion, only 13% of which is at floating rates. In connection with the Emeritus transaction, we assumed $56 million of mortgage debt. We expect to fully repay this amount in the fourth quarter upon expiration of the early prepayment fee. In connection with the ARC transaction we consolidated $25 million at existing mortgage debt during the third quarter.

Under our dividend reinvestment plan, we issued 210,000 shares in the third quarter bringing the total for the nine months to 640,000 shares or about $16 million in proceeds. Our guidance for the full year includes the fourth quarter charge of $800,000 to write-off unamortized deferred financing cost associated with our previous bank agreement. Including that amount we expect net income for diluted share for the full year to range between $1.02 to $1.06. At that level FFO per share should be between $1.62 and $1.66 per diluted share. Excluding impairments, FFO was expected to range between $1.74 and $1.78. The change in our FFO guidance for 2004 excluding impairments, principally reflect the impact of three factors: the litigation settlement, the bank refinancing charge as previously mentioned, and the timing of fourth quarter acquisition activity. And with that I will turn the call over to Talya.

Thank you, Mark. On October 26 we closed a new unsecured revolving line of credit. The new line has a three-year term with an extension option and is initially sized at $500 million. Bank of America and JP Morgan acted as joint lead arrangers and joint book managers for us. The transaction was significantly over subscribed allowing us to include an accordion feature, which permits us to expand the facility to $600 million in the future. We decided to refinance our bank line at this time in order to take advantage of a strong bank loan market. This allowed us to accomplish several things: improve our pricing, remove the penalties for use of the line and streamline our covenants.

With respect to improving our pricing, the new line is priced at LIBOR plus 65 basis points with a facility fee of 15 basis points compared with our previous line which was priced that LIBOR plus 87.5 basis points with a facility fee of 25 basis points.

Regarding the penalty for funded assets, we have eliminated the additional charge -- additional fees charged under our previous line for being drawn more than 50%. This will permit us to use our line more effectively without forcing us to tap the capital markets. And finally, streamlining our covenants. We have notified our covenant package to be more in line with other REITs, adding an unencumbered asset test and fixed charge coverage test. We have also structured the limitations associated with joint venture and development activities in order to accommodate our business strategy. We believe that the new credit facilities will result in cost savings and increased flexibility relative to our exposure to short and long-term debt and floating and fixed rate mix.

We closed the third quarter with $143 million drawn on our revolving credit facility and approximately $1.2 billion in long-term debt. This represents the ratio of long-term debt to un-depreciated book capital of 39.5%, which is consistent with our recent history and underscores our objective of maintaining a conservative balance sheet and financial flexibility to allow us to be opportunistic on the investment side of our business model. With the bank still behind us and the expansion of our joint venture with General Electric, we have significant capacity for future acquisition without a need to go to the equity market.

Now let me turn the call back over to Jay.

Thank you Talya. With respect to the current environment, having previously used the terms; sellers market, troughy and white hot to describe the market for healthcare real estate, I will only say that it has gotten even more competitive. In the current quarter, we observed transactions clearing the market with significant valuation parameters in all of the sectors of healthcare real estate in which we operate.

In MOB space, we noted a $97 million portfolio of five medical office buildings in Southern California that traded at a cap rate of 6.6%. In assisted-living, I would note the benchmark assisted-living [quality] financed house transaction.

Skilled nursing, that proposed [Mariner] LBO by a private investor group. Hospitals, both Iasis and Vanguard were taken private in LBO transactions by the private equity firms of TPG and Blackstone respectively. And in life sciences, we are aware of a variety of publicly shaded REITs paying in excess of $400 a square foot for life science space.

Our overall volumes at HCP are flattish versus this time last year, but if you filter the pipeline for those deals that we would choose to aggressively pursue, the volumes mean our underwriting criteria are actually down.

Our 2004 guidance was based on a $400 million net investment level. We are currently negotiating deals for which we are engaging due diligence that we expect to close over the next several months. Our current year volume guidance of net $400 million assumes that certain of these transactions will close in the fourth quarter of 2004. My overall take on this environment is that two issues continue to contribute to softer quality real estate investment opportunities for HCP. One, a favorable Medicare/Medicaid reimbursement environment for operators has resulted in a number of facility based operators being able to enjoy financing alternatives away from the healthcare REIT industry. And two, a new class of investors largely experienced institutional real estate players have rotated into healthcare for the first time.

A quick walk through our five principal real estate sectors will involve the following observations and let me add before I do that review that despite the terrible impact of an unprecedented four back-to-back to back-to-back hurricanes that hit the state of Florida during the month of September, HCP experienced minimal damage on our medical office building and triple-net assets in Florida with no impact on earnings.

In skilled nursing our coverage ratios continue stable. Operators in this sector are enjoying a favorable reimbursement period, which ought to last at a minimum through the end of the current government fiscal year, which is September 30, 2005. One item to watch for in the skilled nursing sector is likely clarity, sometime during the first half of 2005 of refinement of the Medicare RUGs rates.

In assisted-living slow and steady fill-up with our assisted-living operators continues with our coverages remaining stable. Of note there has been no sign to-date of pick up and development activity. Although a continuation in the valuation run in this space might alter that condition.

Continuing care retirement communities we remain very enthusiastic as to the intermediate to long-term prospects for this model. And would note the continued improvements in the financial condition of our second largest customer; American Retirement Corp.

In medical office there is intense competition for properties with valuation parameters now running ahead of operating performance. There has is been a significant reduction in the cap rates for quality medical office building portfolios since our MedCap transaction of just one year ago. And finally in hospitals, this continues to be the most challenged of our major sectors of focus; with large amounts being reserved on the P&Ls of for profit and non-for profit hospital systems owing to bad debt expense from uninsured individuals.

In addition, Tenet and HealthSouth, both of whom are permanently featured in our real estate portfolio, continued to be discussed as likely parties to settlements with the federal government. Finally, HCA recently announced a significant share repurchase transaction that had as one of its results; the effect of reducing HCA's credit status to below investment grade levels.

With that the HCP management team will be delighted to take your questions at this time.

Ladies and gentlemen if you wish to ask a question please press "*" followed by"1" on your touchtone telephone. If your question has been answered or you wish to withdraw your question please press "*" followed by "2", questions will be taken in the order received. Please just allow just a moment while we compile the questions. And our first question comes from the line of Robert Mains (phonetic) please proceed.

Yeah, good morning, good afternoon - afternoon here morning there. Jay, could you talk a little bit about the acquisition that you made in the quarter and also if I marked this down right. The EBITDA coverages versus the second quarter in both the retirement assisted and the hospital areas declined a little bit anything -- is that a product of acquisitions, or just what's going on there? Thanks.

Yeah actually, let me take the second one first. Assumed I'll remember the first one second, the coverages in the assisted-living CTRC space, there is a little bit of noise there owing to the conversion of the mez debt investments in both American Retirement Corp and Emeritus to long-term sale leasebacks, so it's really not Rob an apples-to-apples comparison of the coverage ratios third quarter versus the second; of note which is what we watch, if you drill up into the financials for both those companies, the coverage is -- the operating performance is actually improving. So I would not -- I think it's -- I mean the math is technically correct, but I don't think it's fair to say that the coverage ratios on our properties Q3 over Q2 in that space declined is there -- if anything they are stable to slightly improving.

You have rents there where you did not previously?

Well I think just a way -- when you run the math with mezzanine debt going to sale leasebacks and things like that. That's the way the calculation ends up coming out.

Okay.

Now, and in hospitals there has been -- given my comments about the bad debt expenses, that there has been that - that is an accurate reflection of --

Right.

-- the underlying economics there.

Okay.

With respect to your first question, which related to our acquisition activity for that quarter, that was principally the American Retirement Corp. transaction and the Emeritus transaction and again what we did there I think -- this may be more than any other action we took into the year -- taken during the year, reflects kind of where - where we are going as a management team and as a company. We were at risk, I mean in all likelihood both those mez debts were going away in the second half of '05 and so what we did was we entered into discussions with both those operators and we were able to structure transactions where we have preserved the long-term investment in that real estate and if you do the math, the way we look at the math -- over the term of those sale leasebacks, which we entered into during this quarter; there is a significant pick up in shareholder value versus what we would have had had we just enjoyed the remaining 12-15 months on those mez investments and then had them called away from us. So that was the strategic decision that we made, and again I think is representative of how we are trying to structure the Company for more of a long-term perspective.

Okay, fair enough. Thanks.

Our next question comes from Rich Anderson of Maxcor Financial. Please proceed.

Thank you I'm just trying to work through the numbers and some of the adjustments to G&A and associated adjustment to your guidance. On how much -- let's just tackle the G&A number first. How much of the sort of elements will carry over and will have an impact in the fourth quarter and maybe into 2005?

Okay let me. This is Mark, I'll go through the ones I highlighted one-by-one. Obviously, the litigation settlement won't have any impact going to forward, that’s behind us. We have moved most of the properties out of the [TRFs] that were causing that taxable income and so that problem should not reoccur in the fourth quarter. The relocation cost is also a non-recurring expense that was in the second quarter. And then the only thing that would have some carry over impact going into the fourth quarter would be MRI system conversion and Sarbanes-Oxley. Sarbanes-Oxley compliance, we are still working on that and will be through the end of this year and the MRI system is up and running and with the successful implementation, however, there is still some carry over that we were doing for -- report development and some other enhancements to that, that will continue over into the fourth quarter.

Okay. And with regard to the change in guidance -- if excluding impairments of 174-178, that's just a few pennies and there is a lot - there is three items here. I mean was it that you just underestimated what your litigation costs would be and it came in a bit higher than you thought. Is that a fair statement?

Well, I don’t think that’s a fair statement.

Okay.

We had taken a charge, as we previously described in first quarter this year, but we didn’t and we are not going to do anything other than that until we actually had a settlement. That settlement occurred in third quarter and that’s only --

Yeah we took a - yeah we had a charge of $750,000 previously and then in the guidance that we gave, obviously, we didn’t know at the time of guidance when the settlement would occur and so that number was not backed into the previous guidance.

Okay. Jay would you say life sciences is your fifth division now?

Not if you run the math, I’d say, CCRC’s probably our fifth sector; if you take, you know, if you take a look at year-to-date investment activity I think the life sciences represented about 10% of the dollars we put out on a gross basis year-to-date. So, you know, we are looking at it but.

CCRC is really a combination of other, you know, property types that's why, I know you talked in the past about a fifth division, I guess maybe a - sixth division then?

Again the way I did my review is I went through the five sectors and I included CCRC as a standalone sector, but we think there are significant differences in the business model and continuing care requirement -- [inaudible] assisted-living, you clearly have assisted-living type facilities on those campuses, but what's much more important is to take a look at the economics of those -- entry fee communities and the private pay component, the occupancy, the waiting list; so those are different businesses. The capital involves the time for that capital to get a return. Those are nice long-term stable real estate properties that we match up quite nicely with the -- reasons why our shareholders are investing in our Company.

Okay with regard to the impairment charges how would you say that will impact your ability to increase your dividend next year?

I don't think we would factor into impairments into our dividend policy. I would recall I think it was -- 2 or 3 calls ago, one of your peer suggested that when I first introduced the notion of this kind of comprehensive bottom-up review to the portfolio that there might come out of it a little bit of a -- I think the words he used was kind of a one-time related expense. And I think my response was, I would not disagree with that characterization. –I believe the majority of this is behind us and Paul and his team has done a superb job of very carefully going through every single property, and that’s what came out of that review [subsequent] quarter and therefore, we -- took the action that we took.

Okay, last question is when you think about the potential for maybe a negative piece of news from SNIF Medicare maybe a year from now, how is that altering your underwriting for future transactions in the nursing home sector?

Well we are putting a contingency into that; that's the -- direct answer to your question, what was the -- indirect thing is that we are waiting to see what the impact of that is. We have our own view as to what that might be. But depending on what that news is, of course, I think it's more significant that might alter our view on the relative attractiveness of deploying our shareholder's capital in this space, which as of right now, given some of the recent precedents in terms of price per bed being paid for SNIF, we are somewhat cautious on this space right now.

What is your expectation, if you care to share?

Well, I would say, generally -- I think I have said in prior calls, that you've got an election year going on right now and last time I checked, you've got some pretty significant deficit at both the federal level, which impacts Medicare and at various state levels that impact Medicaid, and I think regardless of who is declared the winner hopefully next Wednesday in the Presidential Election. There is deficit reduction act, a piece of legislation that's going to come through Congress next year and that will, you will see -- you will not see the reimbursement climate that has existed in the last couple of years. Going forward, I would note that the first time any of that could actually have an impact would be in the fourth quarter of '05 given that the government fiscal year runs through September 30, so there is nothing that could really, significantly impact on a negative basis the reimbursement environment, at least until the fourth quarter of '05.

But when you are looking at transactions, you are not saying, well, we are thinking it's going to be down 5% in '06 and so this is how we are looking at this property that you don't have a number in mind?

We are factoring into our underwriting criteria for this space, we are absolutely factoring in the contingency for that. I am not prepared to disclose what that contingency is, but we are definitely putting it into our underwriting process, right now.

Okay thank you.

And our next question comes from Dan Sullivan of Wachovia. Please proceed.

Good morning guys you mentioned that during the quarter or just after the quarter you modified your revolving credit facility, specifically you modified some covenants to be more I guess, REIT-like, for lack of a better word, including an unencumbered asset covenant. I think if I am getting it right your public debt covenants are still not standard REIT covenants and I was wondering if there is any thought of modifying covenants on subsequent issues specifically adding an unencumbered asset coverage covenant. There has been significant investor concern in the market given some recent M&A activity and lack of unencumbered asset covenants, just want to hear your thoughts on that? Thanks.

Hi this Talya, it's a good question. We recognize that we have a different covenant package from most REITs brought on we had on our bank line and we certainly continue to have on our -- on outstanding senior unsecured debt; I think that’s something that we in subscription actions through we can take a look at and look at what folks are going to. I know that there is also and I would share this -- there was a movement among certain REITs to move to no covenant on unsecured bonds. So I think -- it depends on what works in the marketplace and, of course, the outstanding bonds we have will continue to have those covenants until such time as all those bonds mature.

Just related to that, I’d add that the -- if you line up the deal with -- we retired early, which will involve the charge we will take in fourth quarter versus what we've got here, the comparison, -- deal is very significant. I mean the obvious comparison is pricing but if you look at some of these other restrictions that Talya and her team were able to achieve working with Banc of America and JP Morgan and we had, believe it or not we had a penalty, once we drew over 50% of our -- on our previous line, in terms of additional fees and interest rates and that's obviously factored into our thought process in terms of how we use that line and that is no longer in that line. So in addition to improved pricing, we've added a lot of flexibility to our ability to support (indiscernible) – acquisitions team.

Thank you very much.

And your next question comes from the line of Jordan Sadler from Citigroup Smith Barney. Please proceed.

Good morning. I just wanted to touch on the transaction activity and what you might have pending, you said I guess you need another 80 million to reach your full year goal is that right?

Right, we expect to do that by the way.

Okay, you do expect to close the 80 million? And is it --it sounds like you are little bit cautious more cautious on the SNIFs right now do you think it will be sort of any assisted-living, CCRC factor or what should we expect?

Well I would say that we are cautious in the sector; we are in the MOB sector we are, where -- we like the space, we are very mindful of cap rates -- I mean there is a big difference between the cap rate, net cap down at 12 months ago versus the 6.6% cap rate we just saw clear the market last month. Assisted-living, I think that's -- the economic the fundamentals there are pretty good, that’s going to keep going so we are looking at the actually have deals in the pipeline in that sector; I think we'll continue to look at that sector. And then hospitals given our orientation tends to run a little contrary to maybe where the things are going well that is an attractive space to us right now.

And in assisted-living you mentioned you don't see a lot of new development just yet, but think that it could pick up, is that about right?

I didn't say, I think it will; I just said -- we watch that, we are mindful of what happened in the debacle of 1998.

Okay.

We are just --we've got to add even more when we look at various portfolio in terms of potential for new development to track from an investment that we might make right now.

Do you think that there could be competition from alternative types of assets 55 and older multi-family. Have you guys tracked that as well?

Yes, independent living, sure, I think there is but that’s a -- when you drill into that -- that really is a difference space than assisted-living. Although I would add that's one of the other reasons why we become such big fans of the continuing care retirement communities because there you’ve got the whole continuum, you've got the independent living, you’ve got the assisted-living, you’ve got the skilled nursing and then frequently you’ve got the Alzheimer’s. We think that’s a superior model.

Any progress on the JV with GE, I mean what's the status to that, did you guys up-size the total value?

Yes both, their board and our board approved increasing the venture from $600 million to $1.1 billion and that is in the final stages of being papered but it's -- that’s where that stands. So there is ample wherewithal there.

Okay. I just noticed a couple of housekeeping items, on page 6 of the supplemental it seems like the equity income from unconsolidated joint venture line; either they have been lined up wrong, or it looks more like the depreciation amount?

Yeah. That’s correct. Something -- I think, I had missed a line in the transmission through the wires so, yes, we will get that corrected.

Was that then -- and what’s the -- just the equity in income numbers is where I am sort of focused on, was that the negative 600 that you -- ?

Yes, that’s correct.

Okay. Now, what was the JV FFO adjustment of $2.4 million what does that relate to, I noticed it was up significantly?

Alright. Yeah, I think you’re referring to the adjustment in the JV…?

Yeah, $2.379 million or something like that?

No, it's 1 point. The adjustment was actually $1.3 million for the purchase project. Well, our share of the adjustment in the JV for the purchase price (indiscernible) that I referred to is $1.3 million.

Okay. What’s the normalized equity and income number that you expect that to go back to?

Probably about 700,000 per quarter.

700? Okay. And then just lastly the actually two quick ones the charge that you – or the gain rather that you recognized from ACR in the third quarter, I assume that's in interest and other income?

That’s correct.

What was the amount and what will be a good run rate for that line item going forward, I know a lot moved around there?

That number was $4.6 million that we recognized and you know, probably -- I mean – let me look here for a second -- probably a good run rate is around $5 million for that line item.

$5 million?-- no that was the $11.4 million this quarter?

Yeah, because you had the $4.6 million in there…

Oh, so, $5 million even would be a good number. Okay.

Yeah, 5-6.

Okay. And then lastly was there an SAB 101 (phonetic) adjustment?

No. There wasn’t this quarter so, the amount that we were able to take in income in the first quarter part of that about -- in the first quarter we had about $4 million that reduced our revenue; in the second quarter we rolled out about $2 million of that into income, didn't roll out anything in the third quarter but would expect to roll out about another $2 million in the fourth.

Okay. Thank you very much.

Good day.

And your next question comes from Roger Lab (phonetic) of Maxton (phonetic) International. Please proceed.

Two quick questions please. Given your analysis of the “white hot” cap rates and your previous call you said you wanted to be more opportunistic; would you consider more aggressively selling those properties where the cap rates are so low? And the second question is now that you have, and I use the term in quotes, “streamlined” your systems and your people, would you have an inclination to perhaps look at other publicly traded REITs to scale these systems, if you will?

Your first question with respect to the valuations yeah, I would note that already to-date we have sold more real estate in the year 2004 than the company has sold in the cumulative 19-year history of the Company’s existence, so, I think that -- that speaks to where -- where our heads are on that.

Okay.

That said, I believe, the lion's share of that is behind us but, obviously, if something was out there and it was an opportunity for us to, you know, take some capital off the table at very a attractive rate and then recycle that into something that had for whatever reason newer property, higher gross rate, better payer mix what have you, we wouldn’t think twice about executing that sort of strategy. Related to that we will also see us (indiscernible) up some of our development activity as well as another way to get at creating shareholder value returns -- in what is a more heady valuation marker.

You know, with respect to your second question, I think, the job that our shareholders want us to do is be very comprehensive and look at anything and everything that’s out there, so as a routine matter we do that but the valuations -- not unlike the valuations for the properties in the various real estate sectors that we operate in, the valuations for the other publicly-traded REITs are general case as well which tends to detract from the ability to create a lot of value there long-term. So, you know, we have done two strategic transactions in the last five years. In 1999 American Health Properties were $1.2 billion and last year we bought the MedCap subsidiary from HCA for just under $600 million, those have worked out quite well and if the opportunities present themselves; going forward we will take advantage of them, but that’s nothing that we have baked into our business plan or anything like that.

Great. Thanks for your time.

Okay.

Again, ladies and gentlemen, to ask a question, please press "*" followed by "1". And your next question comes from the line of A.J. Rice of Merrill Lynch. Please proceed.

Hi, everybody. Just wanted to maybe even just follow-up on the comments you just made about selling more properties in '04 than the Company had done up to this point, do you have a number that tells us how much rent has been reduced by the asset sales that have taken place this year?

The MOB portfolio, the 17 non-core properties that we parted with at the end of February of this year, they were effectively properties that they were income producing; but they were more one-off properties not located strategically on campuses, hospital campuses that -- which is kind of where we have evolved to in that strategy. That transaction alone was 2.5 cents dilution; with respect to FFO so then the increment from that to where we are today which is 170, I guess or so million dollars of dispositions would be on top of that 2.5 cents and I don’t know if we have estimated that to-date. I will say that with respect to the guidance that Mark has taken you through for the rest of this year, there are no asset dispositions in that guidance number, so it's something in excess of 2.5 cents AJ.

I am just thinking, if you -- this has been a year of what -- you made new investments and that's well [history], I mean -- you've also -- that’s particularly that you are climbing over and if that is sort of coming to an end would you then expect -- presumably we would see an acceleration in FFO next year? Is that what you are sort of leading us to think?

Hopefully I am not leading you to think anything, because we will communicate our guidance at the January call so, we have taken a lot of action this year that again as I said has got -- will impact the next several years of returns for our shareholders. And we have made some conscious decisions realizing that it's created some noise in our results for this year.

Okay thanks.

Operator is that it? Hello?

Pardon me this is the operator. Is Mr. Rice done asking his question?

I am done.

He was done about three minutes ago, operator.

Okay, once again ladies and gentlemen if you would like to ask a question please press "*" "1" and the next question comes from Jordan Sadler with Citigroup Smith Barney. Please proceed.

Hi, Mark. I just had a follow up on the G&A should we just expect it to go down by 1.8 million, and because you mentioned the headquarter expense, so I thought that was a Q2, number.

Headquarter number was -- it was a Q2 number. You know, I guess, the best thing I can tell you about fourth quarter is probably around; it might be a run rate around 8 million.

Okay. And I was -- just had one follow-up on asset sales. I am not sure what the volume was this quarter, I missed that I think, but also maybe the returns on these asset sales, have you guys looked at that at all, maybe on the portfolio that was sold or the year-to-date total that was sold. Have you looked the [IRRs]?

Yeah, we were -- we are looking at them. We haven’t disclosed them but, obviously, we have been quite pleased from two perspectives: one, these are assets that, long-term don’t fit our strategic plan and b, given the acquisition valuation environment that we are in, we have been able to move them out at attractive returns and take that capital and deploy them to, what we think will be an even better return for our shareholders.

So you guys don’t plan on disclosing IRRs on sales?

No.

Okay, thank you.

Yeah.

Ladies and gentlemen currently there is no one in the question queue. If you would like to ask a question please key "*" "1" now; again it’s "*" "1" to ask a question. And the next question comes from David -- he has dropped off, and just a moment to see if there any further questions, again it’s "*" "1" to ask a question. And there are no further questions at this time.

Okay, everybody thank you very much. We appreciate your interest in Health Care Property Investors. Take care.

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