Healthpeak Properties Inc (PEAK) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2005 Health Care Property Investors earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to your host for today's presentation, Mr. Ed Henning, Senior Vice President and General Counsel. Please proceed, sir.

Thank you. Good morning and good afternoon.

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.

Additionally, certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures, as well as certain related disclosures, in our second-quarter supplemental information package or our earnings release, each of which has been furnished to the SEC and is available on our Web site at www.HCPI.com.

Now, I'd like to introduce our Chairman and Chief Executive Officer, Jay Flaherty.

Thanks, Ed. Good morning from Long Beach, California, and welcome to the second-quarter earnings conference call for Health Care Property Investors.

In addition to Senior Vice President and Chief Financial Officer Mark Wallace, we will feature HCP's Executive Vice President of Property Acquisitions and Dispositions, Steve Maulbetsch, on today's call. Let's begin with Steve and his report on our real estate activities. Steve?

Thanks, Jay, and good morning to everyone.

Today, I would like to update you on HCP's 2005 acquisition and disposition activity. Year-to-date, the Company has made secured loans and acquired interest in properties totaling $441 million. We also made 35 million of new construction commitments. Year-to-date dispositions totaled $48 million.

As discussed on the last conference call, we closed on two acquisitions totaling $139 million during the month of April. Subsequent to the end of the second quarter, we closed on 268 million of property acquisitions and committed to finance 12 million toward a construction project.

I will now review the recent transactions in more detail. On July 22, the Company acquired 12 independent and assisted living facilities totaling 957 units for approximately $257 million or $269,000 per unit. This price is inclusive of a $5 million hold-back. These high-quality, 100% private-pay facilities are leased to Aegis Senior Living and Oakmont Senior Communities. Each facility is managed by Aegis, a strong, well-regarded regional operator. The leases have a primary term of 15 years with three ten-year renewal options. The initial annual lease rate is approximately 7.1% with minimum annual increases of 3%, which over a ten-year period will provide an unleveraged internal rate of return of 9.4%.

Eight of the facilities are located in California, three in Washington, and one in Nevada, mostly high barrier-to-entry markets. The average age of the facilities is approximately three years. One facility is just completing construction and will commence operations in the next 30 days. It is already 34% pre-leased. Excluding this facility under construction, the average occupancy of the portfolio is 91% and has a first-year cash flow coverage ratio of 1.0-to-1 after imputed maintenance fees equal to 5% of revenues. We expect the average occupancy and a cash flow coverage ratio to increase over the next 12 months since, of the 11 properties, 2 are in the final stages of lease-up with current occupancies of approximately 85%.

The stabilized GAAP rate in the second year for this portfolio is 7.6%. Since two properties are in lease-up and another is set to open later this month, this is the appropriate valuation metric.

As part of the transaction, the Company assumed approximately $46 million of floating-rate debt, which was swapped to a fixed rate of approximately 5.1% over a 15-year period. There was another 6 million of debt assumed with an interest rate of approximately 6.1%. 19 million of the consideration for this transaction was in the form of downrate units, which are exchangeable into HCP stock. The remainder of the consideration was cash.

Security for the transaction includes a letter of credit or other collateral, corporate guarantees, and a $5 million hold-back to release when certain revenue hurdles at specific properties are achieved. Eight of the properties are in a master lease. Due to lender requirements, the remaining four assets are in separate leases.

The Company also closed on one assisted living facility with 116 units in Florida in a sale leaseback transaction for a purchase price of $16 million, including excess land. This facility was built in 2001 and is operated by a privately held assisted living company with multiple facilities on the East Coast. There are plans to construct a 60-unit addition to the facility at an estimated cost of $7 million. Construction of the capital addition is expected to commence in mid 2006. The facility has an initial lease term of 15 years with two 10-year renewal options. The initial lease rate on this transaction is 8.75% with minimum annual CPI based escalators of 2.75%. The property is currently 96% occupied. The first-year cash flow coverage after imputed management fees of 5% of revenues is 1.05-to-1 and the cap rate is 9.3%.

In another transaction, we closed a commitment to construct a 70,000 square foot $12 million addition to an existing laboratory facility and a 250-space parking garage located in Salt Lake City, Utah. The building will be leased to a publicly traded biopharmaceutical company for 15 years at a rate of 10.5% with increases in rent every three years equal to a 3% annual growth rate. This investment now represents our eighth laboratory office property on this University of Utah Research par (ph) campus with aggregate HCP investment of $85 million to date, all structured as down-rates.

Moving to our disposition activities, during the quarter, we disposed of four skilled nursing facilities and interest in two continuing care retirement facilities for a total of $13 million. The annualized revenue on these facilities was $1.4 million. On average, the skilled nursing facilities were 35 to 40 years old and did not cover rent and the leases were expiring in the near future.

In addition, we are now in the market negotiating with a buyer to sell 38 medical office buildings which are owned by our joint venture with GE. The Company has a 33% interest in the JV. We anticipate closing this transaction in the fourth quarter.

Just a few words regarding the pipeline -- we're currently seeing a number of high-quality, large portfolio transactions primarily in the senior housing and medical office sectors. Competition has broadened to include nontraditional sources such as pension funds, private equity funds, private REITs and Canadian REITs. Overall, we are very proud of the quality and diversity of the transactions we have completed this year. Our year-to-date acquisitions and commitments are broken down by sector as follows -- 73% senior housing investments; 24% medical office buildings, all on balance sheet; and 3% lab office buildings. 7% of the total are development projects. Each of these profitable transactions maintains our disciplined underwriting standards, including the quality of the operator and the quality of the real estate.

Although no assurances can be given regarding future closings, our pipeline is strong and we have the potential to make additional profitable investments during the remainder of the year.

I will now turn the call over to Mark.

Thanks and good morning.

We continue to report solid results this year with FFO per diluted common share for the second quarter coming in at $0.47 compared to $0.44 for the same period last year. On a dollar basis, FFO increased 11% to 64 million. While we reported no impairment charges this quarter, last year's second-quarter FFO was affected by $2.5 million of impairment charges. Current-quarter FFO increased 6% relative to last year's pre-impairment FFO of 60 million.

With that overview, let me review a few items affecting our operating results, and then I will discuss our outlook for the full year. Rental income in the second quarter of 2005 increased 21% over the prior year, primarily reflecting our net acquisition and development activity during 2004, as well as investment in the first half of this year that Steve already discussed.

Sequential comparisons of rental income are affected by a couple of items. First, the second quarter was favorably impacted by our previously announced acquisition of five MOBs (ph) and five assisted living facilities in April of this year, aggregating $139 million. Secondly, quarterly comparisons are affected by contingent rental revenues that primarily relate to our tenant facilities. Contingent rents are generally recognized 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, compared to a favorable effect of 1.2 million in the second quarter of this year. Accordingly, 4.5 million of the sequential increase in rents is attributable to this reporting convention, while the year-over-year effect was minimal.

Interest and other income in the second 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 was relatively comparable.

Our GE joint venture contributed 4.3 million to FFO in the second quarter of 2005 and 2.6 for the same period in 2004, including fee income of just under $800,000 in both periods. The contribution of the GE joint venture to FFO in the second quarter of this year reflects 1.4 million of favorable revisions to the initial purchase price allocation of the October, 2003 MedCap acquisition. The revisions resulted in more value being attributed to below-market lease intangibles. Lease intangibles are amortized over a relatively short period, generally the life of the lease. Accordingly, the cumulative revisions reduced equity income by $0.5 million this quarter while the below-market leased intangible amortization favorably impacted FFO this quarter.

General and administrative expenses were relatively comparable on a year-over-year basis while increasing on a sequential-quarter basis. The sequential increase primarily reflects two items. First, as I mentioned in my remarks on our last call, 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. Additionally, the second quarter reflects expenses associated with SOX-based compensation award granted during the first quarter of this year to both employees and directors. Operating costs increased this quarter relative to the prior year, reflecting development properties that came online last year, the Swedish MOB properties acquired last December, the portfolio of five MOBs we acquired in April of this year, and two additional foreclosure properties.

Our balance sheet at quarter end includes consolidated debt of 1.6 billion, only about 10% of which is at floating rates, following our previously announced issuance in April of $250 million of 5 5/8 senior unsecured Notes. I should also mention that, in June, our (indiscernible) securities were remarketed and re-issued as 10-year senior notes with a coupon of just over 7%.

Under our dividend reinvestment plan, we issued 266,000 shares in the second quarter for $7 million in proceeds, bringing shares issued for the six months to 495,000 shares or $13 million. At June 30, our balance sheet has 10 properties held-for-sale with a carrying value of $9 million.

Moving now to outlook for 2005, we expect gross investments for the full year to range between 600 million and $750 million, including acquired interest in the properties, mezzanine debt investments, and development expenditures. Our consolidated gross investments to date have aggregated 441 million, leaving the balance this year to range between 159 million and $309 million. On balance sheet, dispositions are expected to range between 58 million and $63 million, and our guidance includes anticipated gains on those dispositions of about 12 million for the full year or 3 million for the last half of this year.

As Steve has already discussed, our joint venture with GE recently approved, subject to certain conditions, the sale of 38 medical office buildings with a value of about $100 million. We anticipate this sale to close by year end with a gain at the joint venture level in excess of $20 million. In connection with the sale, we anticipate about 24 million to fixed-rate mortgage debt being assumed and roughly another $30 million of floating rate mortgage debt being repaid at closing.

With those comments, I would offer that we expect diluted earnings per common share for the full year to range between $1.04 $10.8. At that level, FFO per diluted common share should range between $1.82 and $1.86. Our guidance includes $0.02 of FFO in the last half of 2005 being generated by the monetization of ownership stakes in a few of our portfolio operators.

Let me wrap up by mentioning two additional items. First, there's been recent discussion within the REIT industry regarding variable interest entities, VIEs. A number of REITs are now consolidating joint ventures and other entities that previously had not been. We fully implemented the new rules, known as FIN 46, effective January 2004, and at that time began consolidating five joint ventures that had previously been accounted for as equity-method investments. These ventures have aggregate assets of approximately $18.5 million and a nominal effect on earnings. VIE determination tends to be complex and subject to interpretation. VIEs are not necessarily just entities but can be traded through contractual and structural arrangements. Both VIEs and non-VIEs are also subject to revaluation on the occurrence of certain events. Accordingly, we routinely review our investments and other arrangements for VIE considerations and believe that we have accounted for such appropriately.

Last, we issued a supplemental information package this morning quarter, so much of the information that was previously provided in our press release is now located in a new document. We do expect the information to evolve over time and would be appreciative of any suggestions you may have for improvement.

With that, I will now turn the call over to Jay.

Thanks, Mark.

A quick word on our supplemental information, which we are issuing for the very first time as part of this earnings release -- we are continually striving to improve our transparency with our shareholders and the Street. This information disclosure is an important part of that process. While our IT conversion of last year now permits us to produce the information included with this report, the greatest technology in the world is not much value without the effort and judgment of hard-working professionals. In particular, I would especially like to recognize two members of Mark's team, Steve Robie, who joined last year from GE, and Michael Juling (ph).

As Mark indicated, our 2005 guidance incorporates property acquisition volumes of between 600 million and $750 million. Year-to-date closed property acquisitions of $441 million, combined with those transactions in our pipeline that we expect to close by September 30, amount to $600 million. The upper end of our volume guidance of 750 million, adjusted for HCP's anticipated 2005 disposition activity, would produce a net investment level of $700 million for 2005. This represents a 2.7 times increase over 2004's net investment activity of $260 million.

Underscoring Steve's comments, as important as the acquisition volumes is the quality of the acquired properties. Virtually all of these properties are recently developed or recently refurbished and are operated on the campuses of leading hospital systems, in the case of MOBs, or run by top-quality operators in the case of our senior housing investments. The properties are 100% private-paid in high barrier-to-entry markets and have significant downside protection in the form of master leases, letters of credit, and/or hold-backs subject to the achievement of specific property-performance hurdles.

I cannot emphasize enough the significance of our down-REIT structuring in securing these investments on favorable terms to the benefit of HCP shareholders. Of the $600 million in activity, we expect to have closed, by quarter end, 332 million or 55% of the total will have involved transactions utilizing the unique HCP down-REIT.

Steve also mentioned the growing presence of nontraditional healthcare real estate players rotating into our space. To be specific, in the last 18 months, we are aware that the following institutions have bid for, acquired or exited debt and equity components of healthcare real estate portfolios -- Prudential, Starwood Capital, Fortress, (indiscernible) Blackstone, Charlesbank, Whitehall, AEW, JP Morgan, Merrill Lynch, CalPERS, Carlisle, Chartwell, and ING. For those of you that believe that the current lower cap rate environment is a temporary aberration, we are aware that at least two of the institutions I have just listed when to their investment committees during the month of July requesting and receiving permission to lower their return hurdles for healthcare investments.

In light of this environment, I'd like to summarize our property opportunities that we have pursued this year. We have negotiated or our negotiating for ten separate portfolios so far in 2005. These ten portfolios aggregate 2.6 billion of value and represent the sectors of senior housing, medical office building and lab pharma. Six of the ten opportunities we have closed or expect to close on by September 30. Of the remaining 4 situations, we elected to drop from three, not for valuation reasons, not of concern over structuring issues that we identified during the diligence and negotiating period. As examples, in one opportunity, the operator withdrew their guarantee of the lease payments at the eleventh hour. In another situation, we had concerns about the structure of the master lease and restrictions on our ability to subsequently sell properties.

Here is an interesting observation. In only one of these ten opportunities did we pass over a concern based on valuation. This involved a high-quality senior housing portfolio that will end up trading at $335,000 per unit.

Now, let me move to comments on our existing portfolio. Hospitals -- our healthSouth and Tenant properties continue to perform to expectations. During the June 30 quarter, HealthSouth filed its 10-K reports for the years ended December 31, 2002 and 2003. The company has stated that it expects to file its 2004 10-K later this year. At that point, we will once again begin to incorporate the coverage metrics on our nine HealthSouth properties into our overall hospital sector coverage ratios.

Our seven tenant properties produced a modest uptick in their performance from the prior quarter. On their earnings call of this morning, Tenant announced a reduction in their operating loss from the prior period. However, I would note that they do anticipate a delay in filing their 10-Q.

From an overall sector perspective for hospitals, CMS came out last night with their final in-patient payment rule that results in a net Medicare increase of 3.5%, significantly better than the proposed 2.5% increase.

Skilled nursing -- two observations. First, on our last call, I had mentioned there could be some good news coming through our largest skilled nursing exposure, the State of Indiana, which represents 25% of our overall skilled nursing portfolio. The proposed provider tax became law effective July 1, 2005 for skilled nursing properties in the State of Indiana. The recurring effect of this legislation results in our coverage ratio, after management fees for our Indiana skilled nursing portfolio, to increase from its present level of 1.2 times to 1.6 times. Actually, the news is even better than that, as there is an additional one-time catch-up payment which we have elected to not incorporate into our coverage statistics.

Second observation -- on the impact of RUGs, we have run a sensitivity to our portfolio assuming a cut of $15 per patient day. This analysis indicates a potential deterioration of 0.2% or 20 basis points. From an overall skilled-nursing exposure standpoint, the impact of the good news from our Indiana portfolio and the negative impact from the potential RUGs cuts is essentially a push. By the way, skilled nursing now represents 18% of our overall invested real estate portfolio.

Senior housing -- what better way to evidence the continued improvement in performance of this space than to observe that development activity is picking up? The strong performance in this sector will result in a multitude of initial public offerings and (indiscernible) level acquisitions and refinancings, as well as additional property acquisition opportunities for HCP.

Medical office buildings -- the joint venture portfolio disposition that we are in negotiations on represents the continuation of a strategy to work our overall MOB portfolio. The number of the properties involved in this planned portfolio dispositions were located on the campuses of HCA hospitals, sold by HCA as part of their announced disposition program last month. We anticipate being able to provide you with additional details on this transaction, as well as its implications for our remaining joint venture portfolio, on our next quarterly earnings call.

Some final remarks -- our Board meeting of last week concluded two years of Board meetings at HCP where I have served as Chief Executive Officer and it provides a reasonable time frame to assess Company performance. Two years and one Board meeting to go, we developed a list of 48 specific initiatives that we hope to achieve prior to the third anniversary of my employment at the Company in the fourth quarter of this year. At each subsequent Board meeting, the Directors have received an update as to the progress we have made against these 48 objectives. As of last week, 40 of these initiatives have been completed. I am prepared to update you this morning on two of the remaining eight initiatives, specifically FFO payout ratio and sustainable same-store sales growth.

Payout ratio -- during the first quarter of 2003, we set, as an objective, the reduction of our FFO payout ratio to 90%. For the year ended December 31, 2002, HCP's payout ratio was 101%. At the midpoint of our FFO guidance for this year, our payout ratio would be 91%. While a reduction from 101% to 91% is substantial progress, the achievement is even more significant when the unprecedented level of disposition activity that we executed during 2003 and 2004 is taken into account. It is no great secret that, beginning in the late 1990s through 2002, HCP grew its dividend at a faster rate than it grew FFO. Beginning in 2003, with the Board's decision to move away from the historical quarterly increase in the dividend, HCP reversed this pattern and has grown its FFO at a faster rate than it has grown its dividend. With the achievement of a 90% payout ratio now likely in the near-term, the Board will have greater flexibility when it needs to address dividend policy at its Board meeting in February, 2006.

Sustainable same-store sales growth -- HCP established the goal of achieving sustainable, same-store sales growth across its entire portfolio. Two years ago, we were faced with the bankruptcy of one of our skilled nursing operators, Centennial, and the possibility that another, Sun Healthcare, could follow. Last year, we experienced a reduction in the level of participating rents on our Tenant portfolio as that Company began to feel the effect of an ongoing series of operating challenges. This year, we are anniversarying the move out of a handful of physician groups in certain of our medical office buildings and the workout of two assisted living properties. As we head into the letter half of 2005, the overall improvement in each of our real estate subsectors positions our portfolio for sustainable same-store sales increases across the board in 2006.

So, with our diversified real estate portfolio in the strongest position in the Company's history, a bank line that is only drawn down to half of its total availability, a balance sheet with considerable dry powder without the near-term need to visit the equity markets and a corporate infrastructure that has been overhauled and significantly enhanced during the past two years, you can begin to understand both the level of enthusiasm that exists within the HCP organization and the rationale as to why I continue to receive 100% of my non-base salary compensation in the form of long-term equity grants.

That concludes our formal remarks. My partners and I would be delighted to take your questions at this time. Operator?

Thanks very much, sir. (OPERATOR INSTRUCTIONS). A.J. Rice from Merrill Lynch.

Hello, everyone. First of all, just a little more color on the decision to exit the 38 medical office buildings. I understand HCA is selling properties in the change in ownership and the hospital campus. But why does that trigger automatically you're looking to exit those properties? Is there some other dynamic at work?

Any connection between HCA's plan to dispose of the properties and this decision to try and imply there was one is nonexistent. If you go back to the time that we executed the MedCap transaction in the fourth quarter of 2003, we specifically identified certain properties that might be candidates for disposition. In fact, if you go back and take a look at the very thoughtful financing that our Senior Vice President of Strategic Development and Treasurer, Talya Nevo-Hacohen, has put in place in January of 2004, it was tranched, and one of the tranches had floating-rate debt against a handful of properties. So, this is just kind of an execution of a plan that had been put in place some time ago.

I see, okay; I miss understand that. Obviously, you don't have, in the skilled nursing portfolio, another state anywhere close to Indiana in exposure, but there certainly is a lot of discussion about provider taxes and other issues such as that. Can you comment on whether there are any other opportunities along those lines that you might be watching, front burner?

We're watching all of those. Again, I think I said, on my call last quarter, with the emergence of provider taxes, you need to really drill down to the state-by-state level and see where there are already in existence these provider taxes and take a look at the coverages there and then take a look at where there's the possibility for provider taxes to come into being as part of law, and look at the potential for an increase. So, I think we would continue to -- we have a number of states where there are proposed provider taxes under consideration that would benefit us but by far and away the biggest one in terms of moving the needle is the State of Indiana, home to the University of Notre Dame, I might add, that we talked about in the last quarter.

So in terms of going forward, A.J., I wouldn't envision any additional provider tax laws coming into effect that would actually be significant enough to move the needle in our overall portfolio.

Just my final thing would be a little more color on Aegis and Oakmont, the two investments there -- are these new relationships for you, and sort of some flavor as to like how big will you be for them in terms of their overall portfolio and so forth?

Sure. Let me ask Steve Maulbetsch to answer that.

Yes, that is a new relationship for us. Aegis operates over 30 facilities; I think it's around 33 facilities, and so we are 12 of the 33 and we do have high hopes to do more business with them.

Anything on Oakmont real quick?

Oakmont and Aegis are really kind of tied at the hip. They operate together. Aegis operates all over the Oakmont facilities and even though they are separate entities, they kind of operate together.

Okay, I see. Thanks a lot.

Jerry Doctrow of Legg Mason.

Good morning. I had a couple of things. On the sale of the MOBs, just I wanted to get a little bit more color on sort of what the rationale for those -- if they are just like small one-offs or something? Also if you can kind of walk through, so I can understand a little bit better, the financial impact to HCP as the JV sells those assets.

Yes. As I think I mentioned in my formal remarks, we anticipate being able to provide you with additional details on the transaction on our next quarterly earnings call.

So in terms of size or impact on your revenue, whatever, nothing at this point?

We are in negotiations with a very, very high-quality private operator and our kind of stated views on this sort of stuff is to not talk about things until they are closed. We had our hand forced a little bit; there's been a number of publications that featured this, so we felt it was important to let you know about it, but until transaction is closed, we won't have any -- (multiple speakers).

Okay. If you could just review the down-REITs because I think they are just -- some of this they went through a little quickly, so help me just understand the amount of down-REIT units that were done for Aegis and then I think the other MOB transactions as well.

Yes. The down-REITs in the Aegis transaction were 19 million.

Okay. Did I understand, then, on the lab facility (indiscernible) down- REIT again on those -- that expansion?

Yes. That -- I don't have the exact number on that, but I think it's going to be maybe 2 or 3 million. It's going to be a small amount.

Okay. Was there another one there as well, or just those two in the (indiscernible) --?

Well, I think what I said, Jerry, was if you take a look at the transactions that are either closed or we anticipate closing by September 30, about 55% of that total is likely to take the form of a down-REIT, so you can correctly conclude that, among the deals in our pipeline, we have another down-REIT candidate.

Okay. 55% of the total deals will be involved with the down-REIT structure but that's not the amount that you're going to spend using shares basically?

Absolutely not. What happens is it's a very small piece but an important piece, because it ends up being oftentimes the difference-maker in terms of an owner of healthcare real estate to go with us versus someone else.

Right. Then, Jay, if I could, I just want to understand a little bit how you think about sort of your cost of capital and sort of pricing on these deals. Obviously, you're going in at among probably the lower prices that we've seen from healthcare REITs. You've got very attractive sort of annual escalators, and I know you're talking about in terms of IRR over the lease terms, but can you kind of walk me through what you're thinking and maybe your strategy going forward on acquisition pricing?

Sure. Well, I think, as you probably picked up, I have given my comments on the institutional capital. We think this is an environment that, at least near-term, which I would define to be the next couple of years, is here to stay. We don't think -- we're not anticipating a reversal in the cap rates. That's the first point.

I think the second point is no big surprise we've experienced a significant reduction in our cost of capital over the past 12 to 15 months. The most recent visit that we had to the capital markets was in April, where we executed a 12-year, unsecured bullet at 5 5/8, and the demand for that was such that we were able to increase the size of the deal by 25%. So we continue to have very, very good and regular access available to us in the capital markets at unprecedentedly low cost to HCP.

Now, if you take a look at the money we've deployed year-to-date or anticipate deploying between now and the end of the current quarter that we are in, I think you'll find that, on an unlevered IRR basis, you're seeing our returns kind of in the 9.5 to 11% (indiscernible). That's unlevered.

Were you to assume, say, a HCP historical leverage metric $1 of equity and $1 of debt, that would take those sorts of returns into the lower to midteens in terms of IRRs. then, were you to contemplate doing something like we did with our MOB joint venture, where we then went a step farther and employed property level leverage at a level higher than our 50-50 metric, you could take those returns and advance them into the mid to high teens. That's actually before you might adjust them for any sort of big income. So I would just make the observation, whether we're talking about 9.5 to 11 on an unlevered basis, low to midteens, 50-50 leverage basis, or something higher on a property-level sort of structure, like our current joint venture for MOBs, across each of those scenarios, those are very, very attractive returns for our shareholders. Really the only issue is one of how you want to balance return on shareholders equity versus how much money you want to put out. So again, we still are in a very advantageous part of the cycle right here.

Being sort of going in at, say, the lower initial yields and sort of being more dependent on that annual escalator, do you see additional risk there or you see yourself having mitigated it through some of the other structuring things?

I think we primarily see ourselves trying to mitigate that. Your answer is absolutely spot on. There's surely going to be additional risk, so what we then do is take a look at the quality of the real estate, the quality of the operator, where, you know, I mentioned that of the yields we got reasonably series about this year, it added up to 2.6 billion. If you take the 600 million we anticipate closing on, that's just under 25% is our hit ratio. So, I kind of took you through some of the reasons why we passed on some of the other ones. I think oftentimes it's not so much the valuation that kicks the deal out; it is our concern over the quality of the downside protection, some of the other intangibles that go into that. So, we'd like to think we are very, very careful. Again, we are in a fortunate position right now of having some very attractive opportunities to take a look at.

Basically, just as sort of -- I think this is implied but you see yourselves with that structure being able to compete head-to-head with the private capital that's out there, so you see yourself as still being able to make good-sized acquisitions go forward?

Absolutely. Again, I think this is where everybody talks about -- either if they are talking about our company, they talk about the diversified portfolio or other people will talk about their desire to get diversified. You know, that's all nice but I think you've got to think about, what does it really get us? This is actually one of the more subtle benefits of having a diversified portfolio.

If you were to take a look at the complete waterfront of healthcare real estate and kind of put it on a continuum of most institutional attractive to the least institutional attractive, you'd probably come up with maybe eight subsectors. The one that probably looks and feels the closest like a traditional real estate space, you probably put active adults/senior apartments. Now, at the present time, we're not in that space.

At the other end, you'd probably have skilled nursing. Then, reasonable people can debate the placement, but marching from the active adult/senior apartment side of the continuum to the skilled nursing, you'd probably walk through independent living, medical office building, lab pharma, continuing-care retirement communities, assisted living, hospitals, then you'd end up in skilled nursing, in terms of -- (multiple speakers) -- most acute. I would point out that we are in seven of those eight subsectors, so everything but active adult and senior apartments.

Here's the subtle benefit to having a portfolio that's got that sort of representation in it; the institutional capital is kind of washing across all of these sectors more or less in the order of which I gave them to you. So we first started to see this in the fourth quarter of '02 in the medical office building space, and we realized that we needed to kind of change our strikes a little bit or we weren't going to be terribly active in that market. That then brought us to the conclusion that we ought to try to create a joint venture with an institutional partner. Then we've honestly been active in that space and have made -- it created very, very good value for our shareholders.

I think -- we are certainly expecting to see that that pattern will continue. We've seen it start to creep into certainly independent living with the transaction I mentioned to do you, the only one that we have passed on this year, based on valuation. You're starting to see that certainly in some of the higher quality assisted living, as well as the lab and pharma. We expect that penetration over the next couple of years to continue. But there's where our diversified portfolio essentially acted as a little bit of an early warning system that something was up. I think we are now in a position to kind of see the kind of stake to where the puck (ph) is going to be as opposed to where the puck is right now.

Meaning you might move down that continuum, if you will, to get yields that make sense for you?

If, on a risk-adjusted basis, it make sense -- we're not going to go hopping to the highest-yield bucket just because with higher yields comes higher risks, so one of the conclusions we came away from really in '03 was that the notion that we couldn't be competitive any more in MOBs was really a judgment that had been made solely on the basis of gross yield and not risk-adjusted yield. On a risk-adjusted yield basis, if you're buying portfolios of MOBs located on the campus of the number one or number two hospital system in a given metropolitan area, you've got very, very attractive long-term economics.

Which hospital -- and I will jump off -- which hospital was the (indiscernible) MOBs that you bought, on which campus?

You know, we've been asked not to identify that by the seller, which we are obviously going to continue to honor. I suspect maybe at the end of this year we will be able to talk about that, but it's a major kind of top 30 Midwestern market, and this is the top hospital system. I think it's got a 40% market share in that location. Most importantly, as my partner to my left likes to tell me and might partner down in Asheville likes to tell me, the three months of actual results on that portfolio are significantly ahead of not only budget but the underwriting metrics that we underwrote that portfolio on. That's gone extremely well. Obviously, it's only been three months but we are delighted with the results of that investment.

Greg Andrews of Green Street Advisors.

Just to follow-up on the Aegis deal a little bit, could you give a breakout of the independent living versus the assisted living component and whether you've thought about those two parts a bit differently?

Yes, let me ask Steve to take that one.

Yes, the independent living is about one-third of the total number of units. Yes, we do look at that. You know, independent living generally has higher margins. The capital that you can raise, the debt financing that you can raise with independent living is generally cheaper than assisted living, and we like to see that kind of a mix.

Okay. In terms of the -- you mentioned that kind of the best way to think about this was really upon the whole stabilization of both the one facility that just got built, plus two additional ones that are about 80 -- in the 80% occupancy range. So, what would be the coverage ratio? I guess you are starting at 1-to-1. What would be the coverage ratio you might expect in '06 that corresponds to kind of that 7/6 (ph) cap rate?

Yes, that coverage ratio will be close to 1.1.

Okay.

That's after 5% imputed management fee.

Right. Obviously, on a kind of per-bed basis, it's a high price, and it sounds like a high-price, and on a yield basis, it's at the lower end of the spectrum. But what was it in particular about these facilities? Was it the locations or the demographics, or was it the quality of the operations? What gets you comfortable with what obviously are some pretty high rents for the people who are living there?

Yes, I think certainly the locations -- you know, these are in high barrier-to-entry markets, the fact that they are newer facilities. I think just the fact that when you go and visit these facilities, they are the kind of place that you'd like to put your mom in. They are really wonderfully -- (multiple speakers) -- or your dad, exactly! I think that was important, and I think the quality of the operator was important. I think, when you look at it in relationship to replacement costs, you know, it is an attractive price. I think, when we look at replacement costs, we also include the cost to fill up the facilities. In the last 18 months, construction costs have gone up quite a bit. It can take up to four years to go from the time to identify a site to the time that the property fills up. So we've seen other transactions out there, new construction on the West Coast in the 270 to $300,000 a-unit range. Then Jay also mentioned on the call there's another transaction that we expect to trade north of those numbers. So, we are pretty happy with the price that we paid and feel this is a high-quality transaction.

I think we've got some -- if I'm not mistaken -- some properties in the portfolio that are around a corner from Greg, right? Don't you have one in Dana Point and one in Escondido? So at some point, maybe we will organize a little field trip to give you folks some flavor as to what we are talking about here, but it's without a doubt among the finest if not the finest assisted living independent living portfolios we've been able to bring into our fold.

Great. Is Aegis -- what are they doing with the proceeds? Are they paying down some debt or are they using it to build more facilities? What's kind of their game plan as an operator?

I believe they are reinvesting in their business and continuing to grow their business. (multiple speakers).

There's two principles; one is a very high-quality operator that was an executive Vice President at Sunrise, and the other individual is the developer and they intend to continue to kind of use this to reload in some of their next plans, as well as become a new investor and stake older in HCP via the down-REIT.

Getting to the down-REITs, how did you determine the pricing of those? Was it just based on the price going at the time the time you were negotiating or were they set out of the money or -- (multiple speakers)?

(multiple speakers) -- talking about the underlying per-share price that they -- (multiple speakers)?

Yes, how do you determine the value of those?

Well, I think, in that particular case, we had agreed on a price that had both a floor and a cap, and you should have -- have we disclosed? I don't think we disclosed it, but you should assume that, at the time the transaction closed, which is I guess two Fridays ago, the equivalent price was absolutely was very comparable to the then closing price of HCP, so there really wasn't much of a differential.

Then turning to kind of the same-property portfolio, which -- and I really find your new disclosure here extremely helpful, so thanks for doing that. You know, you have year-to-date same-property NOI growth of about just under 1% and partly pulled down by some of these issues in the medical office buildings that you alluded to, Jay, the move-out of some physicians groups. How should we think about this number for, say, the whole year and, say, moving into '06? Is it realistic that this number moves up or will there always be some issues like those kind of turnover issues that -- (multiple speakers)?

Let me make a general comment and then I think Mark is prepared to give you some additional specificity on what's going on with these properties. You heard my remarks on one of our 48 initiatives was to create sustainable same-store sales growth. We believe, as we've come through the end of '05, we are in a position to see that very event occur for 2006. Now, absent that, at this point of the year, I am not going to get into any predictions or forecasts of what the actual percentage would be, but starting off the year and being able to look down the field and not have bottle rockets going off in the portfolio is something that we are all very excited with the likelihood of that happening in 2006. So, with that -- and maybe, Mark, you could give a little more color at to what's going on in terms of specific items here.

Within the MOB group, Jay sort of covered it; the negative there, the 2.7% on a cash basis primarily reflect some tenant rollovers and some rent resets on certain properties.

On the assisted living side, that primarily reflects, as I mentioned in my remarks, that we had two additional foreclosure properties where we currently have a manager working on those and they are in the process of being re-leased, so that's primarily what's driving the assisted living performance.

In the skilled nursing facility area, the improvement there almost at the 6% is primarily related to back-rent collections that we were able to achieve for the first six months of the year, so that's why that number is so high.

Then in the hospital sector, the primary reason for the 0.4% increase is you have a number of things that are sort of offsetting each other. One, you had lease renewals on two hospitals in South Carolina, which were favorable. You also had some renovation of a hospital which went into effect, so now we are seeing the additional rent on the renovation cost. At the same time, that was partially offset by some rent resets that were unfavorable that occurred in the later part of 2004. So, you do have a lot of things running through each sector that affects the same-store performance.

Great. It sounds like there is kind of a seasonality to the business, due to these contingent rents. Could you help outline? Is there a simple way to think about kind of how that works in a typical year?

Well, I think that -- now (indiscernible) but there is -- I think Tenant is kind of -- you've got to put a box around Tenant. Why don't we talk about that really first.

Generally the way it works is that, under some of the contingent rents, we are able to contractually build revenue because we get -- we earn different on the contingent rents; we earn rent based on certain revenue thresholds being achieved. In certain cases, we are able to project, on a quarterly basis, what the annual revenue is going to be and therefore bill off of a project annual number, so that's what we do. So in the early part of the year, we are able to bill -- we are able to bill an amount in excess of what we can recognize on a GAAP basis because, on a GAAP basis, you can't anticipate that you're going to need an annual threshold; you have to have actually crossed the line. So therefore, in the first quarter, we generally are able to bill more than we can recognize and then, in the second and third and fourth quarter, that relationship turns around.

But in terms of the GAAP reporting, then, it is lower in the first quarter, and what, picks up each subsequent quarter, or --?

Yes, that's correct.

Great. Lastly, you mentioned the monetization of some stakes in companies in the second half. Could you provide a little color on that, please?

Again, I think we fall back on our preference to tell you about that after -- these are transactions that have been signed but have not yet closed, and so until they do, we'd like to defer on the specifics.

Is it there to think of those as kind of one-time items?

Or at least lumpy in nature, as opposed kind of return -- (multiple speakers)?

I think I like your second termination better than the terminology of the first. There may be several of these, which is all about how various statements are performing. There is going to be -- as I mentioned, there's going to be a lot of initial public offerings, a lot of entity-level transactions. We have some of that stuff in our portfolio, so we watch that. But I think lumpy is probably a better way to describe it.

Robert Mains of Ryan Beck.

Good morning or good afternoon. Two questions because most of my stuff has been answered. On the JV sale that you're contemplating, I know you like that structure. Is the assumption that whatever you generate would get to some point redeployed?

Actually, the way that venture was set up, that does not have that feature, so that would be after debt paydown, any proceeds available after that, we would then reinvest in our core -- as part of Steve's kind of acquisition volume, but it would not -- it would not remain in that particular venture.

Unless there were another funding? Is that correct?

Well, certainly, clearly you don't need it because there's plenty of firepower in that venture. Remember, that was the venture that was increased from its originally stated goal of 5 or 600 million to 1.1 billion. So, it's not as if we need or we to do something more in that particular venture. We have ample dry powder to do that one.

Fair enough. Then a bigger question on acquisitions, Jay -- you know, in some of the past conference calls, you've characterized the market -- and I might be putting words a little bit in your mouth -- but as being kind of overpriced. Yet you found a fair number of acquisitions in the last quarter. What's changed? Is it the terms that you're able to complete things on, or is it your cost of capital? What do you see different than when you were characterizing a lot of segments as being red hot?

Well, I think the sector is still red hot. I think you might have been actually putting words in my mouth when you said overprice (indiscernible) that. I think you've had tremendous cap-rate compression across all the sectors, but as I mentioned, our cost of capital has come down as well. Notwithstanding that, you know, the percentage of deals that we look at that we end up closing on -- and this year it sounds like it's just going to be under 25%. A lot of times things get kicked out, not so much on valuation but for other reasons. So, we intend to remain an active acquirer and potentially disposer of properties.

Right now, the opportunities we have in front of us are -- create significant value for our shareholders. I would say if you take a look -- and maybe one way to look at it is take a look at her hit ratio, stuff we're looking at versus stuff we're closing. It's just under 25% this year, that is up from last year, which was probably -- actually for the last two years -- which is probably somewhere between 10 and 15%. I think that goes directly to the quality of the opportunities. Quite frankly, this year -- and I mentioned that on the last call -- stuff we're seeing and looking at is just of a higher quality than it was in the previous two years. So it will be interesting to see what happens next year. If this valuation environment continues, maybe at some point, with a lot of the higher-quality stuff having come to market, maybe you'll see a reversal back to kind of the overall quality level that we saw in '03 or '04. But for right now, we really like the stuff we're looking at and the Aegis portfolio and the property in Florida and the addition to the campus at the University of Utah are directly on point for what we are seeing.

Okay, so rather than overvalue it, I guess would it be fair to kind of portray what you are seeing now as being a more favorable risk reward than what was out there a year or two ago?

Yes. For us, yes.

The conundrum maybe you are thinking about -- wait a minute now, the valuations are higher. How can that be? Well, again, I think you kind of get what you pay for. I think what we're finding is that we are able to close on higher quality properties, higher barrier to entries, very meaningful escalators. If we've got to pay a little bit more for that, that's okay versus what we were looking at in '03 and '04, where we just didn't have the -- the properties you're looking at didn't have those characteristics.

Great, thanks a lot.

Jordan Sadler of Smith Barney.

I just wanted to follow up I guess on that last question a little bit. I was curious as to what your return hurdles are now, if they've changed at all. It was interesting that you, I guess, estimated, on one of these transactions, the Aegis transaction, they had 9.3% expected IRR over time. Is that consistent with where you've been awhile, or did you ratchet down your return hurdles recently as well or what?

Well, a couple of comments, Jordan -- one, you're going to have different thresholds for each sector, so you're going to have MOBs is going to be different than independent, which is going to be different from assisted, which is going to be different from hospitals, which is going to be different from skilled nursing, which is going to be different from lab pharma. So, really for us, you can't just generalize. Our cost of capital has come down. These opportunities have presented themselves to us, and they result in -- (multiple speakers)/

Is there a minimum hurdle? Maybe that's it.

We are not -- we clearly not going to do anything below our cost of capital. We are going to make -- we are only going to make accretive transactions, and we are in the fortunate position of having a lot of opportunities to kind of check those boxes right now.

Okay. It looks like your blended initial lease rate on this stuff to date, if I'm guessing, looks around maybe a 7.5 or so. Is that a good number to use on the balance of the year?

Again, Jordan, it depends what space we're playing in.

Well, I guess that is the other question I had for you.

Yes, I mean, if we are -- we are kind an independent, kind of assisted, yes, that's probably on point. If we're talking about hospitals or if we're talking about some of the other sectors, that would probably be low.

Well, I guess, where are your sights focused right now for the second half of the year -- more independent assisted-living type stuff, or other sectors?

Well, if you take a look at what we anticipate doing to get to the 600 million roundabout by September 30, the transactions that are in that number that we've not yet closed on are kind of split 50-50 between MOB and assisted living.

What's your view on the skilled nursing facility space right now? You identified that as being sort of the other -- one end of the continuum you described. Was that the last place you'd look, or -- (multiple speakers)?

Yes, when I said it was at the other end of the continuum, I was doing that in the context of required yields. Remember, I started that discussion by saying that, at the other end, we at the active adult senior apartments. That was -- (multiple speakers).

Higher levels of acuity, I got it.

Therefore higher yields.

That said, we have, the last 2.5 years, been preaching to try to reduce our exposure to sectors where you've got a lot of government, be it federal or state, reimbursement owing to continuing concerns we have with both the federal and state levels deficits. Each quarter of this year, we have reduced that to a new all-time low in the Company. That's not to say we wouldn't do a skilled deal; we did one last year, April of '04. That's an absolutely fantastic transaction performing ahead of expectations. But I think that we've obviously got different underwriting criteria for doing a skilled nursing facility than we are going to have doing some of these other sectors.

Carey Callaghan of Goldman Sachs.

With respect to the lease intangibles discussion, Mark, and I apologize if I didn't catch all this, but can you just review the impact on the quarter? I think you said $500,000 reduction to equity income. Was there an offsetting 1.4 million on the P&L?

No, let me go sort of back over it. What happened was, in connection with doing an audit on the joint venture financial statements, we identified that we needed to allocate more of the value from the initial purchase price to lease -- to below-market lease intangibles, which has the result of also allocating more cost to real estate. The real estate is depreciated, as you know, over a relatively long life and that impacts net income. The below-market lease -- (technical difficulty) -- are amortized into revenue and over a relatively short period of time, generally the life of the lease. So therefore, the net impact of those two things is that the depreciation adjustment impacted our equity income pick-up this quarter by about $0.5 million, okay? But the depreciation obviously doesn't affect FFO, but the below-market amortization does, so there was a favorable FFO adjustment related to the below-market lease intangible amortization in this quarter of about 1.4 million.

That did impact FFO?

That did impact FFO. So if you look in the press release, if you turn to the page that reconciles net income to FFO, you'll see that the FFO related to the joint ventures -- unconsolidated joint ventures is up substantially over last year, and that's the primary reason.

I see, terrific. Jay, with respect to valuation, you talked about the 2.6 billion I believe it was, the ten transactions. Is it your sense that the market is paying up for larger portfolios, given the amount of institutional interest in healthcare properties? If so, what is the order of magnitude, the basis-point spread for larger deals?

You are absolutely correct and what is amazing to us is how quickly that changed. We went from an environment two years ago in MOBs where you had discount pricing on larger transactions and premium pricing on smaller transactions. That has been completely turned upside down. You now have discount pricing on the larger deals and you've probably got premium pricing on the smaller deals. We believe that's almost entirely a result of the institutional capital that has come into this space.

In terms of a yield differential, you know, depending on the property, depending on the location, depending on a whole bunch of stuff, it could be 50 to 100 basis points, something like that.

Meaningful, okay. Then lastly, and you might not be in a position to comment on this, but you said you'd talk more about it at the third-quarter conference call -- but what's the game plan for redeploying in the MOB JV proceeds that you will sell?

Well, again, I don't think we have a specific game plan, only because -- well, as I mentioned on an earlier question, the (indiscernible) come back to us, so they don't sit in that venture. Then we would just tell you we would probably just do that as money is fungible, so that's part of our acquisition deployment plan for the second half of the year. That would be money that the margin would be that much more money that we would not have to go out and borrow either off our bank line or we were talking about another term debt deal. So it would be a reduction in the borrowing requirements we would have. That's probably the way we think about it.

Terrific. Thank you.

Robert Belzer of Prudential Equity Group.

Just a couple of questions today -- first, just a little clarification -- (indiscernible) you had said the medical office disposition was 100 million. Is that the total consideration for that sale?

I think it was described as being around 100 million. Yes, that would represent the entire transaction value.

Okay, great. The next question is on -- on the additional issuance down-REITs, you gave a number of 55%. Now that I'm assuming would be of the additional transactions and not consideration?

Robert, I think what I said was we would take a look at our dollar volume that we intend to close by September 30. We expect that to be about 600 million. I think I said that about 55% or $332 million of that 600 involved transactions where a down-REIT was part of the overall transaction structure. It is by no means and is nowhere near 55% in terms of the consideration but it is taking the form of down-REITs. I think Steve mentioned to you, in the overall Aegis deal, which was $267 million round numbers, about $19 million took the form of a down-REIT, so in that case, it's less than 10%.

Can we expect something in that magnitude for the balance of this transaction?

Better than the 600?

Right. For total consideration in the 10% in the pharma boundary units?

That's a good question. We will have to get back to you on that. I think we haven't -- at least I would be guessing on that; I do not do that. So, we can come back to you on that, or as we close those deals, probably what we will do is we will give you the specifics on the next call as we hopefully close those two transactions.

Would it be fair to say that it wouldn't vary dramatically from that level? (multiple speakers).

I think that is reasonable.

Then just a follow-up on the cap rates on acquisitions and also on what you may expect on dispositions. Some of your comments -- I'm assuming that what you're looking at would be pretty much similar to what you already closed this year in terms of cap rates and you're not really seeing too much incremental compression. Is that a fair assumption to make?

I think we've seen compression from the first of this year 'til now, Robert. I think, in the last couple of transactions, which have been primarily in the senior housing, I think we've started to see some stabilization, albeit stabilization at lower caprate levels.

Okay. Just one other final question -- you mentioned you had dry powder, Jay, to fund investments. Can you kind of give us an indication on how much dry powder you may have?

Well, if you look at our JV joint venture, we've got 1.1 billion of capacity there, and I think we're probably got -- I don't know, something less than 600, so you've probably got 0.5 billion of MOB dry powder. Then if you take a look at our shelf, I think, in terms of shelf availability, we are about 1.25 billion. Then on top of that, you've got our bank line, which pro forma for the Aegis deal is only drawn down by half, so that ought to take us through the end of the current quarter I think.

What I'm alluding to is, in other words, before your leverage ratio would get to the point where you would want to visit the equity market say?

I think in the first quarter this year, I kind of indicated that I felt, at least for the next $0.75 billion or so volumes, given where we had our leverage ratios and our coverage ratios and things like that, we didn't feel the need to revisit the equity markets. Now, obviously, any disposition proceeds would add to that. But at the present time, if we're kind of put out -- since I think I said that -- maybe 0.25 billion, that's just round numbers. We probably feel like we've got at least another $0.5 billion worth of transactions that we could take down for cash without requiring us to go back to the equity markets. But here again, that's where, depending on how we take it down, if we're taking down a lot of volume in the MOB venture, it would be even more than that because, A, we only own a third of that venture and, B, we will employ higher loan-to-values on the transactions we take down there. So you better be -- are we talking about on balance or you are talking about in debentures or think like that, but I think, if we're talking about on balance sheet, I think we feel pretty good, at least for the next $0.5 billion or so of activity.

That's it for me today. Thanks.

(OPERATOR INSTRUCTIONS). Gary Taylor of Banc of America Securities.

Good afternoon, thanks for taking all of the questions. I just had a question on the senior housing market and particularly the assisted living market, which obviously I would characterize as heating up again and development activity growing. Historically, you know, development, investments in those types of facilities have been a big source of rent resets and write-offs for the healthcare REITs. So as you're kind of looking forward and you are seeing development pick up again, do we see you out continuing to look for triple net lease opportunities on stabilized properties, or do we start to see your construction lending move up there, investments in development properties move up there? How do you view how you will participate in the growth of that market?

Well, the first, second and third most important thing to look at is quality of the real estate, the barriers to entry, and the quality of the operator. So, we love -- we love $268,000 a unit in the form of the Aegis transaction where we're getting brand-new properties in very, very high barrier-to-entry markets with an operator the quality of Aegis. Now, that's the first comment I would make.

The second comment I would make is you've not seen us do any development in assisted living. The development we've done to date has been in largely in MOBs and there, we are starting off with -- typically with in excess of 50% of a commitment to have the property pre-leased. We are also talking typically about having operating support agreements provided by the hospital on whose campus we're building the MOBs.

With respect to the Aegis transaction, we do have a property here that's actually opening later this month. It's not even open yet. It's 35% pre-leased. We like it a lot, we like the market, but I don't think you're going to see us go on kind of a financing scheme to finance assisted living development; I would be surprised if you saw us do that. So, I think we're going to kind of stick to higher barrier-to-entry markets, stabilized properties or soon-to-be stabilized properties, and kind of lock in some of those good escalators. That's the game plan for now.

Any thoughts on, for the assisted living providers, how receptive the banks are becoming to them again? Do you still think that your cost of capital implied in the sale leaseback is going to be attractive to them versus some of their other revenues? Any thoughts on just how that's kind of moving?

Well, the banks have been very aggressive. You've seen the same thing go on that you've seen in the residential (indiscernible) market. I actually think the bigger issue, Gary, to watch for and if I had to bet, I would think we've got some new names that you're going to have in your coverage universe here; you'll have several operators of assisted living going public, certainly one very large one, and others to follow. We've seen this happen in -- if you take look at American Retirement Corp., I think that is a company that 2.5 years ago we were fortunate to have the opportunity to invest some capital with. Their access to the capital markets, alternative sources of capital, is somewhat unlimited. Today, they've got a sixfold increase in their market cap. They've done an equity deal in the first quarter of this year. You'll note that one of the loans we have paid this year was actually -- in this quarter was actually repaid by American Retirement Corp. So that's a constant -- hopefully we're picking the right operators and they get healthier and their access to capital improves over time, which may mean that's kind of good news/bad news; it may mean that our existing portfolio with them is doing just great, but it may mean that opportunities to do additional transactions with them become limited. Therefore, our focus becomes one of trying to find the next series of operators that we can invest in and hopefully grow with.

Okay, thanks.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions. I'd like to turn it back over to our management team for any closing remarks they may have.

Operator, thank you very much; you did a great job. Everybody, have a great rest of the summer and we will see you in the fall. Take care.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.