Healthpeak Properties Inc (PEAK) 2005 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the third quarter 2005 Health Care Property Investors earnings conference call. My name is [Audrey] and I will be the coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS.] I would now like to turn the presentation over to Mr. Ed Henning, Senior Vice President and General Counsel. You may 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 third quarter supplemental information package or our earnings release, each of which has been furnished to the SEC and is available on our website at www.hcpi.com. I'll now turn the call over to our CEO, Jay Flaherty.

Thanks, Ed. Welcome to the 2005 third quarter earnings conference call for Health Care Property Investors. Let's get right to the results, and for that I'd like to turn the call over to Senior Vice President and Chief Financial Officer Mark Wallace, who has promised no tricks and all treats this morning. Mark?

Thank you, Jay, and good morning. We continue to report solid results this year with FFO per diluted common share for the third quarter coming in at $0.50 compared to $0.37 for the same period last year. While we incurred no asset impairments this period, last year's third quarter results were affected by $13 million, or $0.09, of asset impairment charges. Our FFO per diluted share for this quarter represents an increase of about 9% relative to last year's pre-impairment FFO of $0.46. Year to date, we have acquired interest in properties and made secure loans aggregating $556 million at average initial yields of 7.5%. Our third quarter investments of $332 million, include twelve independent and assisted living facilities we acquired in July for $252 million and discussed on our last call.

Additionally, in August we completed a $41 million acquisition of five assisted living facilities and a sale-leaseback transaction with an initial lease term of 15 years and two 10-year renewal options. The initial lease rate is 8.5% with annual escalators of at least 2.75%. Subsequent to quarter end, we completed the acquisition of an interest in seven medical office buildings valued at $52 million, including assumed debt of $25 million, DownREIT units valued at $11 million and cash of $16 million. The MOBs included approximately $335,000 rentable square feet and have an initial yield of 8.2%. This year we've sold interest in 14 properties valued at $53 million, resulting in gains of $9 million, although such gains are excluded from FFO.

During the third quarter, we also sold an equity interest in FCCI Health Care Services in connection with its acquisition by Triumph Health Care and recognized a gain of $2.8 million. This gain is included in FFO and reflected in the interest and other income caption on our P&L statement. The otherwise reduced level of interest and other income reflects last year's repayment of [inaudible] debt from ARC and Ameritus. Overall, GAAP basis same property NOI increased 3.1% while adjusted NOI, which excludes the effect of straight line rents and leased intangible amortization, increased 1.8% for the first nine months of this year. In addition to leased escalators and resets, same property adjusted NOI growth resulted from higher contingent rents and collection of back rents, partially offset by two additional foreclosure properties being included in our portfolio.

We're fortunate that the financial impact of the recent hurricanes to HCP should not be significant as most of the economic loss from property damage and lost tenant revenues should be recoverable under insurance. Most of the properties affected by Katrina and Rita are owned within our joint venture with General Electric. Ten medical office buildings in the venture suffered some degree of damage. Our preliminary assessments indicate four medical office buildings located in New Orleans incurred substantial damage and may be a total loss. Revenue and net operating income for these four properties for the first nine months of this year was approximately $900,000 and $400,000, respectively. The other six damaged properties are undergoing repairs, occupied, and operating to varying degrees. Regarding hurricane Wilma, initial information indicates there was damage to nine properties, but generally limited to exterior surfaces and structures.

Our GE joint venture contributed $2.1 million to FFO in the third quarter of 2005 and $2.5 million for the same period in 2004. During the third quarter the JV incurred about $400,000 of costs related to the hurricanes. All of these medical office buildings are included in our property counts, same property performance measure, and occupancy rate at quarter end. Adjusted same property NOI performance for the portfolio in our GE joint venture was down about 4.5% as the favorable impact of escalators and rent resets was offset by hurricane costs, slightly lower occupancy, as well as increases in property taxes and higher energy costs at certain locations.

Turning back now to our consolidated results, I should also mention that general and administrative expense declined both sequentially and year over year. You may recall that last year's G&A included a number of special items such as litigation costs, taxes related to activities in our taxable REIT subsidiary, and system implementation costs that, as expected, did not recur. Our balance sheet at quarter end includes consolidated debt of $1.9 million, 11% of which is at floating rates. During the quarter we issued $200 million of 4 7/8, five year senior unsecured notes and assumed $59 million of mortgage debt. Under our dividend reinvestment plan, we issued about 180,000 shares in the third quarter for $4.6 million in proceeds, bringing shares issued for the nine months to $674,000 shares with $17 million in proceeds. Our balance sheet at quarter end has only eight properties held for sale with a carrying value of $7 million.

Regarding our outlook for 2005, we expect gross investments for the fourth quarter to be around $125 million, although I would caution that predicting activity for any particular quarter is uncertain. Assuming that level is achieved, our consolidated gross investments for the full year would be $630 million. Our on balance sheet dispositions are expected to be $63 million for the full year, with $10 million occurring during the fourth quarter. Our net income guidance includes gains on dispositions of about $11 million for the full year and $2 million for the fourth quarter.

On our last conference call we discussed that 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. As of September 30th, rights of first refusal have been exercised on eight of these properties with a value of $35 million. The sale of these properties should close by year end with a gain at the joint venture level of near $9 million. In connection with that sale, $18 million of mortgage debt is expected to be assumed at closing. Given those comments, we expect diluted earnings per common share for the full year to range between $1.15 and $1.19, and FFO per diluted common share to range between $1.85 and $1.89.

I will now turn the call back over to Jay.

Thanks, Mark. With ten months of results in the books, as we make the turn and head for home during the final portion of the year, I think it's fair to say that the performance and contribution of the Company's core portfolio is the single biggest differentiator in terms of our results this year compared with 2004. As a bit of context, let me take you back a little over two years ago to HCP's April 22, 2003, earnings call where I announced a series of organizational changes following my joining the Company. Quoting from that call:

"The first newly created position in the Company is Executive Vice President, Portfolio Management."

And what we have done is move the existing real estate portfolio out from its previous reporting lines within the accounting department and elevated that position to an executive senior management position. The individual that will take on this position will be charged front and center with managing, on a much more active basis, our real estate portfolio. We were fortunate to recruit Paul Gallagher from a 15-year career at GE Real Estate into that position in late 2003, and Paul and his team's efforts have really begun to pay off during 2005. The specific initiatives instituted during the past 12 months include: one, sales of nonstrategic assets; two, master lease swaps; three, collection of past-due rents; four, re-leasing of space and extension of term for maturing loans; five, collection of transfer consideration on existing leases; and, six, the expansion and refurbishment of existing properties.

Together, these initiatives have helped produce a same property adjusted NOI increase of 1.8%, which includes the impact of a negative 1.1% result in our own MOB portfolio. This positive same-store sales performance compares with a flat result in 2004. For 2006, we anticipate each of our sectors being budgeted for same-store sales increases. Importantly, these asset management actions have served to further reduce the risk profile of HCP's portfolio. From the standpoint of unlevered return on investment, all five of our sectors are currently producing double-digit results.

At the present time, the skilled nursing sector represents just 17% of our portfolio, and the overall component of our portfolio that is invested in sectors where operators receive revenues from government reimbursed sources is now down to 36% of the portfolio. The improved performance of HCP's portfolio has allowed us to increase our FFO guidance for 2005. At the upwardly revised midpoint of $1.87 in FFO for 2005, HCP's payout ratio would amount to 90%; a significant improvement from the 101% level of not quite two years ago.

Turning to property acquisitions. We anticipate gross volumes of $630 million for 2005. Net of $100 million in anticipated property dispositions, this would produce $530 million of net property additions, a 100% increase from the net $268 million level achieved in 2004. We continue to take advantage of our DownREIT structuring expertise, as 50% of our year-to-date portfolio acquisitions have included a DownREIT component. This capability is a significant competitive advantage for HCP. During the third quarter, we again successfully accessed the term debt markets, pricing a $200 million five-year debt offering at a rate of 4 7/8%. This transaction was heavily oversubscribed and was announced, marketed, and priced in a total of 42 minutes. The financing allowed us to reduce the borrowings on our bank line to $140 million at the present time.

In terms of the operators in our portfolio, two observations. First, we had experienced a modest level of strategic consolidation in recent months. We anticipate that this activity will actually accelerate in the next quarter or two and will involve the skilled and assisted living sectors of our portfolio. Secondly, tenant continues to be confronted by a number of operating challenges, most recently, the effects of hurricane Katrina in the New Orleans market, where tenant operated five acute care hospitals. This morning, tenant reported a third quarter loss below consensus estimates, citing weak admissions.

As we all know, health care is a local business and we would be remiss if we did not acknowledge the incredible efforts of the caregivers that work in all of our properties impacted by this season's storms. In particular, the actions performed by the tenant employees at HCP's North Shore Regional Hospital in Slidell, Louisiana, which remained open throughout the storm and its aftermath, were heroic. In recognition of these dedicated health care professional, HCP has contributed a total of $100,000 to hurricane relief efforts, including a $25,000 donation to the Tenant Employee Fund.

That concludes our formal remarks. As the Operator organizes your questions, I would note that we look forward to visiting with many of you later this week in Chicago. Representing HCP at NAREIT will be our Senior Vice President of Business Development, Scott Kellman, our Senior Vice President, Strategic Development and Treasurer, Talya Nevo-Hacohen, as well as myself. Audrey?

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Jordan Sadler with Citigroup.

Hi. It's [Greg Nalter] here with Jordan. My first question is on the acquisitions you're expecting for the fourth quarter. The $125 million you outlined, which segments should we expect those in?

You should expect them predominantly in the senior housing and medical office building spaces.

And the cap rates?

We would be delighted to tell you about those after they close.

Can you just talk in general about how cap rates are across different segments and how they may have changed in the past three months?

Actually, in the past three months we really have not seen much in the way of a change. They've been pretty stable since I took you through the sectors on the Q2 earnings call. Just to repeat, we would ballpark cap rates in the medical office building space today between 6 3/4 and 7 3/4. We'd talk about independent living cap rates in the 6 3/4. There have been some outlier transactions up as high as 8 1/2 cap rate there. On assisted living, I would place those between 7 1/2 and 9. In the skilled nursing, I'd put the cap rates there at between 11 1/2 and 13. And that would be how I'd take you through those sectors.

Okay. Could you give us a little bit more color on the 500 basis point decline in the hospital occupancy in the second to third quarter?

I believe that was largely tenant related. Our coverages have held stable with tenants, and I would point out that we actually are experiencing a modest uptick in '05 versus '04 in terms of the participating rent component off our tenant leases.

And my last question is just on the SAB101 adjustment in the quarter. What was that?

Yes, this is Mark. It's included in the supplemental package. For the quarter, the SAB101 was a positive 1.2 million.

Thank you.

You can find it on page 11.

And your next question comes from the line of A.J. Rice with Merrill Lynch. You may proceed.

Thanks. Hello everybody. A couple questions about -- I know some of the areas you've been targeting, Jay, and the rest of the team -- I know there's been an issue of trying to make inroads with nonprofits in the hospital area and some of the assets that they control as well as in the lab/biotech area. I think there's a transaction with Elan that you've been involved with. Can you just give us some flavor for what you're seeing in those two markets and what progress you're making?

Oh, on the nonprofit side, that continues to show good promise for us. We've -- we're very pleased with the two MOB portfolio transactions we've closed just in the past nine months there; one was for about $111 million up in the Seattle market, and the other was about -- well, about $80 million, but we're going to close another traunch of that between now and the end of the year. We anticipate closing another traunch of that. So real solid transactions. In that market, it's a little bit of developing a reputation and once you get in there, business can create additional business. I particularly credit [Chuck Elkin] and his team's efforts down in Nashville with some of the inroads they are making to further penetrate that market for us.

How about in the lab and biotech area?

Well, that's a market that we've got just under 5% of our existing portfolio invested in. It is performing very well. In fact, it's performing above expectations. You see very nice same-store sales results there in the most recent supplemental, and we're continuing to evaluate that space. We've closed a handful of smaller acquisitions this year, particularly up on the University of Utah campus, where we've taken advantage of our DownREIT structure.

The pricing, any comment about what the pricing is in that environment and competitive landscape?

I think you've seen the same sort of phenomenon, A.J., that you've seen in the other sectors. There was some compression that began about 18 months ago, but there again in the last quarter or two, we've seen that stabilize out.

Okay. All right. Thanks a lot.

And your next question comes from the line of Jerry Doctrow with Legg Mason. You may proceed.

Good morning. I had a couple of things. Just on property operating expenses, that also shifted a lot from second quarter. I was wondering if you can give us -- actually what the rents were on the directly managed stuff, and also just some discussion of property operating expenses and what that run rate should look like?

Yes, Jerry. On the operating expenses, it's, as you know, it's mostly the medical office buildings. It went down sequentially from Q2 to 3Q primarily because on one building, we got an additional property tax assessment, it was about $750,000, which we recorded in the second quarter. We subsequently appealed for an abatement and actually got that number down, so in the third quarter you actually had an adjustment to that amount, which actually was about $250,000 in the quarter. So, net net when you look at it, that one item caused about a $1 million swing between the two quarters.

Okay. So the run rate should be about 250 up from this quarter? Is that the right way to think of it?

Yes, 250, and maybe a little bit more in the fourth quarter just because we are experiencing some higher energy costs and insurance costs and things like that.

Is it fair to say the insurance costs -- increased insurance costs might really not hit until maybe next year? Is that fair?

It is a little bit in the fourth quarter.

And do you have -- because I think we had this before but I couldn't find it in the stuff that you had sent out -- do you just have -- because I could calculate it as a percentage of rent, the rent on those directly managed MOBs?

Yes. Just a second. I'll get it here for you. It is in the 10-Q, Let me just see if I can find it for you. The rent on the on balance sheet medical office buildings for the third quarter was $31.8 million; for the nine months it was $92.9 million.

Okay. Great. And then just one or two other things, if I could. I was wondering if you could just revisit a bit the discussion of the hurricane on the JV. There were just a lot of numbers you were throwing out there, and what I'm trying, I guess, to understand is, again, what -- in terms of the quarter, in terms of go forward, really how that translates into impact for FFO for you guys.

Okay. I think the bottom line is the impact on FFO for us will be minimal. The JV incurred about $400,000 of costs in the third quarter and, of course, our share of that is only one-third, so very minimal impact to this quarter. Now, going forward, there are four medical office buildings, as I've said, that incurred either substantial damage and may be a total loss. Those we don't expect to have revenue or NOI really to get those properties in the fourth quarter. So just to give you a flavor of how much that is, for the last nine months those four buildings ran revenues of $900,000 and NOI of $400,000.

Okay. And basically, again, one-third of that would be knocked off for you guys?

Correct. Now, in some cases on the lost revenue, we would anticipate that being able to be recovered under our business interruption insurance. However, the timing of the recognition in the financial statements of business interruption coverage is generally when you settle the claim, as there's a timing mismatch between when you lose the revenue and when you get the recovery.

Right. And that I assume will carry, certainly, into '06 if not longer, until you settle up?

That's correct.

Okay. Let's see. I think there's one or two other things. You touched on this a little bit, but I was wondering if we can just go back and talk a little bit more maybe, Jay, about strategy going forward. We're starting to think into '06. You mentioned before that you expected more consolidation transactions, cap rates may be stabilizing. If you could give us as I say a little more color on investment outlook. I was taking your remarks to be maybe a bit more optimistic. Should we be thinking $500 million again for next year, or just maybe some color on that?

Yes. I think my comment on the consolidation was related to what we're seeing in our existing portfolio. In other words, we had a couple of transactions close involving operators in our portfolio and we are aware of several more that have not closed yet but we anticipate closing either in Q4 or Q1 of '06. The impact of that on HCP can take the form of a variety of things. As you saw in the most recent quarter, we had an equity ownership stake in one of the operators that happened to be in the skilled space, and we were fortunate to have a nice result there. Another benefit has been oftentimes in a lot of our leases we have what's called the transfer consideration, which kicks in when there's a change of control involving the operator that we have the lease with.

Now, the way the accounting profession operates the debt consideration of -- you amortize that consideration over the remaining term of the lease. So that doesn't have the one-time effect that the, say, on the equity interest had in this most recent quarter. So we expect to have more activity like that. I would say that -- as you see industries evolve and you can see the assisted living industry evolve right in front of our eyes, we've gone from severe supply demand disequilibrium in the late 1990s to a time frame where employing capital into that space was a very, very rewarding thing; witness HCP's moves as it rotated into particularly the CCRC component of that space in the 2002/2003 time frame. We were able to make what in hindsight was over $500 million of shareholders’ capital was deployed into that space and we were fortunate to get very, very good real estate.

Now you've got more of a match between the supply/demand, and you're starting to see now with the absorption of that incredible amount of supply that came on the market, get leveled out. Now you're starting to see real price increases. I would point out to a couple of factors there. The occupancy just in our assisted living ticked up two points in this quarter, and we anticipate the business in assisted living to continue to be quite good. As I have said repeatedly in the last couple of years, that's good news and bad news. From a credit perspective it's great; you'll continue to see our coverages creep up, you'll continue to see our occupancies creep up.

We increasingly sleep real well at night with respect to the credit profile of our operators in that component of our portfolio. The flip side is as they get stronger they've got the ability to access other forms of capital away from us, which can result in either pressure on our margins or actually transactions going away from us. So it's a little bit of a good news/bad news result for HCP.

And just overall outlook for investments next year? Same, better, worse?

Well, as you know, I don't like to talk about stuff until it's done. I will tell you that our present pipeline is very significant.

Okay. One last and then I'll drop off. Just the run rate for minority interest, a small item, but something we just need for modeling. Is this quarter a good run rate going forward?

Yes. I think this quarter would be a good run rate.

Thanks a lot.

And your next question comes from the line of Robert Mains with Ryan Beck. You may proceed.

Good morning or afternoon, depending on the time zone. A couple of -- one clarification question. In terms of divestitures for the full year, I thought I heard $100 million and I also heard $63 million.

It was $63 million for on balance sheet. That's the number that you heard. The $100 million that you heard related to the 38 medical office buildings that are in the GE joint venture portfolio, which we had announced that the venture had approved of sales subject to certain conditions.

But that would be the difference between the 60 and 100, it is our pro-rata share, right, of the GE joint venture dispositions?

Yes, correct.

All right, great. Then a couple questions on the income statement. First of all, G&A, it's bounced around and you mentioned some of the reasons why. Where should we look at it settling out? Should we look at a nominal dollar amount, percentage of revenues? It was around this level in the Q1, it went up in Q2, now it's down to the 7.3 million level again.

Yes, I wish I could tell you, I wish I could make G&A just be level throughout each quarter; it would make everything much easier. Unfortunately, it bounces around primarily due to the level of professional fees that we're incurring. So for example, the second quarter tends to have annual report, proxy, annual meeting, so legal -- it tends to be heavier on legal and accounting fees in that quarter. And so I would expect that the fourth quarter would be closer to the third, although probably not quite as high; in the third quarter we ran 8.8 million. So somewhere around that, or maybe a little lower in the fourth, again, primarily because fourth quarter tends to be a high quarter of heavy professional costs.

Fourth quarter closer to the second?

Yes.

And one other item on the income statement. Real estate depreciation, I assume I'm missing something, obviously, it didn't move up very much given the level of acquisition activity?

Yes. The primary reason is, as you know, when we initially close transactions we do a preliminary purchase price allocation then, subsequently, when we get finalized appraisal report and finalize the allocations we make adjustments to depreciation and intangibles and other things. So it would have normally have moved up, absent adjustments to the initial purchase price allocations.

Okay. So that would occur in the fourth quarter then?

You tend to have a little bit each quarter, depending on when they get finalized.

Okay. I think that's all I got for now. Thanks.

And your next question comes from the line of Rich Anderson with Harris Nesbitt. You may proceed.

Thanks. And good morning/afternoon. Jay, just back to the consolidation question. Did you mention what specific healthcare arenas you're seeing most of that in?

Yes, I did. I said the consolidation activity that we're seeing involving operators in our portfolio will be primarily focused on the assisted and skilled sectors.

Okay. And what about reduced demand for space from consolidation? I know you gave the good news/bad news scenario. Do you think that there's -- companies can get more efficient and need less space?

Well, I think you're one for two. They can definitely get more efficient. And I think what we're seeing with our operators is kind of the winning models of those operators that are really, really have got a very good handle on the cost side of the business and particularly in P&L components of like insurance and things like that, can really drive an economy of scale. With respect to your second point we actually haven't seen any incidents of that. I guess we continue to see a modest amount of development. Those are the two things that we watch. But for the most part, the consolidation activity we're seeing is more of an expense reduction motivator from a standpoint of what the strategic driver or the strategic catalyst is for the acquiring operators.

Okay. So that was to my next question, the rationale to entertain consolidation from the seller's perspective would be what? I mean, do they feel like they've tapped out in terms of their value in the marketplace? What other factors are behind them making -- ?

Well, the two factors that I have seen repeated the most are number one, the ability to have a scale, a benefit, on the expense side. At some point, some of the small to medium sized operators in our portfolio just can't -- they can't generate the sort of savings, particularly on the insurance side, that some of the bigger operators do, that's one thing.

The second one has, frankly, got nothing to do with strategy; it's got everything to do with the fact that lot of these operators were 19 -- late 1990 vintage investments on the part of the private equity business and they've been under water for a long period of time and they're finally coming up for air. And several of them, the investments are sitting in funds that have a finite date at which point exits need to be taken. Quite frankly, that's driving probably the majority of the activity.

Okay. That's interesting. Did you say that the lion's share of your fourth quarter activity would be in the ILF, ALF, and MOB area?

I said the senior housing and medical office.

Okay. What do you think your -- and senior housing being not skilled nursing?

AL, IL, and CCRC, not -– not skilled nursing.

So what do you see as the percentage of your portfolio not exposed -- I'm sorry, I should say it this way -- the percentage of your portfolio exposed to government reimbursement, what's your target, say, in the next year or two?

Let me answer that with two comments. One, today, as you heard, it's down to 36%. That's the skilled and hospital. To be quite honest, the reality, is it's lower than that. If you go into the census in those sectors, for example, in skilled, in our skilled portfolio, which I have just said is 17% of our overall portfolio by investment, we have in that skilled component, 18% of the census is actually private pay, okay? If you go into the hospital component, which is 19% of our overall portfolio, 38% of the census is actually private pay. So if you were to go out and have your Cray computer start to crunch through what the census is on that, you actually come up with a materially lower percent of the overall portfolio that's actually invested in sectors that's deriving its revenues directly from government reimbursed business. But in terms of just the dollar investment for us in the skilled and hospital space for us is about 36%.

That said, I think I'd fall back on our mantra of diversification. We like to have a balance. Right now, particularly in skilled, we don't like the risk/reward opportunities that we see currently. That's not to suggest that we wouldn't rotate back into the skilled space, if, in our view, that risk/reward proposition changed. As you recall, I think on two calls ago, I indicated that we had developed a view that if the RUGs refinement news was not as good as it turned out being, that might have been a potential re-entry point. But for now, we're finding a better value opportunity in some our other sectors. So I think try and keep everything in balance but then being opportunistic if we saw the landscape change, that is kind of the way we think.

I guess to your comment about the census numbers still, I mean, even if you have 18% private pay in a SNF, but the majority of it is government reimbursed and that's going to impact the value of the real estate, regardless of the fact that it's 18% private pay. I mean, is that the way you sort of look at it?

Yes.

Okay. And in terms of risk/reward, I mean, I think you and I had this conversation about the closer we get to the next presidential election, the less likely we'll have any meaningful Medicare/Medicaid cut issues in front of us. Do you think that as we get closer to 2008 you might be more inclined to take a closer look at SNFs?

Right now, I think our visibility is out to the end of '06, and I think we see and anticipate a reasonably stable reimbursement environment out through the end of '06.

Last question is in terms of your guidance, did you not know about this improving operational outlook during your second quarter call or were you sort of -- you saw it but you didn't have enough conviction to raise your guidance at that point, or was the guidance more external growth tied?

Well, we go through the same rigor with respect to our guidance. There's been nothing changed with our discipline there. We made an assessment and the assessment is what we put and disclosed publicly on our August call. Things have improved in the last three months. In fact, I was talking to one of the larger operators in our assisted living portfolio two weeks ago and he was telling me that it was the single best three-month performance in the history of the assisted living business, the three months ended September 30. That's some of that pricing power you're starting to see there. So things have improved since we last gave you guidance in August until today, November 1st. And then we had the one investment in our portfolio, the change of control transaction that closed, which gave us a little bit of an additional boost.

So it's primarily operational, like just good internal growth prospects that have driven the guidance up?

As I said, the key is when you go from having a portfolio that was actually generating negative same-store sales in '03 and flat same-store sales in '04, and now we're clicking along at 1.8 positive, and that includes a negative 1.1 in our own MOB, and we're anticipating everything being budgeted in '06 positive, that moves the needle. That's a $4 billion real estate portfolio. And you don't have to have much in the way of basis point turnaround to start moving the needle. What we always wanted to do was get to the point where we didn't want to become dependent on acquisition volumes. Acquisition volumes, particularly the way we like to do them, which is we don't like to schedule them out; when they are there we'll do them and when they're not, we won't. That ought to be the icing on the cake.

And we're now in a position where, with Paul and his team's efforts, we have got that portfolio really starting to hum. It takes a while to turn the thing around. And so now if you think about it, we really have three drivers, and it goes back to that investment triangle where you've got opportunistic at the top of the triangle, diversification in the bottom left, and conservatism in the -- conservative balance sheet in the bottom right. You've got three drivers that come off that: one is internal growth, one is external growth, one is leveraging our capital in the manner in which we did the join venture with GE.

The most recent quarter, the real story here is the most recent quarter, the quarter ended September 30, this is the first quarter where we've had all three of those drivers kicking in. You go back and look at the previous quarters in the last two years, it's always been one was working or maybe two was working and one was dragging. Well, in the most recent quarter, we had some nice benefits for some acquisitions. We had some nice benefits from internal growth. And we've continued to have some nice benefits from the economics in our joint venture with GE. So that's what -- we've finally got all those going in the right direction. That becomes very powerful.

Okay, thanks.

And your next question comes from the line of [Julia Penn] from Green Street Advisors. You may proceed.

Hi, it's Greg Andrews here with Julia Penn.

Hey, Greg.

Hi. Many of my questions were answered but a couple of things. In terms of the portfolio management that you talked about at the beginning of the call, can you give us some sense of how far along in that process you say you are? I mean, you've done -- you're going to do $100 million of dispositions this year. Is there a lot left that you want to continue doing over the next few years, or are you mostly done?

No, no. I think there's a good bit of work to do still. Paul and his team have already got their targets set on '06 opportunities. I don't think --the way we think about this, quite frankly, it's not -- there's not going to be an end. It will be ongoing and maybe what will happen next is we take the steps that we've done and get the existing portfolio where it is. It probably becomes a little bit of a strategic weapon for us because we can go out and maybe take down a portfolio or an entire entity that's got some good stuff in it but maybe it's got some stuff that has to get worked out. The procedures and the experience that Paul and his team have developed in the last 18 months, we'll then just apply it to the next opportunity. So we don't view this as something that we're going to do once; it's constant.

I must add, I've got to tell you, Paul's out with some business development opportunities today, but I'm remiss to not also acknowledge the business development results that his team -- we gave them, in addition to doing all of the things that they've accomplished, we gave them a specific business development goal to generate new business opportunities off the existing portfolio as compared with new business opportunities, say, that Scott Kellman or myself or Chuck Elkin are focused on. Right now, new business off the existing portfolio is approaching 1/3 of the volume this year and so, again, the portfolio was a source of all sorts of opportunities for us, be they opportunities to increase same-store sales or generate new business opportunities.

Okay. And then with regard to same property NOI, it sounds like an impressive pick-up this year from last. You didn't really specifically comment about '06 other than to say it was positive in all the categories. Can you give us some sense where that might be relative to the 1.8 this year?

No. I think just to be clear, I said all five sectors will be budgeted for same-store sales increases. Right now, we've got the MOB space is negative and as Mark indicated, we've got some one-time things going on there and then we've got some other things that, quite frankly, aren't one-time things. Energy costs, we're not anticipating any improvement in the energy cost or, frankly, the insurance costs. So we're in the middle of that budgeting process. I really can't respond to your question now, but suffice to say, all five sectors will be budgeted for same-store sales increases in 2006.

Okay. Thanks.

Yes.

And your next question comes from the line of Robert Belzer with Prudential Equity Group. You may proceed.

Hello, yes. A P&L line item question. In the interest and other income category, sequentially that went up $1.8 million. Was there any one-time items in this category?

Yes. The FCCI gain that I talked about, 2.8 million, it's in that line item.

So we can expect this interest and other income to go down accordingly in the fourth quarter?

Yes.

Okay, good. That's it for me. Thanks.

And your next question comes from the line of [Jeff Whitehorn with Gilman Hill Asset Management]. You may proceed.

Good morning or afternoon. Just a couple of questions. Your relationship with GE, I'm sure you're content with it, but is there anything you want to morph it into or change it slightly?

The second question, so I can get some of my clients off my back, the dividend. I know at your Board meeting, at your annual meeting, it's always reviewed; is there any possibility of a slight increase?

Third question, acquisitions. You've said there might be some entities, or I guess you're opportunistic. Have there been some that you passed on because of pricing or some that got away from you, or might '06 be a year where you make one or two?

And last question, there are a group of investors from the Middle East who want to invest in REITs. And since I have got some experience with them, it's more like the mountain coming to Mohammed. Have you encountered any of these people or have done some one-on-ones with this group of money in order to get your name out there?

Okay. Let me start with my favorite question, which is the dividend. For the record, we have increased our dividend every year we've been public. That is a record now of 20 years. Our Board of Directors makes all decisions relative to our dividend, and they do that once a year at what will be the February Board meeting of next year. They'll do that after they've had a chance to review the '05 results and the '06 plan. I think the best leading indicator you can look to there is the payout ratio.

You'll recall two years ago right after I joined the company, that payout ratio was about 101%. I indicated that the Board and the management team were committed to continuing to grow the dividend, but we were going to grow the dividend and, at the same time, reduce the payout ratio. In two years that payout ratio has been reduced from 101% to 90%. So we've got a much different sort of environment to be thinking about dividend increases over the next quarter or two than we have had for the last two years. But, again, I'm not going to speak for the Board, but I would think it would be unusual if the Board didn't act to increase the dividend again for the 21st consecutive year.

With respect to our relationship with GE, we have enormous regard for that organization. We spend a lot of time with that organization. At the most recent NIC conference in Washington, D.C., we actually co-hosted a marketing event with their team. And I'll be with some of the individuals later this week in Chicago at NAREIT. We are constantly talking about different things we can do. But I would actually re-frame your question; We don't think about your question the way you asked it, we think about it more broadly in terms of capital partner -- institutional capital partner sorts of opportunities. So we don't limit those to GE. That's not an exclusive joint venture that we have there. It's a joint venture that has been incredibly successful. I think I will be in a position at our next earnings call to connect some of those dots, because I anticipate the first disposition out of that GE joint venture to be closed by then. So that's the way we think about that.

With respect to acquisitions, we have passed -- I think your question was one of selectivity. I would say, in general, we probably take down, in general, somewhere between 10% and 15% of the transactions that we typically review for possible investment on the part of our shareholders. So it's a pretty thin filter, a pretty narrow filter. And I don't see us changing our selectivity whatsover. What has occurred in our pipeline -- and I've spoken to this in the last two quarters -- is that the quality, the opportunities that we seek to invest in, the quality component of that pipeline has gone up a fair amount. It is much higher this year and what's in our pipeline today than what it was a year ago. And I think if that quality continues to be resident in our pipeline, I think you'll continue to see us ramp up our volumes. I mean, this Aegis transaction that we closed in August or the MOB transaction we closed in April are very, very representative of the quality of real estate that we have our eye on right now.

With respect to the Mideast comment, I have visited with institutional investors from that part of the world. I have done that both in London and more recently in New York, and we have great respect for the financial acumen of the investment professionals in that part of the world and, obviously, would welcome the opportunity for visits, more visits in that regard.

There's a large -- well -- I can give you my e-mail, but there's -- as you know, there's a big group in Michigan, and there's one, or at least one broker that I know of from the Chicago area. I can give you one person's name, not that I have any connections with the broker or that person except that I have known him for 25 years. Because, well, -- as I have said, you've gone to London to make yourself known. It's not the other way around. If they do attend conferences, they still like that personal touch. And if you're interested, I can give you the name so you can continue in that process.

Great. We'd be glad to talk to you off line on that topic. Thank you very much for offering that.

Not a problem. Thank you for answering my questions.

[OPERATOR INSTRUCTIONS]. We now have a follow-up question from Mr. Robert Mains with Ryan Beck. You may proceed.

Thanks. To follow-up to the comment you had about government exposure. Can I surmise from that that your CCRCs have fairly minimal government exposure and the ALFs aren't doing much in the way of Medicaid waivers?

With respect to the CCRC, it is almost entirely non-government. Sometimes, Rob, you'll see a little bit of that when you've got a skilled nursing facility or campus. But it is -- those campuses are clicking along at -- and by the way, in that instance, it's Medicare, Rob, not Medicaid. But those campuses are clicking along at mid to high 90s in terms of occupancy, private pay, with waiting lists. Scott Kellman and I were out trooping around a potential prospective development just last week. We really like that space quite a bit. And you're right in your other question; there's very diminimus amount of Medicaid going on in assisted living.

Okay. And then I have one cash flow question. Operating cash flow has been up year over year pretty nicely every quarter. Any particular timing issues we should look for in the fourth quarter?

Timing?

That would affect operating cash flow either negatively or positively in terms of receipt of cash payments?

This is Mark. Nothing in particular comes to mind.

I guess the disposition, which is here where we own 1/3 of the dispositions that are coming out of the GE joint venture that is anticipated to close, but that won't close until right before the end of the year. As you see next year if you look out, we've got just one debt maturity. I think that comes up in Q1. And as you go into the lease expiration schedule, which is another one of my favorite pages in the supplemental, you'll see next to nothing in terms of expiring leases for 2006.

Okay. That's great. Thanks.

Thank you.

And our final question comes from the line of A.J. Rice with Merrill Lynch. You may proceed.

Sure. Just a quick follow-up question in relation to the discussion about the dividend. I have been thinking about that going forward. I think, Jay, also, when you came on board a couple years ago, the comment beyond what you had already articulated was that the company really needed to get its payout ratio down to the 90% range. Now that that is in prospect and view, is that still what you would consider, given the opportunities that HCP faces and the investments you're making? Is that still a reasonable target range or is there any change in your thinking that 90% is no longer the right ratio, maybe something else?

I mean, again, now you're getting into a discussion, and it's a robust one, that our Board undertakes. I think I had indicated when I made that commitment to get it down to 90, that was in April of '03. I believe I indicated that I expected that to take several years, three years in particular. We're ahead of schedule, but we're not ready to declare victory yet. And we also -- with the increased component of our businesses in MOBs, we are increasingly focused on AFFO as well as just FFO payout ratio.

I think our philosophy as a company is to be conservative in everything we do, whether it's our debt financing, our dividend policy. The only thing I could tell you is that I wouldn't anticipate going back to 101 anytime soon, but it may well be that at 90%, 90 looks pretty good, but maybe something in the mid 80s looks even better. But that will be for the Board to decide and deliberate on in February.

Okay. All right. Thanks.

ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call over to Mr. Jay Flaherty, Chief Executive Officer, for closing remarks.

Thanks everybody. I appreciate your time and your interest in Health Care Property Investors. And for several of you, I anticipate we'll see you in the coming days in Chicago. Take care. Thanks. Thanks, Audrey.

ladies and gentlemen, this does conclude your presentation. At this time you may all disconnect and have a wonderful day.