Healthpeak Properties Inc (PEAK) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter one 2005 Health Care Property Investors Earnings Conference Call. My name is John and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Jay Flaherty, Chief Executive Officer. Please proceed, sir.

Thank you, operator. Hello everyone and welcome to the 2005 First Quarter Earnings Conference Call for Health Care Property Investors. I will now ask our Senior Vice President, General Counsel, Ed Henning to read our forward-looking statement. Ed?

Thanks, Jay. 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 FFO may not be updated until the next announcement of earnings, and events prior to the next announcement could render the expectations stale. I will now turn the call back over to Jay.

Thanks, Ed. Beginning with our last conference call, we modified our call format to feature one of the members of the HCP Senior Management Team, in addition to hearing from the CEO and the CFO. As you will recall, this past February, we had Executive Vice President , Medical Office Operations, Chuck Elcan review the results of our Mid-cap subsidiary. Today, we will hear from HCP's Executive Vice President, Portfolio Strategy, Paul Gallagher. But first let's get to the results of the most recently completed quarter and for that, I turn the call over to Senior Vice President, Chief Financial Officer, Mark Wallace. Mark?

Thanks, Jay. And good morning. 2005 is off to a good start. Today, we reported FFO per diluted share for the first quarter of $0.44 compared to $0.41 for the same period last year. On a dollar basis, FFO increased 9% to 59 million compared to 54 million in the first quarter of 2004. While our investment activity for the first quarter was modest and about 11 million, in April, we acquired interest in properties valued at $139 million, bringing our year to date investments to 100 -- 150 million.

Turning to dispositions, in the first quarter, we sold four properties for aggregate proceeds of 34 million, that generated a net gain of just under five million. One sale of a hospital accounted for 26 million of our disposition activity. That sale was made pursuant to the exercise of a purchase option with a lease yield of 13% on our original investment.

With that overview, let me review a few of the items affecting our operating results. Rental income in the first quarter of 2005 increased 20% over the prior year primarily reflecting the impact of net acquisition and development activity during 2004. Sequential comparisons of rental income were impacted by a couple of items. First, the fourth quarter of 2004 was favorably impacted by the recognition of $5.7 million of income related to affiliates of American Retirement Corporation resorting from our change in the estimated collectibility of straight line rents. ARC contributed 10 million to rental income in the first quarter of this year, of which 700,000 was related -- was related to the excess of straight line rent over contractual amounts. Second, the first quarter of each year is affected by revenue recognition criteria related to contingent rental income that results in recording such revenues later during the year than the quarter in which the rent is contractually billable. This reduced revenues by about 3.3 million in the first quarter of 2005. The effect of this adjustment in the first quarter of last year was a reduction in revenue of about 3.9 million, while the effect in the fourth quarter of 2004 was a favorable 1.3 million.

Interest and other income in the first quarter declined year-over-year reflecting our reduced level of mezzanine debt investments following repayments last year from ARC and Emeritus. On a sequential basis, interest and other income declined due to -- due to the repayment of certain loans including the repayment of a $5.7 million loan to ARC that was made in July 2004 at an interest rate of 9%. Our GE joint venture contributed 2.5 million to FFO in the first quarter of 2005, and three million for the same period in 2004, including fee income of $800,000 in both periods. The contribution of the GE joint venture to FFO reflects the $288 million of mortgage financing the venture closed in January of last year.

General and administrative expenses were flat on a year-over-year basis, and declined on a sequential quarter basis. But let me mention two items affecting comparability. As I discussed on our year-end conference call, the fourth quarter of 2004 was impacted by a 1.5 million nonrecurring charge to revise the amortization period for certain stock compensation agreements. Secondly, expenditures for certain recurring activities were lower in the first quarter of this year than the average amount we are likely to experience for the full year, primarily due to the timing of certain costs being weighted more toward the latter part of the year. Operating costs increased this quarter relative to the prior year reflecting development properties that came online last year, and five properties acquired with our Swed -- Swedish transaction last December.

Investment activity during the first quarter included $7 million of expenditures primarily related to medical office buildings and a $4 million advance as to first draw on a construction loan participation. Subsequent to quarter end, we completed a $58 million sale lease back transaction on five assisted living facilities. The initial lease rate is 9% with CPI based escalators over an initial 15-year lease term with two ten-year renewal options. These properties and five existing assets under lease would be incorporated into one newly formed master lease. The new facilitates are 99% occupied with cash flow coverage of 1.35 for 2005 after management fees. Cash flow coverage for the 10 properties combined with a new master lease is 1.17 with occupancy of 96%.

In April, we also acquired an interest in five medical office buildings for $81 million, including the assumption of $29 million of debt. On average, these properties are 13 years old and located on the campus of a leading investment grade rated nonprofit health -- hospital system. The initial yie -- yield is estimated at 7%, with two properties currently in lease-up. Following an expected lease-up period of 18 months, we anticipate a yield of about 8.2%. The transaction was structured with a hold-back feature based on certain lease-up criteria being achieved.

Our balance sheet at quarter end included consolidated debt of 1.4 billion, about 20% of which was at floating rates. Following our -- following our recent acquisition and the issuance of $250 million of senior unsecured notes our net line of credit borrowings are near 100 million and floating rate debt presently represents approximately 9% of consolidated debt. Under our dividend reinvestment plan we issued about 229,000 shares in the first quarter for $5.7 million in proceeds. At March 31st, our balance sheet has 11 properties held for sale, with a carrying value of $10 million.

Regarding our outlook for 2005, on our last conference call, I indicated that our going in FFO rate for this year was about $1.74 per diluted share. Using a similar approach to last quarter, I would estimate our current FFO rate to be about $1.76 on an annualized basis. To arrive at that amount, we made essentially four adjustments to our reported results for the first quarter of 2005. First, we normalized for the effect of contingent rents. Second, we gave effect to the April acquisition activity and our senior unsecured notes offering. Third, we normalized G&A costs to reflect higher anticipated levels over the balance of the year. And last, we gave effect to the previously mentioned dispositions. Following that approach, we arrive at a present FFO rate of $0.44 per quarter. While that happens to be the same amount that we actually reported for the first quarter, that's just a coincidence. The $0.44 represents our FFO rate following the aforementioned adjustment in annualizes to $1.76 per diluted share. I think that is a fair way to look at where we are today. And with that, I will now turn the call over to Paul.

Thank you, Mark. And good morning. I wanted to take some time today to give you an overview of our asset management group, and the processes we use to monitor our portfolio. I joined HCP a year and a half ago after 15 years at GE Capital's Real Estate Group. When Jay pitched the opportunity of HCP for me his goal was simple. Build a team that could both proactively monitor a diverse portfolio and achieve the maximum value potential of the portfolio. Not so easy when that portfolio consists of over 500 assets where only limited asset management functions were in place.

A little background. When I joined, the portfolio consisted of a little over 350 triple net assets in three different sectors and of smaller multi-tenant MOB portfolio. The second day on the job, we took down the Mid-cap portfolio of 100 MOB assets and needed to integrate them into our existing 85 property portfolio of MOBs. Chuck's team at Nashville included a top notch asset management group so we decided to transfer and consolidate the management of our existing MOB's to Nashville. With a team in place to manage the MOB assets we the began to build a team here in Long Beach around the various sectors of triple net and other portfolio. Concurrently, we identified the need for a more robust I.T. system. We adopted MRI, the system used by our national team to monitor over 2700 leases in our MOB portfolio. And the conversion of the entire portfolio to MRI was successfully completed in 2004.

With an asset management team in place, mid 2004, for our triple net portfolio, we began an asset by asset, sector by sector review of the portfolio, starting with our largest assets. We rated both the assets and the operators' performance. The result of this bottoms up review was a third quarter impairment charge of $13.2 million, and the sale of over $200 million of nonstrategic assets, more than the Company sold cumulatively in its 20-year history. Once we had a handle on the state of the portfolio, and the state was remarkably good considering the fact that formal asset management had not been in place in the past, a testament to our acquisitions we headed by Steve Maulbetsch, and as I have always said good underwriting trumps good asset management. It was time to implement a -- the proactive managing of our portfolio. We established surveillance routines and determines the metrics we would use to measure our assets and portfolio's performance. These metrics and routines force a constant focus on issues that could have a negative or a positive financial impact on HCP. Included in our routines, our frequency of visits to properties and operators. These visits provide critical market intelligence and serve to identify the value creation opportunities of our assets. Alongside this operating rhythm of routines, our asset management group brings a renewed commitment to support our valued operator relationships.

The last piece to finalize in our operating rhythm is that we quantify the financial impacts of the risks and opportunities within our portfolio. We then focus on our asset management processes accordingly to meet the value creation objectives. Our philosophy is simple. We try to maximize the value of our -- for our shareholders every time we touch our operator's core properties. The approach has begun to pay off. The following are examples of proactive asset management successes we've been able to accomplish. 100% of 2005 lease expirations have either been renewed or have exercised their right to renew. An underperforming portfolio was restructured into a master lease portfolio with additional collateral provided by the operator in return for providing a payment plan for past due rent. Seven nonstrategic and underperforming assets targeted as sales candidates have been sold or under purchase of sale agreements where we have been able to collect the purchase price in excess of our net book investment as well as significant back rent. We have structured new sale lease-back investments with existing customers where a portion of their proceeds were used to fund capital improvements to their existing assets. We have identified opportunities and have provided capital for the expansion of existing properties to leverage market opportunities for our operators. Finally, we have traded complicated additional rent obligations on mature assets where there was limited upside for CPI increases and a master lease.

After a lot of hard work by our asset management team, the quality of our portfolio is in very good shape. Occupancies in our assisted living portfolio have improved from 83% to 86%. Cash flow coverages in our significant portfolio have dramatically improved from 1.1 times to just over 1.3 times after management fee, giving our operators some cushion to deal with any potential (inaudible) adjustments. While hospital coverages are down from historical highs, we have, with stepped up surveillance established a better handle on what is driving the changes in operational cash flow and we really like the real estate assets. Chuck's team in Nashville is doing a terrific job driving NOI at the property level and the private paid portion of our portfolio is now at its highest level, well above 50%. Even though we have done quite a bit of work over the past year and a half, we will continue to drive the active management of our portfolio. Our team is in place. We're getting in rhythm. And we are ready to scale the platform.

And with, that I would like to turn it over to Jay.

Thanks, Paul. As you can tell from his remarks, the initiatives under taken under Paul's leadership as well as the generally improving business environment for our operators has resulted in HCP's real estate portfolio being in as good a shape as it has been at any point during the past several years.

Let me turn to the overall investment environment which remains quite challenging. Real estate focus capital, particularly nontraditional capital, continues to flood the health care marketplace, and will remain a factor in our view for the foreseeable future. It is our belief that many investors have either lowered expected returns, and/or become more aggressive in their exit assumptions to justify their investments. We estimate that the average expected returns across the major sub sectors of health care real estate are down between 150 and 250 basis points over the last 12 to 24 months. With one-third of the year behind us, we have closed on $150 million of property acquisitions and $34 million of property dispositions for a net investment level of $116 million. These results and only these results are incorporated into the $1.76 run rate figure that Mark took you through a few minutes ago. As we look at the volume and quality of opportunities in our current pipeline, I would expect the acquisition component of our overall investment activity to accelerate relative to the first pour months of 2005, and the disposition component to trail off relative to the pace of property dispositions we executed year to date.

On our last call, I indicated that the best predictor of our level of property acquisitions would be our activity in the term debt markets. With that in mind, last week, we closed at $250 million 12-year unsecured churn debt offering at a coupon of 5 5/8%. The transaction was heavily oversubscribed, allowing HCP to increase the size of the deal, decrease the interest rate on the new issue, and take advantage of the recent bond market rally. The proceeds of this issue were used to pay down outstanding indebtedness on our $500 million bank line which now stands net drawn at just under $100 million following the assisted living and MOB portfolios we closed on last week.

Our other news announced last week was the additional to HCP of Scott Kellman as Senior Vice President, Business Development, a newly created position. Scott is well known to the Senior Management Team at HCP, and given the amount of congratulatory e-mail traffic I received this past week, is also well known to you. Scott is a terrific addition to the Company bringing a wealth of expertise in the areas of hospital operations, health care real estate, and REIT leadership.

In other items, I did want to note the increase in the coverage ratio of our hospital sector to 2.1 times from 1.8 times in the prior quarter. We called it on our last call. I had predicted an uptick in these ratios in light of the increasingly positive fundamentals for the hospital industry. Each of the for-profit hospital companies that reported first quarter earnings last week comfortably exceeded street estimates. This metric still does not incorporate the results of our Health South properties, although we now expect Health South to file the 2002 and 2003 10-Ks by quarter end.

Finally, we will have both our Annual Meeting of Shareholders and our Board of Directors Meeting next week. I am delighted to note that Ken Roath had decided to again be nominated as a Director of HCP. I think this is particularly fitting, given that this month, HCP is celebrating its 20-year anniversary as a publicly traded company, and Ken himself will be ringing the closing bell at the New York Stock Exchange during NARAE, next month in New York City.

This completes our formally prepared remarks. We would be delighted to take your questions at this time. Operator?

[OPERATOR INSTRUCTIONS] Jordan Sadler, Smith Barney.

Good morning, everybody. And I'm here with John Litt. First question, Jay, just on the acquisitions and dispositions pace, you talked about, in which areas would you expect these acquisitions to come given the sort of nature of capital chasing real estate in your sector now?

If you look across our four primary sectors, Jordan and John, and then overlay that with our current pipeline, I would say the largest concentration is in the senior housing sector. I would then say -- it kind of drops off, and then I would put the MOB space, and the hospital space kind of on the same -- same next step, an then trailing where both MOBs and hospitals would be, would be skilled nursing beside -- behind that.

Okay. So in terms of senior housing, you mean assisted living and independent living, CCRC's?

Exactly. That's -- and I would say of the overall pipeline, which by the way is up two and a half to three times where it was at this point in the year -- last year. I would say the senior housing component of that pipeline is not quite at, but is approaching 50% of that pipeline.

Just to think about it, just to make sure I'm thinking about it correctly, you did 150 million of acquisitions in the first quarter or actually to date, so would that put you on a pace to do something like 600 for the full year, or more?

Well, if your question is, what is the math on, if we did 100 --

No, I mean is that the right way to think about it, that you would be above 600 million in acquisitions this year?

You know, we just don't think about it that way. We look at our pipeline, and if there is good deals to do, we're going to do them all. And if there's not, we're not going to do any. So we -- that -- that -- that's really, is the difficulty, for -- for us anyway given that we're in multiple sectors and we've got multiple ways to take ownership be it in a joint venture or on balance sheet or what have you. So I would stand by what I said earlier, the pipeline is up -- actually, I think I would make a second comment as well. The pipeline is up two and a half to three times in terms of gross volume, where it was a year ago. But much more important from our perspective, the quality of the pipeline that we would be interested in pursuing. Okay, so the first thing we do is we ask three question, is it quality operator, is it a quality real estate, and does it pass the parent test, would be comfortable with our parents residing in the property. The quality component of the pipeline has gone from, something that a year ago was kind of in a quarter to a third of the pipeline. The quality component of the pipeline that we have today is almost 75%. So the opportunities that we're seeing, notwithstanding the fact that the valuations have gone up are -- are -- are quite significant right now.

Okay. When you say that acquisitions -- you expect to accelerate, you just think in terms of the actual number of transactions should pick up?

Well, I would say both the number of transactions and the volume. In other words for the first third of the year we effectively did two transactions. We did a couple smaller ones, but we effectively did two transactions, aggregating $150 million. I'm expecting, based on what we're seeing in the pipeline, and based on the quality of that pipeline, that our activity for the last two-thirds of the year will accelerate both in terms of number of transactions and the volume of those transactions.

Okay. Fair enough. Cap rates consistent with what you saw in the first quarter, or are they coming down?

I don't think -- I think they're starting to stabilize in here. I mean I think, you know, from a cap rate standpoint, if you look at MOB's, we -- we -- we've seen one or two instances of people breaking through the seven but I -- I -- I would couch the cap rates there, kind of in a high sixs to low nine as a range. Skilled nursing, kind of an 11 to 14 range. Assisted living, eight, maybe, maybe -- maybe high seven to say 10, and then independent living, seven or I guess even maybe high sixs, up to nine.

And then the acquisition of the MOBs on the nonprofit campus during the quarter is, that your first exposure to a nonprofit hospital?

Oh, no. Oh, absolutely not. We have been very fortunate to have had in our portfolio -- I think it is either a AA or AAA rated hospital system in Indianapolis, Clarion. But more recently, as Chuck and his acquisition team completed kind of the integration of our -- the HCP portfolio with the Med- cap portfolio. We have identified that as a particular growth initiative and Chuck's team has done a fantastic job. Recall, the last week of December last year, we closed on $111 million portfolio of nonprofits up in Seattle with the leading system up there, Swedish medical system. And this is yet another evidence of our -- of successfully executing our strategy to begin to penetrate that nonprofital -- non profit hospital system. Again, as a quick aside, if you look at all the hospital beds in the United States, the preponderance of them, in excess of 80%, are owned by nonprofit hospital systems. Yet were you to take a look at the revenues coming in our Company, you would see the percentage coming from nonprofit health care systems, way underweighted relative to what is out there. So we have had a very specific initiative to grow that business, and Chuck and the team down in Nashville has done a nice job ramping that business up for us.

And what do the opportunities look like on the acute care hospital front? In terms of --

That is probably our biggest level of frustration. We -- last year, if you go back and look at our comments on the calls, we -- we liked hospitals, particularly back then, when they were initially in the first half of last year, starting to feel the pain of the -- of the uninsured in the form of bad debt expense, given that we were going to a very, very sluggish economic recovery. Our view is that -- and I think you will recall that we had done some very granular work on our portfolio. That when we look through our portfolio, and stratified our better performing real estate investments across all our sector, one thing jumped out at us. This is done about -- right -- right when Paul was coming on board and that was all the best real estate from a performance stand point was either on the campus or across the street from the leading hospital system in the particular metropolitan area that we were in. So we really view the hospital as -- as kind of the stickiness, if you will, in terms of good performing real estate. So we went after that very hard.

It certainly my biggest frustration at this point that we haven't been able to put more dollars to work in that particular component. It represents just about 25% of our company today. We would like to grow that. It is not for lack of trying that we haven't. And I think now as you start to see the -- the fundamentals improve which makes sense because if the economy in fact is getting -- or has got an little stronger, the uninsured component is going down and the bad debt expense is dropping off. And it is my understanding that Ken on the earnings call this morning was able to verify some of those improving metrics. We like the space a lot. So it continues to be our -- probably our number one objective in terms of deploying our shareholder's capital. But to date, we really have not been able to achieve the success that we would like to achieve in that particular space.

Great. Last question, just intentions on the moppers that are -- I guess can be remarketed come June?

Yes, I think the intent is just to-- to -- to -- to do just that. Just remarket them in June, which that is the -- what we have in our -- our budget and we would expect them to be remarketed in the current rate, and have little or no effect whatsoever in terms of our budget and the metrics that Mark took you through in his remarks.

Great. Thanks.

Thank you.

Greg Andrews, Green Street Advisors.

Good morning.

Good morning.

In terms of the pickup in coverage from -- from the hospital sector, do you -- do you see that continuing to improve then in -- in ensuing quarters? And where do you think that might go by the end of the year, say?

Greg, I do expect it to continue to improve but we're seeing it anecdotally, and I think gravitating towards the mid twos is -- without the addition of the Health South numbers, it is a distinct possibility. And were we to, review the 10-K filings that Health South has committed to do between now and the quarter end -- the June quarter end, it is possible it could go -- could go higher still. So the business is -- is performing well.

So that -- that -- that was my follow-up question, that the Health South, obviously you don't have the numbers, but your expectation would be -- ?

We have the numbers. We have elected not to disclose them, because Health South, themselves have indicated that until they get their filings current, you can't rely on the financials. We are doing the follow-up and the Paul -- Paul Gallagher asset -- nash -- nash -- asset management function on -- on those properties, just like we are the rest of the portfolio.

So that the cash flow coverage there would -- would bring up that -- the current average that you have for -- for the hospital sector?

That collection of non-inpatient rehab hospitals are continuing to perform very well.

Okay. And then turning to the MOBs, you had, for the quarter, I guess, 0.1% increase in same property revenues less operating expenses. What -- what's your forecast for that figure for -- for say -- say the full year? Is it much the same? Or does it -- ?

No, you got some noise in there that Chuck's team had had effectively inherited. There are two properties that were in what we will call the old HCP portfolio, not Chuck's portfolio, that during the course of '04, each had some tenant turnover. And the -- it subsequently -- the space has been re-leased but we are anniversarying right now, and I think we are going to continue to do that for the next quarter, kind of a bad -- bad debt comparable. But I think you will see in the second half of the year, you will start to see the same store sales metrics in Chuck's space start to tick off. You probably won't start to see that numerically until -- until our third quarter.

Do you have a figure that you could give us as kind of guidance for the -- for the whole year?

I don't, no. I mean we certainly have a budget and Chuck is managing quite well, I might add, that budget, but that's nothing we disclosed to the public.

Okay. And then lastly, I joined a little late, I don't know if you talked about this, but the -- the -- the two investments outside of the -- I guess you had had five assisted living, five MOBs and then another couple, what were those? And could you just talk quickly about those?

Yes, one was a construction loan in the CCRC space, our favorite space. And then we had another -- that was about $10 million, Greg.

Okay.

And then we had a $7.5 million investment in a -- in a medical office building.

And is it your hope that the construction loan will be turned into a sale lease back at some point?

ARC? That would be my hope. I think realistically, you'll -- you won't see that particular one. That was an opportunity for us to start to reap some of the benefits of our business development initiative. And that's a new name to our portfolio, a very high quality operator, CCRCs, and our hope is that we will be able to do more business with that particular operator. It is a first class operator. So it is a new name in our portfolio which is what we're most excited about.

Great. Thank you.

Thank you.

Jerry Doctrow, Legg Mason.

Hi, good morning. At least on the West Coast. There is, I guess been a published report out there about a smaller REIT being taken over and receiving an unsolicited offer and there has been various rumors that you might the -- the offerer. I was curious if you're looking at potential consolidation in the spaces? You -- you didn't mention that at all as one of the your acquisition opportunities.

Well, on consolidation, I think we look at that all the time. We don't differentiate between a level of deal or a portfolio of properties. So --

Have you made an offer specifically for -- for another REIT?

Our policy is not to comment on any sort of -- that's speculation. I think Jerry, I think it was actually yourself that on a couple of calls last year was asking us about the rumors with respect to our Swedish investment. And again, our policy is we don't comment on speculation, but as soon as we close the deals we will tell you everything we can -- can about those closed transactions.

Okay. I wouldn't have expected anything else. But I had to ask. Just on the -- on the -- not-for-profit, you [bought] some MOBs with the not-for-profit, can you tell us just the city in which was the not-for-profit?

Yes, it is in the midwest. We've been asked, which we're going to honor, at least -- we've asked for the time being, which we're going to honor, that we not disclose the identity. But it is midwest city, it's a -- it's the leading market share hospital system in that city, and we are very, very excited about the -- that real estate.

And was it sort of a shopped deal, an auction deal or was it something you guys kind of found on your own and negotiated?

I would say there was -- there was an auction process -- there was an auction process. That kind of characterizes it as maybe a limited auction process.

Okay. Thanks.

You bet.

Robert Mains, Ryan Beck.

I'm sorry. A question on the asset sale of the hospital. When in the quarter did that occur?

That closed on February 28th.

Okay, and what flavor of hospital was it? Was it acute, was it health tech? Was it rehab?

Acute.

Okay. So you talked about an increase in the hospital coverage. You also had I think what, about a percentage point decrease in nursing home occupancy, is that kind of just noise?

Yes. You know what that is, quite frankly? That is the -- the benefit of having a -- a high quality information technology system that is now being drilled down at the property level, and it just gives us a lot more robust capability to get in and take a look at the census and things like that. So I wouldn't necessarily conclude that you had an occupancy drop-off, which is probably (inaudible). I think that is just a -- we feel very good about the quality of information that we're getting out of this MRI platform, and a lot of this has to do, from a functional standpoint, a lot more specific measuring and things like that.

Does that imply then that the numbers that you're giving for these are not lagged a quarter like your peers do? Your 331 number is actually 331?

The numbers, I mean -- protocol -- is pretty standard in the health care industry. We get the information. So for example, we get the most current information you have. As an example, the most current information have you in our hospital coverages for say tenant would be for the 12/31/04 quarter for tenant. You don't have the -- for the quarter that was the 3/31 quarter. So there -- and that is the case for the skilled nursing operation as well. So those are -- now -- now we get to see stuff more -- more frequent than that but the stuff you're seeing, these coverages are definitely lagging the quarter.

Yes. You could have had the tenant stuff. The conference call, it got over about five minutes ago. The last question, on the assisted living traunch that you brought -- ?

I can give you, by the way, I can give you a review of that tenant call if you'd like as well. Go ahead.

I would have had enough of it for one day, thanks. The assisted living portfolio, you said CPI based escalators, are those capped?

Are you talking about the -- the acquisition we made?

Yes.

Is that -- is that your question?

Yes.

It is the greater of 2.75, Rob or 75% of the annual CPI increase. That is the escalator. Great -- great portfolio of properties by the way.

Very good. That's all I had. Thank you.

Thank you.

Rich Anderson, Maxcor Financial.

Thanks. Just a few quick ones. For the 34 -- or -- or you mentioned purchase options and 13% lease yield. How much of that was accounted for in the 34 million that you sold?

Point -- it was 24.2 out of the 34 was the hospital that exercised the purchase option that closed on February 28. And that was all -- that was all being kind of dealt with during our fourth quarter. So that obviously was all reflected in our -- in our budget thinking for '05.

Do you have any more in the form of purchase options that will be a part of the held for sale properties?

We have -- we have another couple of assets that -- that had have sold and their yield is about 12.5%. We he have to be sold another 10 assets, with yields at about 10.5%.

What -- what are the time frames on those?

Just first off, the remainder of the year.

And how much in total?

What was your total on the 10? As it is held for sale?

10 million.

10 million? Okay. Jay, any more Senior Management additions in the future?

Not that I know of.

Okay. Last question, actually two more questions. First is the addition of Tandem Healthcare on your largest tenant list. Is that function of your investment activity or is that simply just expanding the list of your top tenants?

No, that was the investment we made. That is the -- that's the answer to the trivia question. The only killed nursing facility acquisition we made in the last 2 1/2 years. That's the transaction, new -- new construc -- newly constructed skilled nursing in Virginia that we closed on in two traunches, April '04, and then we closed the final traunch in June '04. So that was I think in the aggregate, if I recall was about $62 million, or two transactions.

That wasn't on the list last quarter. That's why I asked.

I don't know the answer so that but that transaction is, if you will recall, the coverage is, after management fees, was north of 1.5, all master leased , heavy private paid, Medicare centers, terrific transaction.

Okay. Last question is, you mentioned Ken Roath, up to be a Director again. Does that also mean up to be Chairman?

The two don't necessarily tie together. Ken's original, if you recall, from the management succession plan that was announced at the end of '02, was called for him to step down and actually this month, I guess. But so he has decided to -- to again be nominated for the Board of Directors. And so we obviously have our Annual Meeting next week and I would expect that he will do real well in the voting.

Okay. Thanks.

Paul Morgan, FBR.

Good morning. Just as a follow-up there about those asset sales, did you say -- did I hear you right, you said 10 million in aggregate for 10 properties?

Yes, we had, what I said was we had 11 properties held for sale at the balance sheet date that -- that were -- had a value of 10 million.

Had a value of 10 million.

Right.

Okay. Jay, you mentioned during your comments about the -- the cap-rate compression, and across the board, and the various property types and at the same time getting more aggressive in acquisitions. I'm wondering how you -- how you interpret the cap-rate compression in the context of kind of enthusiasm about -- about accelerating the deal flow.

I don't think I used the word aggressive. I think I -- I think I said that the pipeline is up materially year-over-year and the quality component of that pipeline is up even -- even more materially. I don't think I would use the word aggressive. So I think there are very good opportunities out there for us. So we're of the view that we are going to be living in a low -- lower -- lower from the standpoint of where we were two, two and a half years ago, cap-rate environment for the next several years. We think that's primarily driven by money flow and some of those funds will kind of come and go depending on what -- what's going on in the world. But there is a -- there has been a significant sea change, if you will, for funds flow, both into real estate, but in particular, in healthcare. And so we are operating under the assumption that that's the world that we're going to be living in the for the foreseeable future. And I think we have demonstrated to the street our ability to make good investments, notwithstanding that sort of environment. And they will be the case that we will continue to tweak our model, we've done that before, with great success. We created a joint venture about 18 months ago and we've doubled the size of that joint venture. And we are -- I think with the team we have in place, with the skills that are represented, I think we are very, very confident in our ability to execute in this lower cap-rate environment. Good quality transactions for our shareholders.

Lastly, on the RUG refinements for SNIFs, any -- last quarter, you mentioned about, number one, being a little shy in that area, because of the risk, but then also considering being opportunistic, in the event there's issues that take place following the refinement, any update to that view of the landscape?

Yes, not really. I don't think I used the word shy. I think we -- we -- we pulled back is what we did. And we are waiting for some clarity. There has been some clarity since our last call as it relates to hospitals which is good news. They got the market (inaudible) adjustment. There has been no resolution on the skilled nursing. But we continue to think that there are going to be a downward adjustments when all is said and done, and we want to see some -- some -- some clarity there before we were to decide to rotate back in that space. I think what's -- what's going on with -- over the next decade or so, what -- what the impact of Medicare will be in this country and on our country's credit rating, I think there is a very good analogy out there that we're all watching out right now and that's called General Motors. And so we're not saying we wouldn't make investments in this space. It is just that we want to be compensated on a risk adjusted basis fairly for making those adjustments. And so we're -- until we see some clarity there with the -- the new adjustment, stuff like that, we're continuing to stay on hold in that space.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Carey Callaghan, Goldman Sachs.

Jay, did you guys compete with Ventas in the Provident deal?

Carey, we're -- we are party to some legal agreements that preclude our ability to say anything about the specifics of that transaction.

Okay. Just more broadly then, can you just comment on the -- sort of the state of play, if you will, for senior living companies, the operating companies, with respect to their desire to own versus lease? And are there some big opportunities for the companies to divest themselves of some real estate?

Yes, I absolutely believe that's the case. I think if you were to drill into our pipeline now and look at the senior housing component, you will see -- you'll see people in there where, what I would characterize as developers that are taking advantage of the valuations that are -- exist today currently. I think you will see a couple of instances some -- some operators with very long-standing successful track records that from a generational standpoint don't have -- these are private company, obviously, don't have anybody from a success standpoint in their platform. And so they're deciding to -- to -- to take advantage of the low interest rate environment, and I think probably be a tax -- a tax rate being what they are. So I think you got a whole bunch of different things going on there. But the net of the whole thing is that the volume had really accelerated in the senior housing component of our -- our pipeline. Just in the last -- I would say six months.

And some of those private companies have meaningful portfolios?

Very meaningful.

Okay. Thank you.

Robert Belzer, Prudential Equity Group.

Yes, hi, just a couple of questions today. First, another one on your hospital coverage. Is there a four quarters annualized, Jay?

We don't disclose that. This is the trailing fourth quarters, Robert, that you have here.

Yes, in other words you still have some of the one-time bad debt and also expenses that are running through that number?

Yes, which is why I think on the last quarterly call, indicated that our expectation was for this coverage ratio to go up, and on an earlier question on this call, indicated that I think you're going to continue to see some positive [uplift] on that particular metric, as the rest of the year unfolds.

Okay, then, switching to your -- another question on your same center comparison, the other properties was up 2.8%, but that up obviously included a straight line impact. Was there anything else that could affect that rate looking ahead? Are you looking at anything there?

Well, that -- you're looking at the other properties. That's our triple net component. And I think the greatest risk there, quite frankly, would be the RUGS refinement adjustment getting resolved and having that all go away, effective October one, but again the first time you start to see that actually show up would actually be at this period next year. Because A, the operators won't -- won't feel the effect until their fourth quarter. And B, we won't report that given that we trail a quarter until we report the 3/31/06 quarter. So that would be the first time you would start to see some impact there.

Okay. And then finally, just switching over to your acquisitions. You -- you mentioned that the quality had gone up, Jay, and also, you are seeing some larger players. Just kind of wondering, what do you attribute the improved quality to, and also, are -- are there developers out there that are looking to reload their capacity to develop at this point in the cycle?

Let me take the last component of your question first, the answer is absolute yes. If fact we're -- we're -- we know of some developers that are kind of reloading for the third and fourth time. Which he by the way, as a quick digression, we are seeing development now starting to creep back in to particularly the IL and the AL space. So we're all -- it hasn't been that many years ago that we saw what happened to a space when it got overdeveloped, so we're watching that very carefully. And the first quarter, I can report that we are starting to see some activity there. Now, back to the first part of your question, that talked about the -- the pipeline, just again to refresh my memory as to what the specific question was?

Just -- just what -- what -- is there anything specific that you can attribute to -- ?

I -- I think it's -- it's very smart, very successful real estate professionals looking at an interest rate environment that is -- is likely to see interest rates increase. And the tax environment, particularly capital gains tax, that is probably not going to get any lower, and has risk to -- to go higher over -- over the next couple of years given the -- the budget, the federal and the state budget deficit situations.

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

Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn the call back over to Mr. Jay Flaherty for closing remarks.

Thank you very much for your time. And we look forward to talking to you after our -- our second quarter results. Take care.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a great day.