Healthpeak Properties Inc (PEAK) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 HCP earnings conference call. My name is Mike, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Please be advised we will be taking questions at the conclusion of the presentation and this call is being recorded for replay purposes. I would like to turn the presentation over to your host for today's conference, Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may go ahead, sir.

Thank you. Good afternoon and good morning. 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 Chairman and CEO, Jay Flaherty.

Thank you, Ed. Welcome to HCP's third quarter earnings conference call. Joining me on our call today are Executive Vice President and Chief Investment Officer, Paul Gallagher, and Executive Vice President and Chief Financial Officer, Mark Wallace, who I will now turn the call over to. Mark?

Thanks, Jay, and good morning. This was another eventful quarter for HCP. We closed our $3 billion acquisition of Slough Estates and related financing, we made substantial progress in deleveraging our balance sheet, and we are entering the final stages of our Slough integration activities. This morning we reported FFO per diluted share for the third quarter of $0.52. Our third quarter results include approximately $9 million, or $0.04 of FFO income related to the collectability of straight-line rents from Summerville Senior Living, as previously announced. The recognition of Summerville's straight-line rents reflects the credit enhancement provided by an Emeritis guarantee that went into effect upon the acquisition of Summerville by Emeritus. Our results also include just over $9 million, or $0.05 per diluted share, of merger-related cost comprised of the following: $6 million of interest expense related to the write off of deferred financing costs associated with the termination of our previous revolver; $1.4 million of interest expense related to bridge loan fee amortization; and $1.7 million of G&A expense related to other integration-related activities.

Consolidated GAAP-basis, same-property NOI growth for the nine months of 2007 was 5.7%, while same-property adjusted NOI growth was 2.3%. As we discussed on our previous call, the life science sector of our same-property portfolio was impacted by one tenant that reduced their space by 160,000 square feet earlier this year at our Lusk campus in San Diego. We have signed a lease for half of the vacant space with rent commencing in early 2008. We are currently in discussions to lease the remaining space and expect to sign a lease this quarter. If you eliminate the effect of this property, our consolidated adjusted NOI grow would be 3.3%. All of our other sectors reported solid adjusted NOI growth. Skilled nursing facilities came in at 4.1%, senior housing at 3.8%, and medical office buildings at 3.4%. During the third quarter, excluding the Slough acquisition, we acquired interest in $118 million of properties at average initial yields of 7.8%. In July we received $44 million upon the early repayment of an 8.375% loan receivable due 2010, including a $4 million prepayment premium, which is included in interest and other income. In July and August prepayment options were exercised on two properties for $51 million, which included $4 million of (inaudible) maintenance that we recognized in income from direct financing leases.

During the third quarter we sold 42 properties for $504 million, including the sale of a 41-property senior housing portfolio for $501 million to Emeritus at a cap rate on trailing NOI of 5.9%. These sales resulted in gains of $286 million for the quarter and are excluded from FFO. In September HCP Ventures IV, the MOB joint venture we formed in April, acquired a property valued at $35 million and concurrently replaced $23 million of ten-year secure debt at 6.65%. Transaction equity was funded pro-rated by the partners. In connection with the Slough acquisition we arranged two new bank credit facilities; a $3 billion unsecured bridge loan under which we drew $2.75 billion at closing, and a $1.5 billion four-year revolving credit facility, which replaced our previous $1 billion revolver. We have made substantial progress on our commitment to deleverage our balance sheet. On October 5th we issued nine million shares of common stock and received net proceeds of $303 million. Ten days later we issued $600 million of senior unsecured notes at an interest of 6.7% due 2018. The proceeds from these transactions, combined with the proceeds from the Emeritus sale, totaled $1.4 billion and have all been applied to reduce our bridge loan to its current outstanding balance of $1.35 billion. Since the closing of Slough on August 1st, our overall leverage ratio has declined from 60% to 55% today, our floating rate debt is down from 42% to 27%, and we have no outstanding borrowings on our revolver today.

Gross investments are forecast to be up to $800 million in the fourth quarter, resulting in total expected gross investment for the full year of between $3.7 billion and $4.5 billion. We now expect the remarketing of our former GE joint venture to be completed in mid 2008. Accordingly, we expect transfers of assets in the joint venture for 2007 to be $1.7 billion, comprised of our senior housing joint venture we formed in January and the MOB JV we formed in April. Our investment management platform should generate between $13 million and $14 million in income. Real estate dispositions are expected to be about $100 million in the fourth quarter, resulting in disposition for the full year of about $1 billion.

Gains for the full year reported from GAAP earnings on these dispositions should range between $400 million and $450 million. Adjusted same-property performance is expected to be between 2% and 2.5% for the full year. Reported G&A should range between $75 million, and $80 million. Merger-related costs for the full years should be $22 million, $11 million of which will be reported in G&A and the balance reported in interest expense. Our guidance for the full year assumes weighted-average diluted shares applicable to FFO of about 216 million. And last, we've revised both our supplemental package and disclosures in our 10-Q this quarter to provide more information following the acquisition of Slough Estates and we expect to make further changes at year end and we welcome your comments as our business and disclosures continue to evolve.

I'll now turn the call back over to Jay.

Thanks, Mark. I will focus my comments on achievements with two important initiatives; one, the integration of our recent Slough life science acquisition, and, two, our delevering plan. The Company's life science portfolio has grown to 5.9 million square feet, including 5.2 million square feet from the Slough acquisition. As of September 30, 2007, life sciences represented 25% of HCP's real estate portfolio and was 84% occupied. We expect to see occupancy gains in the coming months as a result of recent leasing activity. Before we provide an update on our leasing and development activity, let me review the market environment for our core life science markets of San Francisco and San Diego, California. In the Bay area, market fundamentals remain strong for lab space. The San Francisco peninsula continues to experience a lack of inventory and demand has helped maintain occupancy rates between 96% and 97% in the sub-markets of south San Francisco, Redwood City and Mountain View. Continued tenent demand along the peninsula exceeds 600,000 square feet and combined with limited new supply in the short term, has resulted in positive absorption of approximately one million square feet on a gross basis this year.

Market demand for lab space in San Diego, while not as strong as the Bay area, has continued to show signs of improvement. Occupancy in the San Diego life science market currently sits at 94%, which is a 6% increase from its low in mid 2004. Occupancy in Torrey Pines has also started to improve and has increased to 87% from its recent low of 85% experienced earlier this year. Tenant demand remains strong with approximately 900,000 square feet of space requirements currently in the market, and has resulted in positive absorption of 173,000 square feet on a net basis this year. The favorable fundamentals underlying our markets have translated into a significant number of executed leases in both our geographic clusters. Since reaching agreement to acquire Slough, approximately 708,000 square feet of leasing activity has been completed. Of this total, 299,000 square feet related to new or renewal leases on previously-occupied space that resulted in an increase in rent of 80% over expiring leases. The remaining 409,000 square feet of leasing related to previously vacant space of which approximately 315,000 square feet within the San Diego region and represented recently-executed leases to Scripps Health and [General Automix]. This leasing success provides further evidence of the strengthening markets in northern San Diego county.

The focus on leasing has resulted in positive momentum in both of our core markets and has meaningfully reduced the portfolio's overall vacant space, particularly on the legacy Slough portfolio. When the Slough transaction was announced four months ago, the 5.2 million square feet of existing real estate was 82% leased. Given the leasing velocity, this existing portfolio is now 88% leased, which will result in increased occupancy in future quarters. The demand for space in our markets remains robust, with approximately 235,000 square feet of space in negotiation. This demand, combined with only 42,000 square feet of leased expirations prior to year end, should continue to produce occupancy gains and income growth as rents roll to market.

One of the key strategic reasons we pursued Slough for the past four years was the future income potential from its development pipeline, which represented approximately 3.8 million square feet, including future redevelopment. The committed development pipeline totals 544,000 square feet in six buildings, which are all located in south San Francisco. These buildings are 86% preleased. We expect to complete five preleased buildings totaling 466,000 square feet during 2008. These five buildings represent new, best-in-class life science space and they are 100% leased to Amgen and Genentech. Genentech will take 49% of the space during the first half of 2008 and Amgen will take the remaining 51% in the fourth quarter of 2008. The future development pipeline represents an aggregate 3.3 million square feet of expansion opportunity in south San Francisco, Torrey pines, [Pahway], and Carlsbad, California.

Let me now turn to the progress we've achieved in delevering the $3 billion bridge commitment obtained in connection with the Slough acquisition. Our outstanding balance has been reduced by over one half to $1.35 billion. As Mark mentioned, since we last visited with you we have closed three transactions that generated $1.4 billion of cash proceeds, reducing our leverage ratio to 55%. We committed to refinancing the $3 billion bridge on a 50% debt, 50% equity basis. Closed asset dispositions and this months equity offering comprise $1.05 billion, or 70% of the targeted $1.5 billion equity component. We expect to joint venture our portfolio and execute asset dispositions to complete this process.

On the debt side, we have closed on $600 million, or 40% of our targeted debt raise, and have hedged $500 million of the remaining $900 million at an underlying rate of 4.32% on a ten-year treasury. Recognizing the speed and success of our delevering initiatives, S&P removed HCP from credit watch during the quarter. The Company's ability to execute over-subscribed capital market transactions, notwithstanding the recent credit market turmoil, and our substantial liquidity levels position HCP to be opportunistic in the current investment environment. Finally, we were delighted to welcome Christine Garvey to our board of directors last week. Christine's experience as a director of at Prologic, Hilton Hotels and Union Bank will be invaluable to HCP going forward.

Operator, at this time we would welcome any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And the first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Thanks, morning, Jay.

Morning, Jerry.

I just had a couple of thing. One is a number of people were concerned about the same-store occupancy declines in your supplement and I was just trying to clarify whether those are indeed third quart -- third quarter numbers and if you can give us any additional color on what's going on there?

Well, as is our historic past, what we report in our recently completed quarter always trails a quarter. So in other words, in our third quarter supplemental, the information that you saw this morning or last night, that actually relates to operator performance for the second quarter, so that always lags a quarter. And that's always been that way and we don't anticipate that changing. That's the one comment and I'd make two comments. That's one comment. The second comment is got to be a little careful. We got the same property performance metrics from my perspective are interesting and they're all -- we're very pleased with them, but you got to take a step back. In the big picture they represent at this point only 28% of all the real estate in our portfolio, because we haven't yet owned CNL a year yet, so that doesn't qualify to be in that, and we obviously haven't owned Slough yet a year, going on two months. If you take a look at the big, big picture, 72% of all the real estate that HCP owns today as of September 30, did not find its way into the metrics that you see in the supplemental as characterized as same-property performance, so I think you got to-- got to understand that point.

No, that's very helpful. And if I could just do one or two other things. I just wanted to clarify the $9 million in straight line. I think, Mark, seemed like you were categorizing this as sort of a one-time item and we're trying to debate whether to pull it out or not and also just clarify, yes it is -- if I understand what you're doing is non-cash, so it's in the straight line deduct for the quarter in terms of fat or your adjustments that you provide and that should not occur -- reoccur in the second quarter? I'm just trying to get a straight-line run rate really next quarter as well.

Yes, you're correct that I would characterize it as it would hit -- that it would be a one-time item and it wouldn't be something that you would want to annualize Straight-line rent for next quarter would probably run around $14 million.

Okay. And the one other thing I guess I want to just ask and then I'll jump off and come back if I have others. You ran through, Jay, a lot of the leasing activity and that sort of thing, which actually sounds quite impressive to those of us who are trying to model. I think we've got a schedule on the development but I don't think we've got any schedule on either the leasing activity or on asset sales or potential asset sales, and so trying to get a better handling on the timing, I was wondering, because that's something we might be able to see unless I missed it in the supplement?

Yes, you're probably with an eye towards '08 results, is that --?

Yes, you said you leased whatever the -- you went through the square footages but -- and some of that was first half, some of that was second half, but just getting a sense of how that would play out for the quarters would be real helpful.

I think the take away on Slough, our top four priorities in this order as of August 1, which is when we closed, were the integration, lease-up of the -- of the assets, which if you recall at take down, the lease-up portfolio -- the stabilized portfolio was 95%, the lease-up portfolio was at 48%, that blended to an 82%. As we sit here today, the stabilized portfolio has gone to 96% and the lease-up has gone from 48% to 57%, which blends to an 88%. So we are ecstatic with the velocity that we've seen on the leasing activity and that was priority number two after integration. Priority number three was the delevering actions and then four was development. So you can see we've made very, very good progress on the first three. We are now -- in light of the tightness up in the Bay area and the improving fundamentals in San Diego and the success we've enjoyed, we are relooking our '08 plan relative to development, which ex the Genentech and Amgen buildings identified, actually had no '08 starts planned at the time we closed the transaction. So we're reevaluating that plan now and expect it to be up in those markets in the next several business days with our partners.

And I think lease-up activity sounded great and just trying to get it timed out right. If I could just -- one last thing, I guess, you had also -- I think we've talked before, chatted a little bit about acquisition environment. I was wondering if -- and you've done some acquisitions built in for your fourth quarter guidance -- are you still looking at high yield in any sense as to -- in terms of us thinking about guidance on rates and stuff like that? I know, for example, the [ACR/CMBS] is being marketed right now. Is there maybe a high yield in there, 10% plus kind of thing that would be part of that acquisition or should we be thinking of it as more -- sort of more traditional property acquisitions?

Well, I think -- let me say this. The acquisition environment has been pretty interesting the last couple of months, particularly in the time frame since we last spoke to you with all the credit market turmoil. I would say -- I'd characterized the environment in the last month or two as being one that's in disequilibrium. I think Mr. Litt coined the phrase stalemate. That probably does a better job of capturing where things are. You've got folks that have very good access to capital who are -- got a lot of irons in the fire out there that understandably are trying to be aggressive, then you got sellers on the other side that are asking themselves, what could have happened in the last two months that would take valuations that existed in the first time half of the year to where they are now. So you've got a little bit of a stand off at the present time. I suspect that'll probably work itself out, although it may not actually begin to occur until the first part of next year.

With respect to our guidance you'll see that we dropped the top end of our guidance by $0.05. In other words, we had a $0.10 range on our last call, $2.20, to $2.30. We are now showing to $2.20 to $2.25. We dropped the top end $0.05, and that was solely a function of the timing on two issues. One, we've got a very significant deal pipeline but I think to the extent that we're successful in closing some of the transactions between now and the end of the year, by the time they close the timing will be such that they really won't have as much of an impact on our '07 result as they would have if they had closed earlier in the quarter -- or earlier in the year.

And then the other issue that slipped on timing was our decision to flip-flop the deleveraging execution on our MedCap joint venture from Q4 to Q1 and then take the equity deal from Q1 and Q4. We just flip-flopped those two transactions. That had obviously acquisition-related fees associated with it, so by slipping that a quarter those two things accounted for us dropping the top end of the range by $0.05. Other than that, Jerry, I can tell you that we have every property type represented in our deal pipeline right now and we have every product type, so it would be the complete. And we've got development deals in there, we've got joint venture transactions, we've got (inaudible) debt investments, we've got sale lease backs and they span all five of our property types, so it's well represented. The real question is, what if anything we're able to close up between now and the end of the year and that'll -- we're watching that very carefully. We're in a very liquid position. We've set ourselves up to take advantage of it, but we'll just have to see what happens in the next 60 days.

Okay, great. Thanks.

And the next question comes from the line of Mark Bissert with Goldman Sachs. Please proceed.

Hey, guys. Hey, Jay, I'm not sure if I misheard you, but I thought Mark had said you'd moved the MOB -- or the MedCap portfolio to the JV to mid '08. Is that correct, or is it still the first quarter of '08?

We've flip-flopped from -- we have added a Q4 -- excuse me, a Q1 execution -- the equity deal is a Q1 execution, we moved that into Q4. We had the MedCap joint venture as a Q4 execution and we've moved that into Q1. End of Q1 is our targeted close date on that.

Okay. And related to to that what are you seeing in terms of backup in cap rates regarding MOBs and did that have anything to do with your decision to wait in terms of finding somebody that would go in on that with you?

Yes. No, the answer -- if I can take the second question first, that really didn't have much, if any. Recall what's driving a lot of these tempering of the deal environment is the ability to get secured debt. We at a very fortunate position for two reasons on this portfolio. Number one, the secures debt's already in place, it's very attractive, 5.675% term debt, albeit at probably a lower loan to value. And then secondly, the portfolio is performing exceptionally well. Tom Claridge, in particular, has done a wonderful job with that portfolio this year. So what we saw there was -- if you recall, we've owned this portfolio as of three weeks ago for four years. That enabled us to clear through a Safe Harbor with respect to some tax issues and we've got a very nice opportunity there. We are now in the market as of three weeks ago. We've got a number of folks that have executed confidentiality agreements and we remain optimistic that we'll have that exec queuing. But that -- we wanted that to go at its own pace and not try to jam that or anything, which is why we flip-flopped the execution on those two delevering actions.

And shifting gears back to the same-store report, as you look at CNL coming into the blended portfolio and Slough, what are some good growth rates as we look to '08 and into '09 for NOI in terms of year-over-year growth?

Let me make a couple comments. Adjusted same-property is the 2.3 metric that Mark indicated. Ex the repositioning of our Lusk campus, which we've talked to you in previous calls about, it's really 3.3, so I think that's more representative of what's going on in portfolio. Now, fast forward 12 months from today on this call. we'll be pointing out that that same property performance, you'll need to go the other way because you'll have a one-time windfall coming the other way as we finish leasing up the Lusk campus. But right now, 2.3 is the stated same-property performance. Ex the Lusk campus we're really at 3.3.

When we circle through those same-property performances -- notwithstanding my comment that those metrics only pick up just over a quarter of the portfolio -- from our perspective they look petty good. Senior housing at 3.8, MOB's at 3.4, skilled at 4.1 and hospital at 2.7. But I think the more important, the elephant in the room is what's going on with those properties that are not captured by that metric. And for that the biggest chunk of that is Sunrise and I'd ask our Chief Investment Officer, Paul Gallagher, maybe to comment on the performance of the Sunrise portfolio.

Yes, as we look at that portfolio occupancy today is stable quarter over quarter at 90.5%. The metric that we look at is property level NOI, and through three quarters year over year the growth in NOI is 5.3%. And again Sunrise is a big chunk of the CNL. I would say this that the remainder of the CNL portfolio is probably not going to come in that 5.3%. It's probably going to look a lot more like what we have in our (inaudible) portfolio.

Okay. And with the expansion that you guys are going through, are you having troubles at all in terms of staffing or your ability to handle the transaction volume that you've set out to achieve?

Sorry, Mark, could you repeat that?

Sure, just wondering with all of the volume -- the transaction volume that you've set out to achieve are you having any pressure in terms of staffing or your ability to handle that transaction volume?

Are you talking about at the property level or are you talking about back at the Company?

The Company level in terms of the overview?

No. Look, we've increased the size of the Company a little bit. I think like the following metric is very instructive. At the time we closed CNL we had 80 employees. Today we have 140, and we've ramped up two areas -- actually three areas in particular; accounting, legal and asset management. And you've seen us consolidate our Orlando office. We were able to transfer a number of valued employees to both our Nashville platform to focus on MOBs and a smaller number out here to Long Beach.

I will tell you that we've also benefited from the fact that with the subprime -- a lot of subprime activity's headed down -- is headquartered down there in the Orange County, Irvine area, and with some of the stress in those businesses we've benefited nicely by our ability to welcome some first-class professionals into the Company that's made that a lot of easier. So I think we're -- we still have one of -- a small number of openings, but we are -- we had our board meeting last Thursday and we deemed the CNL integration books closed, complete, and we are very, very far along on the Slough integration. So we're feeling pretty good about where we are.

Okay. And lastly related to the Slough acquisition, previously you guys had said the lease spreads were roughly 17%, if I'm correct, for the overall portfolio and you just stated that -- was it just the San Francisco portfolio that had 80% lease spreads?

Yes -- yes and yes. Now, remember, a lot of those leases that were in that grouping that -- we had the significant mark-to-market, if you think about it a lot of those were five-year leases, Mark, that had been entered into back right about the time the .com bubble popped. So we're coming off, I would say -- at the time those were entered into that was a good time to be leasing space if you were a tenant, probably not such a great time as a landlord, so we're now recognizing the mark-to-market there. So I think you shouldn't necessarily think that every time we're going to roll a mark -- rent to market we're going to be clicking along at 80%. but we've got -- the underlying demands in those markets are very good and we -- we continue to -- we continue to release space at or ahead of the plan we had that was incorporated in the underwriting of our acquisition assumptions.

Okay. Great. Thank you.

And our next question comes from the line of Jonathan Litt of Citigroup. Please proceed.

Hi, it's Craig Melcher here with Jon. So, Jay, on just your last comment there. Last quarter when you gave -- when you did the Slough acquisition, you gave an '08 yield expectation of 6.3 on the stabilized and leased assets. Is it fair to assume that you think you can build that higher than that given the leasing activity you've done and the rents you've been able to achieve?

Well, if a quarter makes a year, we're coming in above where we thought we'd be. But it's a quarter and a quarter doesn't make a year, so we'll see. But we -- so far we like what we've seen.

The portfolio's 88% leased now, but could you talk about what the occupancy is now and when those lease will translate into rent?

Yes, Paul?

The portfolio's still 82% occupied. Those leases will come in -- into play in the fourth quarter and first quarter.

Fourth quarter of '07 and first quarter of '08.

Correct.

And the releasing spread you think you'll be able to achieve on those, that's the numbers you've mentioned already?

Not the 80%. I mean they're up nicely but not 80% sort of up.

Okay.

We'll be able to give you more specificity with that the next time we chat.

Okay. And the senior housing portfolio, can you talk about the sequential change you've seen? It looks like the occupancy at least for the same-store numbers has come down sequentially by about 200 basis points and if you comment on the CNL assets, was that occupancy number -- I think you said they were -- on the Sunrise they were flat year over year but maybe sequentially how the assets are doing and if the housing market is having any impact on that?

I think, Craig -- and a bunch of us were just earlier this month back at the big senior housing conference, which is probably the most recent and most relevant perspective back in Washington, D.C., in the middle middle of October. I will tell you that, if you take the mood at that conference versus the two years previous, two years ago people were feeling pretty good, a year ago there was a lot of champagne being popped. This year a little more -- not down, but definitely more somber and I think consistently what we heard from our operating partners was concern about the potential fallout of the subprime situation migrating from residential into the senior housing space, and the one state that was consistently mentioned was Florida.

Now, we really haven't seen much, if anything, show up in our numbers yet, but I'd caution it's only been a quarter. We are watching it very carefully. Some of the stuff that you see in the occupancy, those are really more one-off things. They would not at all be representative of some turn in the business. So we are watching it very carefully. We haven't seen anything that would suggest that there has been a turn down, but it wasn't lost on myself and Paul and Tom Kirby. who's here, and the rest of us, the focus that this topic had on the part of the executives that run the senior housing operations.

So is the issue that they can't sell their homes to move in or is the the issue that they could go to a home cheaper?

Jon, it depends. If you were talking about a CCRC that is the issue because the sale of the primary residence becomes the source of the down payment. But we really spent a lot of time on this topic. What it more commonly is, because a lot of those -- the majority of the opportunities are more of a rental think it really becomes like an emotional sort of thing. Mom and dad thought their house was worth X.. They start looking at the comps in the neighborhood and they're not what they had thought it was a year or two ago and they're delaying the decision to go in, so it's more something like that. It's more of an emotional thing, with the exception in the CCR space where you've got the -- got the entry fee model. Then in fact you are talking about that being the primary source of the down payment.

So that didn't drive the 200 basis points impact. What drove the 200 basis points?

The 200 basis points was really 150 basis points. Previous quarter we were 89.9% and this quarter we're coming in at 88.4%. One of the big drivers was in our Emeritus portfolio. They were going through their merger so there were some circumstances around that. Going back to the --

Well, they just dropped the ball during the merger?

I don't know that they dropped the ball, no.

I don't think that's a fair characterization. I think they were very focused on getting this transaction done with such great things for them, and as a result they probably gave up a little bit. We've seen that throughout our portfolio. There's been a lot of change in control of things, so that's not uncommon for us to observe.

But back to the housing market, we're also seeing the deposits -- both at the CCRC and the independent living operators that we have, the deposits for new units is remaining consistent. What's happening is the conversion of those deposits into actual units has slowed down a little bit because people are, in fact, waiting for the sale of their homes.

Right. But just to go back to the Slough for a second, if you go in 88% occupied when the leases roll in you know there was a huge increase on the southern San Francisco stuff. Can you give us an idea of what it was across six percentage points in occupancy gains? Do you think it was a 5% increase across everything?

Jon, I'm not sure we understand your question.

Well, you said there was an 80% increase on the Slough assets in south San Francisco.

On the leases that rolled.

Right.

Remember, we had two components of 82% lease going to 88%. Some were renewals of leases, and those are the components that when they rolled we were able to achieve a 50% increase in rent. The other component was leasing of previously vacant space.

How would that relate to -- I mean, at some point it was leased, right?

Yes, everything was leased to go from 82% to 88%. Those were the metrics that I gave you in my -- that 708,000 square feet, Jon.

Right.

That's the amount of -- it's a huge amount of leasing activity that since we cut the deal with Slough that's been achieved here. But a portion of it, about a third of that, are renewals of leases and those leases that renewed they're up huge from the existing rents and that I think is partly a function of when those leases were cut, which is my comment about back in the .com busted period. The remaining 409,000 square feet, that's just previously vacant space that's just coming on, particularly down in Pahway, where we had a huge lease-up of a couple of buildings down there.

I guess from a modeling perspective, can you ballpark the rent? Is it like $35 a foot in rent on that other square feet?

We'd have to come back to you on that, Jon.

Okay, thank you.

And the next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

Thanks and a good morning to you. Can you give average rent per square foot for the medical office and life science portfolios, just an overall number?

No.

You can't do that? Okay. Can you talk about your CapEx requirements as it relates to releasing lab space?

Typically what the folks in the Slough platform has experienced is relatively small amounts, between $5 and $10 per square foot, simply because the space is very reusable to other type tenants.

A lot of times, Rich, those original TI improvements end up becoming effectively building improvements because a lot of stuff you're doing is pretty permanent.

Okay, so it's $5 to $10 a foot over a five-year lease.

Anywhere from a five to a ten-year lease.

Okay. With regard to some of the [one-timdish] items, you mentioned that you booked -- I missed the detail -- you booked something in the DFL income that brought it up pretty high for the quarter. First of all what was that and will it recur, or will that DFL income go back down to the $15 million range?

No, I don't expect that item to reoccur. That was some options that were exercised and therefore we had a yield maintenance premium associated and so that was $4 million. So, no, I wouldn't expect to it reoccur. So it should go back down.

Okay. Could you break down the -- the triple net rental income and the operating rental income?

I'll tell you what, why don't you call us back.

I think that's in the supplemental, isn't it?

Yes, we'd be glad to take you through the supplemental, Rich?

All right, I didn't see the supplemental. I'll look for it again.

Yes, it's not in. And the other thing is we -- in the 10-Q some of that information used to be back there. We changed the segment disclosures in the Q to better match the lineup with the sectors that we've had in the supplemental, so why don't you give me a call and we'll --

Okay, no problem. Jay, you mentioned that the two items that brought down the high-end of your guidance range I'm surprised that the debt costs aren't factoring into your thought process. Did you assume rising debt costs when you originally provided the guidance -- or last provided the guidance in the second quarter?

Yes. We're pretty conservative on that, so we obviously always try to exceed the expectations. But we did -- we did well in the execution but I think we did -- we know we did well relative to plan.

Okay, fine. With regard to the 6.6% cap rate that you mention as the average so far year to date, what cap rate does that assume for the SEUSA portfolio,and are you talking about GAAP or cash cap rates or yields?

Rich, I'm sorry. I have no idea what 6.6% cap rate you are referring to. Could you help us out there?

First page of the press release, other investment transactions, first paragraph, $3.7 billion of transactions averaging 6.6%.

Well, that's -- yes, that's Slough --

Right, so what did you assume for Slough? Is that 6.3?

That'd be 6.3 on the 80%.

Okay.

And then the remainder was some one-off, a couple of MOBs. and we had some construction debts -- some construction drawdowns and some development transactions, Rich.

It's in that $3.7 billion, there's $3 billion tied to Slough or is it $2.3 billion? Because $2.3 billion is 6.3 but $3 billion is a much lower number. I'm just trying to do the math there. It's not working out for me.

$3 billion is in there for Slough.

Okay. Then the last question is, I was looking through your 10-Q and there is a little detail on the Slough portfolio and it gets to a number including fair value of liabilities of $3.2 billion for the purchase price for Slough. I recall the number being $2.9 billion at the outset and then at some point along the line it went up to $3 billion and then I see this $3.2 billion. Can you reconcile what the right number is?

I'd be glad to. If you look on pa -- if you in the 10-Q there's a -- in the footnote you have two things there. You have the $2.9 billion, which is the purchase pri -- or the $2.98 billion, so that's $3 billion, which is the purchase price for the equity interest. And then when you do the accounting you have to value the assets, you put all the assets on your book. So when you do that you have to put the assets on the books that equal both the underlying amount that you paid for the equity and any liabilities that you assumed. So any current liabilities that exist ex Slough, as well as any tangible liabilities that are accounted for in the purchase price, go into the valuation of the assets. If you look in footnote three you will find both numbers there and you'll see the -- you'll see the purchase price allocation.

Okay. Thank you very much.

Okay.

And the next question comes from the line of John Stewart with Credit Suisse. Please proceed.

Thank you. Jay, can you give us any insight in terms of whether Amgen intends to occupy the space that they're going to take as far as the 2008 deliveries?

I think, John, the answer is some. They are looking to sublease a portion of that. The way that works for some of that space is that we've got consent rights over that process and to the extent the rents end up coming in higher than our contractual rents there's a potential for us to participate in that differential. But we've -- Marshall and his team has had a number of meetings with Amgen in recent weeks and the answer right now -- it's still developing -- is they intend to occupy some and sublease some of the other.

Any idea what some means? Is it kind of half and half, or --?

Yes, I would -- from what I've heard so far it's still remains to be seen, but again, we've got a 15-year triple net lease that we're dealing with, so from our standpoint we think it's neutral to potentially positive situation.

Sure. Just to confi -- I don't imagine there was any debt on the asset sales, is that right, the $500 million that you sold to Emeritus?

That's right. Typically, John, we typically will not have secured debt on any properties unless they find their way into a joint venture, so property that we will hold on our balance sheet are typically unencumbered.

Got it. And then in terms of just a clarification on the guidance, it excludes the merger-related charges but is this straight-line rent reversal, is that included in the guidance.

Yes.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And the next question comes from the line of Robert Mains with Morgan Keegan. Please proceed.

Thanks. Let me just amplify that last one on the straight line. So the guidance has a $9 million (inaudible), is that correct?

The guidance has the $9 million in the (inaudible), yes.

It does, okay. If I take that out, it's a pretty big jump in -- where we were in the third quarter to the number that you gave Jerry. What is the source of that increase from Q3 to Q4?

You've got additional -- you've got additional investment volume, we've got that. You've got the Slough portfolio that it's now -- both has (inaudible) imbedded and will be in the fourth quarter for three months versus two months. And then you've got a number of other items as well, but those would be [large ones.]

The properties that you realized the straight line on, those are ones that are still in the portfolio or are they part of the group that was sold back?

No, the ones -- that ones that we're recognizing straight li -- well, the ones that we're recognizing straight line on going forward are the ones that are still in the portfolio.

Okay. All right, that makes sense. Another question down there in the [FAD] calculation, TI and lease commissions were up pretty dramatically from where they were in the second quarter. Is that a run rate that we're at now or is that going to bounce around a lot? Just want to get some sort of an idea what have that might be.

Most of the increase over prior quarters, again, is attributable to Slough coming into the portfolio. So I would say -- the best estimate I have now for fourth quarter, which is -- would be around $16 million to $17 million, so it will go up relative to historical periods.

And that's kind of a good run rate to use or wouldn't it probably track the leasing (inaudible), as well?

It does track volumes, but if you're going to model out that's as good a run rate to use as anything else.

Okay. And then the other number that you gave out, SG&A is up, is that just kind of the seasonal stuff that goes into that number? It's always kind of bounced around.

It does bounce around because we do have seasonal stuff in there, so I think -- again, the guidance that we have for the full year is still the same rate that we had previously.

Okay. And then operating expense, will that track what the -- I'm assuming the bulk of the increase is Slough related -- should that track what your revenues are or is that going to be -- should we look at that more as a fixed cost?

I don't really --

(inaudible) where it was in the second quarter.

I think it will track with revenue for an extent and if you -- actually the way I typically look at it would be what the operating (inaudible) are relative to revenue by property type, because property types have different operating margins. So if you want to -- if you'd like me to go over that with you I'll be glad to do that.

Okay,. And then last question, Jay, you had said -- just make sure I got it right -- $800 million in gross acquisitions in the fourth quarter?

Up to.

Up to.

Up to.

It depends on wha -- in other words, it'd be zero at the low end of our range and $800 million at the high end of that range, that's how it spreads, the $2.20 to $2.25.

Right. Assuming -- the zero isn't all that interesting to talk about -- assuming that you're up near the higher end or halfway to the higher end, that's a substantial increase over where you've been the last couple of quarters and I know that you've got Slough on your plate, but getting back to the previous question about acquisitions, is this just stuff that all seems to be coming loose at the same time or are you sensing something else going on in the market?

Well,hang on., Ex Slough, what did we close through September 30, about 650.

Last couple of quarters have been sort of quiet.

Yes, As you know (inaudible) lumpy so I don't think --I can't put my -- I can't really identify any one single item, but I think you ought to read into the fact that the range is zero to $800 million. You said zero may not be terribly interesting; that may be reality. So I will tell you that stuff that's in that zero to -- at the high-end of that $800 million range -- this may be a good way to answer your question -- has been in that pipeline for three quarters now, so it hasn't been moving along at a very good pace but who knows, maybe some of that will shake loose.

Okay, that's a good answer. Thanks.

And the next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed.

Thanks. Hey, guys. A question for Paul. Paul, those of us that look at NAV. are searching for guideposts as to where values are and where cap rates are. During the third quarter you reported $118 million of acquisitions at an average yield of seven to eight. Given what you've bought, MOBs, senior housing, that yield is strikingly high. Can you comment on that?

Good acquisitions. In one case we were able to buy a MOBs on the campus of a hospital that we had and we were able to lease the building up prior to closing so we were able to gets a very nice transaction there because of our relationship with the hospital. The other one was a transaction that was actually cut about six months ago. The building was a lease-up so we were able to get a fairly attractive yield there. And the last transaction was a relationship with one of our existing customers, Emeritus, where they were able to go out and find an opportunistic senior housing property that we were able to lease at an above-market rate because of the risk that they were willing to take on leasing the property up.

What was the rate on that?

8.5%.

And can you comment generally, Paul, on where you think cap rates have moved in your five property types? How much have they moved, if any?

We have not really seen any deal that has been cut post July close and really haven't seen where things are settling out at, so I don't have any real good data points to be able to say they moved 25 or 50 basis points at this point in time, but we'll see.

A question for Jay. Jay, can you comment on the Sunrise sales process and your perspective on what's happening there?

Yes, I read the same headlines everybody else does. My general take is that they're making some pretty good progress there. I think they've got some resolution from the press releases that I've read relating to some of the legal issues, I think they got their -- they had their annual meeting, which had been ongoing for a while. They named a new CFO, who I had the pleasure of visiting with during the course of the quarter. I came away very impressed with him. So my sense is they're working their way through it and making slow but very steady progress on stuff they got to get done.

Thank you.

And the next question comes from the line of Karin Ford with KeyBanc Capital Markets. Please proceed.

Hey, it's Jordan here with Karin. Just a couple of quick ones Did you give the total cost and expected yield of the Slough deliveries in '08? I know you said 400 -- 466,000 square feet, five buildings.

Yes, the 466,00 you should assume those will come in right around that same overall 6.3 cap rate, Jordan. Remember they were cut -- at the time we negotiated the deal they were all preleased with fixed price contracts.

Okay, so that factors into the 6.3?

Absolutely.

Is there a value to throw on that? Some percentage of the 436 from the sup line, maybe? Some ratable percentage would work?

We'll try to get back to you on that.

All right. Other question relates to the roll in '08, I think at the time you said 6% of the portfolio was rolling/portfolio, that is. I was just curious about your expectations for the roll next year in terms of releasing spreads?

Are you talking about the absolute roll, because I think that would be in our lease expiration schedule.

Well, your expectation in terms of the mark-to-market on rents, just for '08.

Yes. you know what, I think it's early days for us to comment on that. We're very pleased with what we've seen to date and what we have in the on-deck circle here for the fourth quarter but we're -- that's really kind of the focus in the next month or so is putting the (inaudible), the '08 -- put the finishing touches on the (inaudible) to '08, so I'm going to punt on that.

Do you have a sense of when those leases may have originated if -- in terms of vintage? Were they '01 leases, as well '02 leases, as well (inaudible) --?

You definitely have some of that in there but there's some longer-dated leases as well.

Okay, and then just lastly.

Remember that one -- the one campus down there in Mountain View where we have Google and things like that there's a lot of nonlife science tenancy in that campus.

Is that -- some of that rolling next year?

A small portion of it.

Okay. The other thing was I thought you said at the beginning when you would announced this last transaction that you were looking for 89% occupancy in '09, up from this lab portfolio/ Is that now trending a little bit better? Is it safe to presume that that's what's happening here? If you're already at 88% and we're not even in '08?

Yes, what we said -- I guess in the call script here -- is that we're at 82% rising to 89% in 2008 in weakened stabilization, which we would characterize as being 95% by 2009. So we're already -- the leases we put in place have gone up to 88%. You will see that follow through in terms of the occupancy, which typically lags 180 days plus or minus. We are definitely tracking ahead of schedule. There's no doubt about that,both in terms of leasing velocity as well as the rate. But again, it's early days. We've only owned the company here for two months, but so far so good.

Sure, and I appreciate the commentary. On the opening commentary on the Bay area and San Diego markets you talked about what's happening there a little bit. Do you have a sense of what the market rents are doing or what they are in the Bay area and San Diego for life science space?

In the Bay area it would be north, what, $4, $4.50 something.

In both marketplaces we're seeing rental rates increase versus where they were probably a year ago. In our San Diego market we are seeing significant increases as we go about releasing our Lusk campus, so we're seeing good rental increase.

The Lusk campus is probably most --the most relevant metric, Jordan, to answer your question as far as a San Diego benchmark. And we now have -- remember that's an asset we acquired back in January, '94. We repositioned it (inaudible). Had then a 100% tenant and we've got half it leased to one party and pretty far down with the remainder of that. The lease that we signed represents about half of that portfolio, which we signed in the second quarter is up about 100% -- excuse me, 86%. It's up meaningfully from what we had, so these are all -- these are all real good indicators but how all of this comes together for our '08 plans is something that we still haven't put the finishing touches on.

Is that $4.50 number you started with, is that a good number?

$4 to $4.50 for the bay area.

Specifically south San Francisco, a little lower as you head down the [pensil] a little bit.

And want to take a stab at San Diego?

$2 to $3, maybe $2.50 to $3.

Okay. That's helpful. Thank you.

Our next question is a follow up from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

I think most everything actually has now covered. Who owns the DFL properties that they've bought out?

Ericsson.

Ericsson. Okay. Thanks.

And at this time I'd like to turn it back to Jay Flaherty, Chairman and Chief Executive Officer, for closing remarks.

Okay, folks, thanks for your time and those that will be in Las Vegas next month at (inaudible) we look forward to visiting with you some more there. Take care.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much and have a great day.