Healthpeak Properties Inc (PEAK) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2005 Health Care Property Investors earnings conference call. [OPERATOR INSTRUCTIONS] I will now like the turn the presentation over to your host for today's call, 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 the 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. Any projections 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 fourth 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. And now I would like to introduce our Chairman and Chief Executive Officer, Jay Flaherty.

Thanks, Ed. Welcome to Health Care Property Investors 2005 fourth quarter conference call and happy Valentine's Day, everyone. Now, let me turn the call over to our Senior Vice President/Chief Financial Officer, Mark Wallace, to take you through HCP's year-end results. Mark?

Thanks, Jay and good morning. HCP continued to report solid results with FFO per diluted share for the fourth quarter coming in at $0.48, an increase of 6.7% compared to the fourth quarter of 2004. For the full year, reported FFO per diluted share was up nearly 14% to $1.89. Excluding the effect of impairment charges in 2004, annual FFO for 2005 increased 5.6%. As important, we were able to achieve our goal of substantially reducing our FFO pay out ratio which declined to 89% at year end.

During 2005 our investment activities were principally focused in senior housing and medical office building sectors. We acquired interest in properties and made secure loan aggregating $647 million at average initial yields of 7.7%. In addition to our previously announced $51 million acquisition of seven medical office buildings on October 19th of last year, our fourth quarter investments of 144 million included the following: the acquisition on December 22nd of two independent and assisted living facilities for $18 million through a sale lease back transaction at an initial lease rate of 8.5% with annual CPI based escalators that have a floor of 2.75%. The initial lease term of 15 years with two ten-year renewal options. The properties were added to a master lease that now has 21 properties with a coverage ratio of 1.3 times.

Second, a $40 million ten-year mortgage loan with interest at 8.75% that closed on December 28th. The loan is secured by a Texas specialty hospital at a 70% loan to value ratio. Subject to certain conditions, we may fund an additional $10 million under this arrangement. Third, we acquired two medical office buildings for $25 million on December 23rd. These properties were purchased at part of a $165 million acquisition of 15 medical office buildings with a total of 882,000 rentable square feet at an initial yield of 7.3%. The transaction is expected to close in three traunches, the second traunch closed on January 4 of this year, with a purchase of an additional five properties for 41 million. The final traunch should close in March with a purchase of eight properties for $99 million included a $5 million down-REIT component. Final closing is contingent on certain waivers, or rights of first refusal related to these assets.

Last, on February 8th, 2006 we acquired four laboratory office and biotech manufacturing buildings located in San Diego, California for 31 million. The initial yield at 6% with a stabilized yield expected to be 8.3%. The buildings include approximately 158,000 rentable square feet. During 2005 we also sold interest in 20 properties for gross proceeds of 71 million resulting in gains of $10 million although such gains were excluded from FFO.

During the fourth quarter we also realized a gain of 1.3 million related to an optioned purchase certain limited partnership interest and recognized an additional $900,000 gain from the distributions in settlement of bankruptcy claims related to Centennial Healthcare Corporation and its affiliates. Both of these items are included in interest and other income. Absent these transactions, the reduced level of interest and other income reflects repayment of mezzanine debt from ARC and Ameritas during 2004.

Consolidated GAAP basis same property NOI increased just under 1% for the year. However, the relative year-over-year growth was adversely affected by the $5.7 million revision to ARC related straight line rent we recorded in the fourth quarter of 2004. Adjusted NOI, which excludes the effect of straight line rent and lease intangible amortization, increased 2.1% for the year. In addition to lease escalators and resets, same property adjusted NOI growth was impacted by the recognition of higher contingent rents and collection of back rents, partially offset by two additional senior housing foreclosure properties during 2005.

Including fee income, our MOB joint venture contributed 1.8 million to FFO for the fourth quarter and 10.7 million for the full year. Adjusted same property NOI performance for the venture was down 5.6% as the favorable impact of escalators in rent resets was offset by 2% lower occupancy, increases in property taxes,s and higher energy costs. The lower occupancies resulted principally from the expiration of affiliated hospital leases for previously vacated space as well as for the displacement of tenants to accommodate tenant expansions and new leasing activities. We expect same property occupancies to trend up as early as the first quarter of this year and the rate of cost increases to somewhat moderate.

We mentioned in our previous call that our MOB joint venture with GE had approved subject to certain conditions the sale of several properties. In January and February of 2006 the JV sold 21 medical office buildings with 787,000 rentable square feet for approximately $50 million, and recognized gains at the joint venture level of $8 million. In connection with the sale $39 million of secured debt was either repaid or assumed by the purchaser. At year end rights to first refusal have also been exercised on properties with a value of about 34 million. The sale of these properties should close by mid year with a gain at the JV level of about 7 million with $18 million of mortgage debt expected to be assumed at closing.

Let me now turn back to our consolidated results. As expected, fourth quarter G&A increased sequentially due to the normal timing of certain costs during the year. On an annual basis, general and administrative costs declined approximately 13% as a number of special items impacting 2004 did not recur. Under our dividend reinvestment program we issued about 204,000 shares in the fourth quarter for $5.3 million in proceeds. That brings shares issued for the year to 878,000 with $22 million in gross proceeds.

Our balance sheet at year end includes consolidated debt of $2 billion, 0.15% of which is at floating rates. Borrowings under our bank line were $259 million at year end and approximately $298 million at the close of business yesterday. Our consolidated balance sheet includes seven properties held for sale with a carrying value of $5 million.

Regarding our outlook for 2006, we are continuing our practice of providing guidance later in the year. However, similar to last year, as part of our annual planning process, we assessed our starting point for 2006 by annualizing our fourth quarter result after adjusting for certain items. That math works out to about $1.84 per diluted share derived as follows. We reported FFO per diluted share, of $0.48 for the fourth quarter. We deducted the $2.2 million of gains, I previously mentioned. We normalized for the effect of SAB 101 adjustments, and we gave a full quarter's effect for fourth quarter investment activity. Following that approach we arrive at $0.46 per diluted share for the fourth quarter of 2005 which reflects a going in FFO rate of $1.84 per diluted share on an annualized basis. I think that's a fair way to look at where we were at year end and I will now turn the call back over to Jay.

Thanks, Mark. Before turning to 2006, let me say that we were pleased with both the earnings result we achieved in 2005, and the quantity and quality of our closed property transactions. On the earnings side the Company benefited from improvement in the portfolio's overall same-store performance and the realization of several one-off events. These results were facilitated by the significant infrastructure investments made by HCP in 2004, which I will elaborate on in a few moments.

Our net property investments for 2005, which were more than double the level achieved in 2004, benefited from our ability to create structured solutions for sellers. Taking advantage of HCP's equity as 51% of the Company's closed acquisitions incorporated some amount of a down-REIT component. The overall performance resulted in an FFO pay out ratio of 89% at year-end 2005, a reduction from the 101% metric at year-end 2002. This accomplishment is significant as it completes one year ahead of schedule the last remaining objective that I announced in the spring of 2003 as part of our CEO succession plan. With this back drop, last week HCP announced that its Board of Directors had improved an increase in the annual dividend to $1.70 per share representing the 21st consecutive year of dividend increases for HCP's shareholders.

Turning to 2006 and beyond, I want to share with you for the first time the Company's evolving strategic direction and provide perspective on how a series of recent actions support this strategy. First, some context. From 2002 to 2004, HCP became highly dependent on external acquisitions to drive earnings growth. For 2005, in addition to our $562 million of net investments, the Company's existing portfolio generated a 2.1% same-sales performance. So, contributions from external and international growth were achieved. In 2006 we expect both of these metrics to exceed their 2005 results.

While we are pleased with this momentum, it has become clear to us that we need to establish one or more additional growth drivers in order for the Company to further accelerate its dividend and earnings growth. The success of our MOB institutional venture has led us to conclude that growing our assets under management platform is particularly attractive at the present time. Four specific actions undertaken by HCP in the last twelve months evidence the change in our strategic direction towards aggressively growing our assets under management.

Number one, HCP launched a marketing effort last fall to raise $300 million of institutional equity capital which would be available to coinvest with HCP. We are very pleased with the results of this process which has generated interest targeted as two of our primary real estate sectors, medical office and senior housing. We anticipate closing one or more additional ventures during the year. Just over two years ago, HCP owned 100% of its real estate portfolio. At December 31, 2005, approximately 10% of HCP's real estate portfolio represented assets managed for the benefit of others, principally, our MOB venture with GE. We anticipate that assets under management will approach 20% of HCP's portfolio by December 31, 2006.

Secondly, the infrastructure investments made by HCP: accounting, tax, information technology, and asset management, are functional capabilities critical to the manager's selection process of institutional equity players. Our infrastructure investments have actually served two purposes: One, significantly enhancing our own internal processes and reporting capabilities. Our supplemental disclosure is an excellent example of this. And two, our upgraded operating platform have become an important part of our marketing effort to perspective institutional partners. This platform is now operating at a performance level that allows us to scale the Company. Thirdly, while institutional equity capital enjoys making good investments, they love taking good exits from good investments.

Conversely, as those of you that followed our industry over the last decade are aware, the healthcare REIT sector has largely employed a buy and hold approach to investing. At the start of my tenure at HCP, I was fortunate to enjoy one Board meeting of overlap with Ned Spieker in his role as an outside director of HCP. Among the tactics that Ned impressed upon me was creating a sell discipline both strategically and opportunistically.

Beginning in 2004, HCP embarked upon a program to dispose of significant amount of properties. Our thought process was three fold. One, cull the portfolio of under performing and nonstrategic facilities. Two, from a valuation perspective, it was an attractive time to sell properties. And three, to validate a buyer universe for each of the sectors of our real estate portfolio.

In 2004 and 2005, we closed on $241 million of dispositions and last month's sale from our GE joint venture, of which we are managing partner, is a good case in point. When we acquired the 575 million, 113 property MetCap portfolio in October 2003, the joint venture developed an asset plan for the portfolio then identified about one third of the portfolio as nonstrategic properties. Three months later, in January 2004, we closed on $288 million of secured debt financing and traunched our debt maturities to include $34 million of prepayable floating rate financing to complement our asset management plan. Many of these nonstrategic properties were smaller buildings on campuses in tertiary markets that HCA had targeted for sale some of which were consummated during 2005.

In June of last year, Granite Partners began marketing the portfolio on behalf of the joint venture. Given the increased interest in medical office buildings as an asset class, our timing was good, and the process generated multiple offers. In the last month the joint venture has closed on the sale of 21 properties in the portfolio. In addition, ten properties will be sold as part of a right of first refusal that was exercised by the hospitals on whose campuses the properties are located. This final closing is expected later in 2006.

The sale price on the properties that have been closed is $50 million which includes $39 million in secured financing to be assumed or repaid by the buyer. This sales price represents a 7.0 cap rate on actual 2005 net operating income. The leveraged return to the joint venture on the closed disposition is 40%. On top of this return HCP earned one, an acquisition fee in October 2003; two, an asset management fee over the hold period; and three, a disposition fee upon closing. In addition, the absolute level of the leverage returned has put HCP deep into the waterfall on the promote it is entitled to receive. Consistent with our strategy to build a significant and growing platform of assets under management, we expect to retain our one-third interest in the remaining properties in the portfolio.

Now, let me tie in the fourth and final piece of the puzzle, yesterday's announcement regarding organizational changes. First of all, on the financing front maintaining our existing credit ratings is a top priority. As we increasingly look to partner with institutional capital and take advantage of the increasingly attractive secured financing market for healthcare real estate, we accomplish two objectives. One, we diversify our capital sources; and two, we become less reliant on the underwritten equity markets. We will continue to put out HCP equity directly via our pipeline of down-REIT structured property acquisitions. In addition, if the current environment of valuations for healthcare real estate persists, it is probable that we will look to sell additional properties as a more attractive alternative to secondary equity issuance. Given our anticipated volumes, this becomes a full-time job and a big job and HCP is fortunate to have someone as accomplished as Talya Nevo-Hacohen in the Senior Vice President-Capital Markets and Treasurer role.

Next, I have spent time this morning talking about our assets under management as an additional platform of earnings growth for HCP. Steve's Maulbetsch's new role of Executive Vice President-Strategic Development, will provide our most experienced healthcare real estate executive the resources to identify and work through the additional platform opportunities we currently have on our plate. Steve switch is made possible because of the unique talents of Tom Kirby, who will step up to the Senior Vice President-Acquisitions and Dispositions spot. Tom's career at HCP spans eight years and prior to that Tom was an executive of Valuation Counselors, a healthcare valuation firm for over twenty years. Tom and his team have a deep knowledge and successful track record of underwriting healthcare real estate. Finally, Glen Preston has been elevated to Vice President-Business Development. Glen joined HCP at the end of 2003 as part of our MetCap transaction and has done a terrific job working with Chuck Elcan to successfully penetrate the nonprofit MOB space for HCP. On a personal note, it is with immense pride that we are able to effect each of these moves with executives from within HCP, and it is a tribute to my partners, and in turn, the colleagues they have recruited to the Company. That concludes our formal remarks. We will welcome your questions at this time. Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Good morning. Happy Valentine's Day to you all. I just had a couple things. I wanted to clarify on the quarter, and I guess this would be for Mark, that you really have I think 2.2 million against what I might call one-time items in the FFO. Is that the right --

Yes, that's correct. The two gains mentioned 1.3 and 900,000.

Okay, so 46 rather than. And I think the other question may be to Jay and this gets sort of the whole change in your capital structures you're thinking about. The yields on the new stuff you're doing are certainly by historic REIT standards low, and I am trying to understand maybe how you see your cost of capital and how you do say 7.7 deals as an accretive basis. Are you thinking of it not going out with sort of a capital raise and cost of equity is lower or, if you could just walk me through your thinking there?

From a cost to capital standpoint obviously we benefited from the interest rate environment given our credit ratings. We obviously watch that -- monitor that very carefully. I think though, with us moving increasingly towards growing our assets under management, if you take a look at the -- I think the result we had on the disposition of the sale in the GE joint ventures are illustrative of what we can achieve here. After all is said and done, those yields are pretty attractive. In fact, probably exceed some of the yields that the Company historically was able to achieve back in the last decade or so, so --

I guess I am fairly comfortable with doing it in the JV where you have more leverage, that sort of thing, and I was trying to understand on balance sheet--

I think you're likely to see us migrate to a situation where in certain of our asset classes which have had emergence of institutional capital come into those sectors, principally, medical office and senior housing, and have had the resultant decline in yields available for an institution such as ourselves, you're likely to see us do those sorts of transactions going forward increasingly in a partnership with institutional capital, where as you're likely to see us with respect to the sectors that not yet had the rotation into them on the part of institutional capital, principally, skilled nursing ,to the extent we decide to invest in that space, hospitals, and maybe lab pharma you are likely to see us do those transactions on balance sheet.

Okay. And is the stuff that you acquired fourth quarter, you think, likely to stay on balance sheet or could some of that be --

The one transaction that Mark had talked about that closed in multiple traunches, two of which have close and had a third is yet to close, that is an extremely high quality portfolio of medical office buildings located in the southeast part of the country relatively new construction, occupancy levels in the high 90% set up as -- 80% of those leases are set up as net leases, many of which are located on the campus of nonprofit hospitals that have very, very strong credit ratings. I think you're likely to see that transaction end up as a joint-venture transaction as an example.

Okay. And just wondered, too, if the one you did with the 21 property or I guess, 2 properties where there is a lease to a tenant that already has 21, who is the tenant there?

I am sorry?

There is a December 22nd acquisition to ILAL and you just say it puts a master lease of 21 properties. I was curious who the operator was.

That's Summerville, Jerry.

Summerville. Great. Thanks.

Your next question comes from the line of Greg Andrews with Green Street Advisors. Please proceed.

Good morning.

Hi.

Looked like your same property NOI pace actually picked up in the fourth quarter just kind of comparing the numbers to the third quarter. It almost looks like it got close to 3%. You said that you expected it to be better next year than what you reported in '05. Is 3% a good number to dial in for next year?

Yes. I think I have been cuffing the answer to that question is between two and three as you can tell from Mark's comments. Overall at 2.1% we had the result in the MOB joint venture, of which we own a third, at negative 5%, 6%. I think you can tell from Mark's comments, a lot of those particularly on the occupancies, were kind of temporary phenomenons that were involved with reworking that space and so it is with the knowledge of that and the knowledge of progress that our colleagues in Nashville have already achieved since they've been on this from the get-go, that I feel comfortable saying the 2.1%, we expect to exceed that result in '06. Whether it gets to 3% or not, we'll have to see. I am certainly comfortable in a 2% to 3% zone for same-store performance for 2006.

Okay. And then just so I understand, the Mark, the gains you talked about, I didn't really catch the first one, the 1.3 million, you said something about an option? What was that?

We had an option to acquire some limited partnership interest and, which we settled, there was litigation regarding it. We settled the litigation and in doing that we had a $1.3 million gain.

Okay. That makes sense. Then the looks like you added a few facilities on your top operator schedule with MedCap and I am wondering what types of facilities those are.

That was the -- if you go back and look at the one of the December transactions that Mark took you through, that was a specialty hospital transaction as you know we kind of been on a bend to increase our exposure in the hospital space. We haven't done as good a job in that regard as we would have liked. With Scott Kellman coming on board, with his background he targeted that and we're pleased to make that investment albeit a debt investment. We made that investment right at the end of December.

Okay. So the other I think the schedule shows those REIT facilities with them so the other two were prior facilities and you just added.

We had two loans, again these are all mortgage debt investments, two coming into that investment. One of which by the way is scheduled to mature in '06 which again, Scott and his colleagues have already got that extended beyond the maturity date of this year.

Okay. Great. And then turning back to you, Mark, just in terms of getting your annualized run rate, you mentioned deducting the gains that makes sense. The full quarter effect of -- or the full effect of the quarter's activity I understand it, but what was it you said some sort of FAS 141 adjustment? What was that and how big is that?

It is actually a relatively small number. We normalize for the effect of the SAB 101 adjustment which has to do with how we recognize contingent rent. It is a relatively minor amount.

All on the tenant?

Yes.

Greg, that's a thing we have where we kind of -- it is reports it is a timing issue --

[OVERLAPPING VOICES] Seasonality of the receipts from tenant quarter to quarter?

Exactly. It is light in the first quarter. It is heavy in the fourth quarter on balance and washes out during the year and all Mark is trying to do is show you what the true run rate would be.

Right. I am familiar with that. Okay. And just lastly G&A guidance for '06?

If you look at '05 we run a little bit just slightly under 7%. I think in 2006 we're probably going to run somewhere around the fourth quarter run rate for '05 so probably around 7% of revenues.

Terrific. Thank you. Congrats to everyone.

Thanks, Greg.

Your next question is from the line of Jordan Sadler with Citigroup. Please proceed.

Good morning. I am here with Craig Melchior [ph]. On the guidance -- and I know it is not guidance and you're just giving a run rate -- I'm just curious to be clear on what is included or excluded in terms of transactions? Everything completed during the fourth quarter was backed up to let's say September 30th?

Yes. Everything that we did in the fourth quarter is in for a full quarter.

Including the hospital loan, for instance on December 28th?

Correct.

So it excludes the MOB's acquired in January and as well as the lab space in February and the third traunch of the deal of the MOB deal you have coming up in March?

It is only fourth quarter transactions.

Okay. Another question was just going back to one of Jerry's questions. How do you weigh acquisitions opportunities versus buying back stock?

That is an interesting question. Let's see. We're obviously in a fortunate position given the broadband width we have in our portfolio crossing five sectors to look across each of those five sectors and determine not the best opportunity in each sector but the best opportunity across all five sectors. As I said before the number one for example the number one opportunity in skilled nursing might very well be the number one opportunity in the skilled nursing space, but if you roll it all up, it might not make the top five as an example across the entire portfolio. We look at our opportunities that way across the entire portfolio.

One of the other three or four tactics that Mr. Spieker impressed upon me was to always look at our stock price in the context of our acquisition opportunities, and when we start to triangulate in on whether or not to make a decision in a particular property we're going to look at cap rate, replacement costs, FFO accretion, cost to capital, and then, if we're looking at things in a joint venture, leverage returns after fees and things like that. We are also increasingly looking at that or certainly looking at our common stock, and again, I want to point out maintaining our credit rating is a top priority, but it may well be the case it was kind of already looked at this.

To turn that around, we looked at that in the context of sourcing new proceeds and it has occurred to us that we are advantaged to take a look at a couple of properties in our portfolio that maybe were bought at low double-digit cap rates that today might trade in a low to a mid-six cap rates. That probably is a better alternative than to selling common stock in accomplishing the same objective with respect to our maintaining our rating agency metrics. You turn that around and you got the same math going the other way in the terms of where we're deploying our capital. So it is something we look at.

It may well be the case that if we continue to have the sort of success we've had on the most recent exit of the joint venture that some of those proceeds down the road might be allocated to that sort of behavior but again I think the things we think about are maintaining our credit ratings and looking across our portfolio which gives us five different sectors of opportunities, and then looking at our common stock as well. It is kind of a lot of variables there.

I guess in the same context what is the -- you have this three traunch medical office building deal, which if you close the first two traunches, is the whole thing supposed to be a blended mid-seven or what's the full 165?

I think the blended rate that Mark -- 7.3 is what Mark said. Again, we would anticipate a good chunk that far transaction. Here again, we've got the down-REIT, the principal there is first class professional, done a great job, a great reputation, someone we definitely are proud to call a partner, but aside from the down-REIT component you may see a good chunk of that transaction in a joint venture.

Now, are there better growth opportunities? You guys seem to be putting together a few different levers to drive above average growth relative to historical with your same store and some of the asset management businesses you're ticking off. Is there better growth from a portfolio that has a 7/3 initial yield than maybe what you think for your overall portfolio?

You really have got to look at what are the bumps in that deal. Is it a gross lease? Is it a net lease? That particular portfolio probably has less growth because it is I think the occupancy in that net portfolio are 97%, 98%. Now, because the net lease -- I don't think there is much roll on those leases for the next five or six years. That's -- I would characterize that particular portfolio as very high quality, maybe not much not as much growth, more of a current income play. However, with that, again, I go back to the quality of the partner, the principal involved there. We've also had the opportunity to do some development business. Here is where you got to look at our strategy as kind of migrating to different buckets. You may well see the core portfolio, the stabilized portfolio, doing very, very fine in a joint venture and you may see the development opportunities find their way onto our balance sheet directly.

Okay. Last question of the institutional fund or venture that you guys might do. It sounds like is there a $300 million fund coming in the near term? And if so, can you just talk about the structure, your share, and I know you said MOB and senior housing, but just targeted IRR and maybe your structure with leverage and your share.

I think you'll see what we end up doing there as being very similar to what we did with our GE joint venture in terms of structure, leverage, that sort of thing, and when we close that we would be glad to share those details with you in greater detail.

Great. Thank you.

You're welcome.

Your next question comes from the line of Robert Mains with Ryan Beck. Please proceed.

Good morning or good afternoon depending on your time zone. Got a couple numbers questions. The rental and other revenues figure for the quarter, I didn't see in the supplemental break down to that between triple net and managed?

Let me look a second.

While we're looking up I have a follow up I think I can get close to it and if I did the Malt right, managed property NOI was down pretty severely sequentially. Anything going on, particularly, behind that?

No, not really anything that particularly comes to mind on the managed property NOI. Just so you know on pay, I think if you look in the supplemental on page 19 there is a break down there between the NOI by sector, which I think, will give you the information you're looking for in the first question.

Okay. I see the reference. Okay. Fine. So the lower level than in Q4, that's the one that you used in -- I know it is not guidance, but that's the run rate, there is no adjustments you made to that run rate?

That's correct.

Thank you.

Your next question comes from the line of Rich Anderson with Harris Nesbitt. Please proceed.

Thanks and happy Valentine's Day.

Thank you.

The 300 million that you raised recently, does that equate to $1 billion of buying power? Is that a fair statement?

Well, you would have to make an assumption on targeted leverage for that and then we're always going to be a co-investor. We're not going to underwrite anything but we're not putting our own money in. I think if you were to layer in equity contribution along the lines of what we did with our previous joint venture and then have a leverage assumption, I think that gets close to that sort of dollar value.

Okay. The MOB in the joint venture sort of the -- as you called it the temporary reworking of space and the expectation for that to get back up from an occupancy standpoint, how much of that are you doing and sort of keying up for sale? The stuff that you have 34 million you're considering for sale, is any of that 34 million sort of being worked in getting ready to be sold, is that a strategy within the joint venture?

I don't think I understand your question. What 34 million are you referring to.

You said you were thinking of $34 million more, unless I wrote it wrong, out of the joint venture that you think would be sold soon?

What it said was we had identified some nonstrategic properties and we took the portfolio out to market and effectively it is going to close in two traunches. One is the traunch we closed a couple weeks ago. That's 50 million. By the way, there was $34 million of debt against that. That's what you are talking about. The second traunch is the rights of first refusal, the hospitals themselves are exercising, so away from that we don't have any other dispositions contemplated. In fact, I think I said it would be our intent to retain our one-third interest in the remaining properties, something could happen with one or two of them but by all intents and purposes maintain the properties which we identified at the time we did the transaction, so those are keepers if you will.

When you talk about growing assets under management, could you say more of it is going to come from the formation of the new joint venture rather than the growing of the existing joint venture? Is that a fair statement.

I think joint venture is plural. I think what I said, Rich, is we anticipate closing on one or more additional ventures during the course of 2006.

But is the size of the existing G joint venture pretty much where you want it to be at this point? Or does it get bigger?

It could definitely get bigger. You certainly got considerable amount of buying power in that venture in terms of committed equity capital.

The sales that you referenced to the hospitals purchase options, what sort of cap rates are we talking about on the sales?

I am sorry, what are you talking about now?

The sales to -- the right of first refusal to out of the MOB,.

It was all done at a 7-0 cap rate, Rich. You understand we went out to the market and we're in the fortunate position of getting a lot of interest and

They were part of the same transaction?

It is all one deal. It is just that on a portion of the buildings on hospital campuses that had a right of first refusal and the hospitals on whose campuses those buildings sat exercised a right of first refusal. It is all one deal. It is just kind of closed in two different traunches.

I am a little smarter now. Thanks. Last question, when we met recently at NAREIT, maybe, I don't recall. You guys said you were taking a look at Altac and I was wondering with the latest news on the reimbursement potentially changing for Altac, has your opinion changed on getting more into that business?

I think we're I would characterize where we are now as still in evaluation mode. As you know historically we have shied away from that space. In fact, I think towards the end we put out a press release a week or two ago showing there was virtually nothing in your portfolio. That is the sort of event that I talked about in the past that is potentially being a catalyst for us to, we think, maybe provided an entry point for our company, that's a little of the way we think, but I don't think we're prepared at this point in time to make a definitive statement that we're moving into the Altac space.

Thank you very much.

Your next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed.

Good morning. How are you?

Great. Yourself?

I'm wondering if you can provide a brief overview of the acquisition market break out by various segments in terms of cap rates and the availability of future portfolio deals?

Sure. In MOB's you continue to have a lot of interest. I think you're hard pressed to find a week go by where you don't have some announcement in Globe Street of a new MOB joint venture being created. The range of cap rates there we're seeing is kind of 6.75% at the low end to maybe 7.5%. That would be for kind of on campus good-quality portfolios. In senior housing you've gotten IL and AL and CCRC's and you can see that be a little broader range, 6.75% up to 9% although there is rumored to be a portfolio coming out of the private equity firm that if they're successful will probably set a new precedent in terms of cap rates there. They're talking about something in low 6's. Hospitals by the way, those are lease rates, Jay, 6.75% to 9%. On hospitals, again, lease rates you kind of see 8.5%, 9.75%. Skilled -- again lease rates kind of cuffed to the 8.5% to 10% zone and then lab pharma, probably put the range there of 6.75% to 9%.

Okay. Just one more question in terms of operating expenses, I know they bumped up a bit year-over-year around 11% range to around 13% now. Is that a good run rate looking out to '06?

Yes.

Okay. Thank you.

[Operator Instructions] Your next question is a follow-up from the line of Jerry Doctrow. Please proceed.

Jay, just one thing. Going back, you had mentioned that you were through the promote or whatever you're calling it in the JV. I was curious if that actually changes your economics coming off this deal that's already done or changes the economics as we go forward? If you could just elaborate a little bit there.

Oh, yes, the promote's returns, Jerry, that gets to be quite meaningful.

And so in terms of just to so that I am clear, in terms of the particular properties are sold obviously you get a 4% return so you're getting normal above beyond the one third interest you're getting a share in a greater amount but it is reflecting that transaction. It doesn't affect your on a sort of day-by-day basis, and the rest of the portfolio doesn't change your economics.

The way we think about the piece that's closed so far is it is kind of a credit towards the promote, the ultimate promote will be realized by us only when and if our joint-venture partner exits the venture entirely you got a call back mechanism there.

Okay.

Obviously what I said about the nature of those properties versus the remaining properties, it is a very potentially who knows. Who knows when the ultimate exit occurs and what the cap rate environment is at that time, but in these conditions it is a very good result for HCP shareholders.

When that was put together, is there sort of a -- would your partner GE have kind of a similar time frame outlook to other partners. maybe a five, seven year hold or something?

I think that's where you're going to see us go. We learned a lot from this business. It has been a very interesting period of time, and I think you can probably group a lot of these institutional investors into two group. One are kind of the folks that raised their money by funds and kind of have a couple year time frame to invest in and a three to five year hold and an exit sort of profile. There is another group that is increasingly getting interested in our space. I have actually been asked to go up and make a presentation next month in San Francisco at the PRIA conference which is one further bit of evidence of a growing institutional interest in our space, and a lot of those institutions tend to be much longer term in terms of their hold periods, which for certain of our asset classes, now I am thinking specifically of a nonprofit sort of thing, that sets up quite nicely. You may see us while the terms, the economic terms and the deal points are somewhere between these ventures. You may see different hold periods emerge as we evolve the strategy further.

On the GE do you have buy-out rights yourself or do you have if that sold it just goes to the market?

There is a buy and sell there in that agreement, Jerry.

Okay. Great. Thanks.

At this time there are no further questions in queue. I will now turn the call over to management for closing remarks.

Operator, thanks very much. Thanks for your interest, everybody, and have a good rest of the week. Take care.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.