芬塔 (VTR) 2002 Q3 法說會逐字稿

Good day everyone, and welcome to this Ventas Inc. Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Burton Rice. Please go ahead, sir

Thank you, Mary Jane. Good morning as well, and welcome to the Ventas Conference Call to review the company's announcement today regarding its results for the third quarter of 2002. These items were the subject of a press release issued this morning. Let me also note that the company previously issued a press release advising that this conference call is open to the general public on a listen only basis over the Internet. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward looking statements within the meaning of the Federal Securities Laws. These projections, predictions, and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward looking statements are subject to many risk, uncertainties, and contingencies; and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31st 2001 and the company's other reports filed periodically with the SEC, for a discussion of these forward looking statements and other factors that could affect these forward looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is of this date only, and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward looking statements to reflect any changes in expectations. I'll now turn the call over to Debra A. Cafaro, President and Chief Executive Officer. Please go ahead, Debra.

Thank you, Burton. Good morning everyone, and thank you for joining us at our third quarter 2002 earnings call. I have the pleasure of being joined today in Louisville by other members of the Ventas management team. As usual following my remarks, I will be happy to take your questions.

Ventas itself had an excellent third quarter. We announced our first diversification transaction, $120 million investment in Trans Healthcare, a quality long term care operator. We continue to strengthen the Ventas balance sheet by reducing our debt balances to $786 million at 09/30. Through intelligent tax planning, we avoided a $2.2 million tax liability benefiting both earnings and cash. We continue to follow best practices in corporate governance by reconstituting our committees at the board so that we comply with the proposed NYSE rules well before they have been adopted or affective. We sold 40,000 shares of Kindred common stock for an average price of $41 a share, and we made a very important step forward by appointing Ray Lewis as our Chief Investment Officer. As most of you know, Ray joined us after a decade of a successful career at a senior housing at GE and Heller. Finally, since this is an earnings call, I will add that our earnings continue to grow reliably. Many of the positive developments at Ventas were obscured by two macro events. Congress's adjournment in October without addressing the so called sniff clip [ph] which led to a $30 a day cut in medicare reimbursement to nursing home operators effective October 1, and Kindred's October 10th announcement that it would add $40 million a year in professional liability expense to its earnings run rate due principally to its 18th Florida nursing home.

Last quarter, I spoke about how we position to read [ph] to succeed in a difficult environment. Then, I focused on our ability to capture upsides in the long-term care sector for our shareholders. However, I also noted that providing our stakeholders with structural and economic downside protection was an equally important call of our efforts during the Kindred restructuring. This quarter, it's appropriate to review how we position Ventas, Kindred and our portfolio to weather difficulties in the long-term care sector. I believed then, as I do now, that nursing homes are a good, long term investment but that staying power and capital structure positions are crucial.

We did three things in the Kindred restructuring. First, we set Kindred's capital structure at the top in Medicare reimbursements. Specifically, Kindred received about $1.3 billion of debt and lease released during the restructuring. A guiding principle of Kindred's restructuring was to be sure that Kindred could meet its fixed charges even without Medicare give backs and even if they experienced other earnings pressures. In other words, we gave Kindred a sustainable capital structure for the long term. Taking into account Kindred's recent liability expenses and assuming that $30 a day in Medicare reimbursements go away, Kindred appears to have somewhere between 385 and 415 in projected 2003 EBITDAR, which is more than enough to cover its anticipated 285 million in fixed charges. And at 09/30 it reported that it had over $230 million in cash on its balance sheet compared with a debt balance of about $161 million. So the cash flow cushion we deliberately created for Kindred in the restructuring is serving its intended purpose. Kindred should remain able and insentivized [ph] to meet its rent payment to Ventas.

Second, during the restructuring, we set property level coverages so that Kindred would have approximately 1.35 to 1.4 times EBITDAR to rent coverage at the Ventas portfolio upon emergence. These coverage's improved significantly with the Medicare give backs and other operational improvements at Kindred such that through 06/30 of '02, Kindred's trailing 12 month EBITDAR covered rent at our facilities by 1.85 times. So our portfolio can withstand the potential reduction of $30 a day in Medicare payments and the additional liability charges because Kindred's EBITDAR with those haircuts is still projected to cover Ventas rent by over 1.4 times.

Finally, we structured our master leases with Kindred so that every master lease is balanced with inclusion of hospitals and nursing homes. Each lease is also characterized by geographical diversification and property performance variation. This multi-facility pooled master lease structure continues to hold out because each of the master leases has well balanced results even with the reduced Medicare funding and higher liability expense. And because the leases represent the structurally senior obligation in Kindred's capital structure, Ventas is in a last loss position.

So while the events of the October had been far from pleasant or desirable, and I do not want to minimize their significance, we did foresee and plan for them during the Kindred restructuring so that we could provide our stakeholders with downside protections. Let's look to the regulatory front; there, we remain cautiously optimistic. Specifically, we believe there is a better than 50-50 chance that congress will pass some provider relief to the skilled nursing operators during the lame duck session in the weeks of November 12th or the first week of December. We cannot be certain that a provider package will be passed nor can we quantify the level of funding that may be involved. I do note, however, that every dollar received under a provider package will drop straight to Kindred's bottom line and will improve corporate tax growth and property level coverage's. And any such relief, if granted, could be retroactive to October 1.

However, given the uncertainty that continues to surround this area, we are proceeding as if the $30 per day in Medicare funding is gone for good. On the LTACH (ph) side, Kindred has stated that the final PPS rules are likely to be budget neutral and our own reimbursement experts concur. Remember, Kindred will not be subject to LTACH (ph) until September of 2003 and then it can pick and choose which hospitals will immediately go to the full federal rate and which will be subject to the five-year (inaudible).

Regarding Kindred's additional professional liability expense, first, I want to recap Kindred's October 10th announcement. That night, it reported a $55 million professional liability surprise that relates principally to its 18 Florida skilled nursing facilities, 15 of which are owned by us. We receive 4.5 percent of our overall rent from these facilities or approximately 8.5 million in cash rent per year. Kindred has acknowledged its continued willingness to pay this rent. As a result of this development, Kindred has stated its intention and desire to exit the Florida skilled nursing market. We are supportive of Kindred's desire to exit the market on terms acceptable to Ventas. The companies are actively working together to achieve a result in Florida that will be positive for both Ventas and Kindred. Such a result is attainable and realistic.

There are several companies who have expressed preliminary interest in taking over the Florida operations. Many of these companies already operate profitably in Florida. Should we succeed, we will meaningfully improve Kindred's operating results, the value of its common equity, Kindred's credit profile, and our property level coverage's. Accordingly, we are very focused on achieving a good outcome in an expeditious yet prudent fashion. I cannot give you any assurance about when or how these matters will be resolved but I tell you that we are bringing our not insignificant problem solving skills and structuring experience to bear on this topic with as those of you who know we might imagine a high level of intensity and attention.

Given our good third quarter performance, we increased our FFO guidance for 2002 to $1.35 to $1.36 a share, up from our previous guidance of $1.28 to $1.30 a share. If attained, this would represent 20 percent year over year FFO growth. We have also reaffirmed our comfort with our 2003 FFO guidance of $1.43 to $1.45 per share in normalized FFO. As always, our normalized FFO guidance is taken from a number of assumptions and it excludes gains and losses including those from any sales of Kindred equity and non-cash and taxes swapped ineffectiveness, and the impact of any divestitures, acquisitions, or other capital events.

I want to make a few final points and then I'll turn to the third quarter results. This quarter ahead of schedule, we announced our first significant diversifying transaction. A $120 million investment with Trans Healthcare, Inc. The transaction has two components. The first is an approximately $50 million sales effect transaction whereby we are purchasing seven healthcare and senior housing assets and leasing them back to THI. The second is a $70 million loan to THI secured by 20 other properties and some ancillary collateral. That $70 million loan is divided in to a $45 million senior loan structured as a CMBS mortgage loan, which we may see [ph] as to hold for rates and sell and the $25 million mezzanine junior loan. Both the mezz loan and the lease will be guaranteed by THI. THI is a very high quality operator led by President and CEO, Tony Misitano (ph). We are genuinely delighted to have Tony and his team as our first operating partners.

THI is backed by TTCR, which is a well respected private equity firm with numerous successful healthcare investments. The facility from the transaction are located in Ohio and Maryland, which are two states we have targeted for investments, because they have good Medicaid reimbursements, active skilled nursing lobbies, acceptable liability environment and CON requirements that will limit new nursing home supply. The portfolio is marked by stable occupancies and good survey history. THI will use the proceeds of our investment for acquisition and refinancing. We expect to close the transaction this quarter subject to documentation and other conditions and when it closes we look forward to providing you with additional information regarding the economic benefits of the transaction at that time.

Lastly, I'd like to spend a moment on corporate governance. Most of you know that I have been something of a zealot on corporate governance matters since arriving at the company in early 1999. Here too, I think, the review of our history and a summary of our current efforts are in order. By the end of the first quarter of 1999, Ventas eliminated all overlaps in board and management between Kindred and Ventas. We also established an independent committee of the board chaired by Doug Crocker and oversaw all negotiations and agreements between the companies. In 2001, we followed through on our commitment to expand our board and added three independent members and Sheli Rosenberg, Gary Loveman and Jay Gellert (ph), all executives who have been very successful at their own companies and all of whom had no previous ties to Ventas.

That year, we also established a nominating and governance committee chaired by governance expert and attorney Sheli Rosenberg. Recently in September of 2002, we again hit the end of the wall [ph]. Through special action of the Ventas board of directors we reaffirmed our commitment to stay on the leading edge of corporate practices, and reconfiguring our committee so that Ventas could prospectively in compliance with the new NYSE rules even before those rules has been adopted and well in advance of their effective date, which is still 18 to 24 months away. Among other things are three peak committees: audit, compensation and governance are already composed of fully independent board members as defined by the new and more stringent NYSE criteria. Finally, the Ventas audit committee is now vested with oversight of our arrangements with Kindred. Doug Crocker has agreed to serve as its Chair perilous times for directors that's the agreement serves as a statement of confidence in Ventas and in its financial results.

I will now review the third quarter 2002 financials. First of all, normalized FFO for the quarter totaled 26.3 million or 37 cents per diluted share. This FFO represents an increase of 32 percent over the same period last year and excludes 1.2 million of gain on the sale of Kindred equity. Our FFO results this quarter compared favorably with last quarter's 33 cents per share. GAAP net income for the quarter was 17 million or 24 cents per diluted share including gains on sale. Rental revenue for the quarter totaled 47.1 million. Interest income shrank to $237,000 as a result of our continued and deliberate efforts to manage cash efficiently coupled with lower interest rate. Interest expense on our debt declined to 18.7 million down from 21.9 million in the third quarter of 2001 as a result of the savings from the CMBS transaction closed in December of 2001. The high yield offering and our bank revolver both of which closed in April as well as our continued debt pay down effort.

Finally, this quarter we achieved $2.2 million in income tax savings. Last year, we recorded a tax provision of approximately $2.7 million most of which related to tax on the 10 percent of our taxable net income that we did not distribute as a dividend. This year, we're expecting to pay as a dividend to our shareholders more than 100 percent of our 2002 taxable net income. When we filed our 2001 tax return in September of this year, we elected to apply some of this excess to our 2001 undistributed taxable net income. With the election and tax planning allows us to avoid about 2.2 million in net tax obligation and as a result we recognize a $2.2 million tax benefit in our third quarter results. Note that the 2001 tax provision and the 2002 tax benefit are in our FFO in both period in accordance with the NAREIT FFO definition.

So in sum, we believe that we position Ventas to protect our shareholders from the downside as well as to capture upside if and when the long-term care sector stabilizes. This quarter, we began to implement our business strategy of accretive diversification effectively with the announcement of the THI transaction and the appointment of Ray Lewis who will responsibly accelerate our acquisition efforts. And finally, we're focused on creating opportunity out of Kindred's Florida situation. As always, I really appreciate your participation and your attention, and we'd like to open the floor to questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the "*" key followed by the digit "1" on your touchstone phone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order in which you signal as long as time permits. Once again to ask a question, please press "*" "1" on your touchtone phone. We'll first go to Allen Porhnia [ph] with Kenin Capital Management [ph]. Please go ahead.

Allen Porhnia (ph): Good morning, a nice job in the quarter.

Thank you, Allen.

Allen Porhnia (ph): I was very happy to hear that you're open to working with Kindred. I have two questions regarding that situation. First, would you consider a larger asset disposition that would include facilities and other " troubled states?" And second, would you consider a restructuring of the leases so that you would have two tenants in the form of separate corporations, which could potentially improve the view of your credit risk?

That's an excellent question. We hereto were focused on -- we're focused on the goal. The goal is to help Kindred exit the Florida market in a way that benefits those companies. There are myriad ways that can be accomplished and, again, we're willing to work with them to accomplish that objective because, of course, it will be good for their cash flow and their earnings and credit profile, and could, in fact, depending on how it is structured, be a substantial positive for Ventas as well.

Our next question comes from Doug Simpson with Merrill Lynch. Please go ahead.

Hi, good morning everyone. Debby, could you just update us on your thoughts regarding the dividend payout ratio and the balance that you are trying to strike between raising the dividend and paying down debt?

Absolutely, Doug. Yes, we have deliberately chosen for the time being to adopt a conservative dividend pay out ratio so that our dividend will have a terrific sort of year-over-year growth built in them as our tax flow grows. But, basically, we were setting the dividend about 73 to 75 percent of FFO, and we're doing that consistent with our normal somewhat conservative bias. And we're doing it so that we can use that excess cash flow, principally, to make acquisitions secondarily as to pay down debt to a level that we think is appropriate and, again, we've given the market guidance that we want to manage to about 3.5 to 4 times debt to EBITDA. And if we have reached those debt levels and if we are not using the money for acquisitions, then that additional cash flow would be used to flow over and to increase our dividend over and above the, you know, 7 to 10 percent year-over-year growth that's currently contemplated.

Okay.

Is that helpful?

Yes. That's great. Maybe -- could you talk a little bit about what your priorities are as you look at potential acquisitions and maybe just give us a sense to the extent that you're out there and you see a lot of deals but maybe for one reason or another, they're just not right for Ventas at this time. Are you comfortable just not doing anything and letting up the toll growth flow from the rent escalators at Kindred, maybe just talk a little bit about how you think about those types of decisions?

That's great. We are -- the ITO acquisition for us is going to be an acquisition that is accretive, and that will advance the ball on a number of fronts, and that is particularly accretive with the high enough yield so that we can finance it appropriately and also advance our credit objectives. When we find an acquisition like that with an operator who, we believe, is a quality operator and where we have sound property level cash flow, it hit the bull's eye; and those are the kinds of transactions we are pursuing. We will also look at diversification transactions where, we believe, that the diversification benefits will result in FFO multiple growth and/or reduce weighted average cost subject, which will in turn make those transactions accretive. So, Ray has sorted out beating the bushes with his team to look for acquisitions that meet that bull's eye. We do have a very healthy profile with our rent accelerators in terms of FFO growth. But longer-term, we believe it is appropriate to diversify the company and our goal is to do so accretively and with credit profile improvement.

Okay. Great. Thank you.

You're welcome.

Our next question comes from David Carman with J. P. Morgan.

Thank you. Good morning. I had a couple of questions. One is, do you have handy -- I know, you don't really, necessarily, think of yourself this way-- an EBITDA figure for the quarter?

We do think of ourselves that way.

Okay.

It looks like, excluding the gain in the third quarter, we're at, you know, 44.5 million.

44.5, okay.

Okay.

And a few hundred thousand also have come back following the call on that.

Right.

And, perhaps, just a suggestion; and that is: for your coverage from Kindred -- I am wondering, if that may makes sense to talk about it in terms of minus maintenance CAPEX, because they're in the unusual position of having to invest as though, they were owners, even though, they don't book the depreciation.

Well, yes -- I mean, that's actually the -- a common position for all the healthcare operators to have triple net leases. This one is a triples is CAPEX.

Sure.

And yet you've made the -- you make the right point that Kindred does have maintenance CAPEX, and that is -- you know, a rule of thumb is about $300 of day...

Okay.

...on nursing homes.

That's the rule of thumb you're using for both hospitals and skilled nursing.

Well, in the hospitals, we actually use a higher number, between 6 and 2,500 a day.

Very good. We'll use that. Okay. Thank you. I'll follow up after the call.

All right David, call either me or Rick Chawinehart [ph]. We'll be...

All right.

...happy to help you. Thanks.

Thank you.

We'll go now to Charles Lynch with CIBC World Markets.

Thanks and good morning. I've two questions. First, real quickly, on your overhead expense trends, can you, kind of, give a thought on after modest sequential decline from second quarter to third where we should look at those going forward?

Yes. I mean, as I talked about our G&A is somewhat unpredictable. In our budgeting for next year, we have assumed an increase in G&A and professional fees because as you know we buy this conservatively. There are lot of expenses, Charlie, that are unpredictable and for that out of our control and those include things like insurance expense, those to properties for D&O for liability insurance. We're obviously incurring marketing expenses as you saw at the Nick conference. We're implementing our asset management system and property inspections, which are costly and compliance with all of the NYSE rules and Sarbanes-Oxley are also -- is also incurring additional professional fee expenses, which frankly we can't entirely predict. So, you know, I would say that, you know, you should look at for next year anywhere between, lets call it 16 and 17 -- 16 and 18 million combined G&A and professional fees, and we'll continue to try to minimize those but again budgeting conservatively that's why we guide you.

Okay. And on the Trans Health transaction, I mean, I guess I can do some of the math myself on it, but related to your coverage ratios, can you give a sense, if that -- the debt to EBITDA ratio on that transaction solely is that higher, lower, or the same than your current ratio?

Well, if we draw underline to fund the acquisition, which we intend to do, it'll increase the debt to EBITDA ratio.

And what are the other - what is an alternative versus drawing on the line? Is it simply an equation of potential subsequent debt repayments out of cash flow?

Exactly.

Okay. And just lastly and then I let you go, just you just mentioned that you are looking into some situations related to Kindred's Florida assets that could end up being net positive to Ventas. Can you just kind of give some flavor on what type of transaction related to your leased receipts from those properties would fall along those lines? Thanks.

Sure, I'm happy to. Again there are myriad ways we can get to the goal line on the Florida situation and benefit Kindred by committing them to exit the Florida market. And I think, working together, we are going to achieve that objective. In terms of masses I think, you know, a principle -- few principle ways would be potentially a sublease wherein Kindred would sublease or assign its facilities to a Florida operator with our consent and alternatively perhaps, there could be a Beverly like situation where there's suppose an asset transfer and then a new lease.

Our next question comes from Howard Capek (ph) with UBS Warburg.

Howard Capek (ph): Hi, thank you. Just two questions I've -- timing of the acquisition?

It's -- hopefully, assuming that it does close, would be in the fourth quarter.

Howard Capek (ph): Okay. And then -- and for right now the FFO guidance for 2003 excludes that, is that fair? DOW 43, DOW 45?

Yes, and again what we try to do, Howard, is to give a guidance on the fact that we know them and, you know, as and when the transaction closes, we will update that guidance for you.

Howard Capek (ph): Okay. And then just last -- following up on the last question that related to SG&A and trend there, any potential for dragging out of Kindred's Florida situation such that you're going to start having to spend more there?

Well, again, you saw how long it took Beverly to exit the Florida market. I think it took a year, a year and a half. We certainly would hope to do substantially better than that. You know, we -- hopefully, we would like to do it yesterday. And so, that will, you know, potentially involve additional expenses, but we would hope that the situation will get wrapped up, you know, relatively quickly.

Howard Capek (ph): And so you just said, I think, G&A expense 15 million to 18 million, the high end of that would be an extended process?

Again, it could. The high end of that could be any number of things, Howard, such as insurance, things -- more things that we cannot predict, things like professional fees related to the Florida situation and the other things that I mentioned. We do expect to keep that at the low end of the range or even do better. But again our bill -- we don't believe that we can foresee with precision exactly what's going to be thrown at us in 2003. So we try to take that into account.

Howard Capek (ph): Good. Understood, thanks very much.

You're welcome.

We'll next go to Jerry Doctrow with Legg Mason. Please go ahead.

Hi, good morning.

Hi Jerry.

Hi. I've got a couple of things. I guess first there're a lot of questions about the, you know, the stock sales, Debbie by you and some of the other executives. I was wondering if you can kind of review those for us because again I think some of the filings were not as clear as they might be. So...

Okay. And what do -- do you want to ask your other questions as well and I'll...

Yes, I mean, the other things...

...or how about if I answer...

Yes, why don't you answer that one.

Yes. That's great. And thank you for asking that. After this -- after our second quarter earnings release and in the trading window consistent with the Ventas trading policy, I entered into a non-discretionary written 10B5-1 plan. And that plan monatizes some of my auction based compensation that I received over the last three and a half years, and I entered into that plan on August 7th. I think that it's important that -- you know, as I have to those of you I've spoken too about it -- that the plan does not contemplate the sales of any restricted shares. It's only auction trade. So the plan that I adopted on August 7th continues through the end of '03 and once these 10B5-1 plans are adopted, the actual trades in the execution are out of my control, which is the whole point of the plan. Basically, the plan goes on auto pilot. So you know, I think it's important to state that executive [ph] to, sort of, take the safe route and adopt these 10B5-1 plans, pay a price for the security that the plans provide and that the price is that I may be divesting options in Ventas when I think that it's not economically justified to do so. But that said, I did decide to adopt a 10B5-1 plan because I was willing to pay that price in order to remain above reproach in connection with any stock trades that occurred in Ventas shares. So one more, you know, additional piece of information for those of you who would like additional information on the executive compensation and the stock trading, we posted information on the 10B5-1 plans on our website on August 15th at the same time as the board of directors adopted a minimum stock ownership plan for the executives. And so I would direct you to that website section if you have any other questions. I know you've seen that Jerry, but some of the other people may not have.

Right, no, thanks. I appreciate it. And the only thing I just wanted to clarify, the tax issue for sort of this quarter. Its sort of a -- it is a onetime thing. We won't see that repeated, is that...

That's correct, Gary.

Okay. All right, yes, that's all. I think the other questions have been answered. Thank you.

Okay. Terrific.

We'll next go to Charles Ruff with Insight Investments.

Good morning.

Hi Chuck.

Hi. Debra, when you were talking about the next year's G&A and professional fees, you kind of ran down a list. And it sounded like those were all reasons why it was going up, but only a couple of those struck me as unpredictable. Can you take another shot at that and explain what the costs are that are so unpredictable?

All right. I will try to do that. I actually, believe it or not, have a list of them, and we can go through what's unpredictable and what's not.

Okay.

Higher professional fees, they're totally lumpy and very unpredictable. Hiring more people to engage in acquisitions, internal audit, all of -- you know, comply with all of the new NYSE and Sarbanes-Oxley requirements both of which (inaudible) to potentially have a significantly more board and committee meetings, which impose additional costs. More travel and marketing in connection with potential acquisitions. And mind you, you know, if you look at 10 acquisitions, you may incur costs on those acquisitions. And if you only close one of those acquisitions, you've got to basically expense the costs incurred with the nine that you didn't close, and that's highly unpredictable. We're working on creating a technology based asset management system for which we're getting bids right now. We're going to go -- have engineers and others -- other professionals inspect our portfolio on a regular basis, which will be an expansible [ph] item. Corporate, insurance, property level insurance are also, you know, huge wild cards in this environment particularly if, you know, you have to go get terrorism insurance because some lender makes you do it or what have you. And that pretty much is, I think, a respectable rundown...

Okay.

...of what the unknowns are.

Okay.

And, again we tried very hard to keep these to a minimum and we will continue to do so. But we don't want you misguide people and then, you know, exceed what we tell you.

Okay. The fourth quarter looks like it's -- based on your guidance will be 33 to 34. Obviously, this quarter if we back out the tax benefit you had 34...

Right.

...are the kind of things you just mentioned also why FFO in the fourth quarter may drop by a penny?

Yes. And again, it's our expectation that it will at the higher end, but we are not confident enough to assume we know what's going to get thrown at us.

Right.

And so we always expect the unexpected.

Okay. And in last quarter, you talked about dividend expectations for '03. Can we assume that that's unchanged?

That's correct. Again, the board will decide on that at its first regularly scheduled board meeting in the first quarter. But for now, I think you can expect that that's right where we are heading.

And I think also on the second quarter conference call, you talked about possible sale of a facility or two this was obviously before all the Kindred news. Is there anything going on with that or no?

Nothing at present.

Okay. And also I think on that call, you talked about your expectation that the tax refund dispute might be resolved in the third quarter. What's the current view of that?

I am glad you asked about that and you'll see we are going to file our Q today and you'll see some disclosure on that which is pretty positive. Basically, this relates, for those of you who don't know, as of the case audit, which the company is because of this historical nature as a key corporation prior to its redirection in 1999, we have been subject to an audit for the 1997-1998 tax period. This is a routine audit. The field -- IRS field people have been working on it for a couple of years. I mean in this quarter, we did receive preliminary good news about the results of the audit and that is the IRS and company have agreed that not only do we get to keep the refund that we received in 1999 or 2000 of over $26 million but that the IRS would in addition give the company an additional refund of about $1.2 million, which, if received, would be put into that joint tax escrow that we now hold with Kindred where the original -- I repeat the $26 plus million -- refund is sitting. And the only wrinkle in this is that the IRS decision at the field levels remains subject to yet another bureaucratic process, which is called joint committee review. And that joint committee review is ongoing, and we are not yet certain of the outcome or the timing of how that will be resolved. And so, you know, pending that, we're going to lead the money in the escrow with Kindred. But -- yes, preliminary, you know, a quite good news I would say.

Okay. So of that -- if assuming, it gets resolved that way; of the 27.2, you get half of it?

We would get half of it, yes.

Okay. And what's -- when do you expect the IRS to give final approval or say no? When do you expect a decision there?

Well, I wish, I knew that. We -- it, really, a lot depends on how many refund claims -- because that's with the joint committee review -- how many refund claims are backed up in there. You know, we have some historical information that it may take three to six months; but we also have information from EY, which is our tax advisor, that it could be substantially shorter or it could go longer. So I've -- that's the best I can do for you.

Lastly, since you were stressing corporate governance, are there any thoughts regarding the loans to executives and getting those -- I mean, having the executives pay those off?

The loans outstanding basically are our historical loans, which were made under sort of preexisting contractual relationship. There, certainly, will be no additional loans made to executives or board members in violation of (inaudible) and those loans are at present just continuing along on their preexisting terms.

I guess, the question is: are there any discussion about saying, you know, "Yes, we -- legally, we can't force the executives to pay those in"? I think you could surely go to the executives and ask for it and say, " You know, it would look a lot cleaner in today's world."

To my knowledge, the board is not having those discussions. It's focused on compliance.

Okay. Thanks a lot.

You're welcome.

Our next question comes from Tony Howard with Hilliard Lyons.

Good morning, and congratulations on a good quarter.

Thank you, Tony.

Most of my questions have been answered so let me leave it with can you kind of talk about the function that you expect out of Ray? And also, in the past, you had talked about not only increasing the diversity of your operators, but also -- building assets, but also as far as possibly getting into more mortgage loans on the books. Where does that stand, and do you see that increasing your interest rate sensitivity and those kind of questions?

Okay, thank you. Well, first of all, Ray is sitting right here with me today. And for those of you who don't know him, Ray had basically led GE and Heller healthcare finance groups for a decade and very successfully, I might add. And so we expect great things of him in terms of really accelerating our diversification program in terms of sector diversification, which I think is one of your questions, Tony.

Right.

Right now, we're heavily invested in nursing homes and hospitals. We would expect, because of great background and experience, that we will broaden that investment profile to those assisted in independent living on sort of prudent and acceptable terms. And in addition, we do tend to continue to want the focus much more significantly on the sale lease back product than we do on the mortgage product. There may be occasions such as the THI transaction, where we will make limited mortgage investment because it is with an operator and on terms -- with an operator who we want to do business with and on terms that we find acceptable. We are not likely -- or mortgage rates of the old days, we really don't have any interest rate risk given our swap. And therefore, I feel comfortable with making those minimal mortgage investments so long as we continue to focus on our core product, which is the sale lease back product.

Okay, thank you. And again, congratulations.

Thank you.

We'll now go to Patrick Beytagh (ph) with INVESCO.

Patrick Beytagh (ph): Yes, just a couple of questions. They've kind of been covered but I'd like to revisit them.

All right.

Patrick Beytagh (ph): With regards to acquisitions, I mean, some of your competitors, you know, they've been looking at them a little bit longer than you'll have. Do you have -- maybe at this point in time, do you have a, you know, pipeline that you're looking at, that kind of thing or we're not that far along?

Well, actually we had given -- that's an important question, Patrick. We had given guidance to the market that we would expect to not really see anything material as a way of acquisitions until the first quarter of '03. I hope that we will beat that projection by closing the THI transaction, which is a significant step for us, in the fourth quarter of this year. Since Ray has -- before Ray got here, I with Stephanie Anderson and Rick Chwinhart (ph) and other members of the team had been working on building that pipeline. Ray got here, October 1, with his contacts; and he has been working since then to again accelerate and add to the work that we had done before his arrival. So, yes, I would say, we lag our competitors likely who's been doing this for, you know, 10 or 15 years; but we're highly focused on it. And I think the pipeline is -- we're working on actually a number of things, which could be meaningful acquisition activity and working on building that pipeline.

Patrick Beytagh (ph): Okay. And then next question is with regards to Kindred and their desire to get out of Florida, you did mentioned previously that some -- you know, a couple of structures might be a sublease, you know, to a different operator in Florida or has it transferred new -- in a new lease? Do you prefer one over the other?

I want to remain open-minded really about the best way to deal with it, because it really depends on how these discussions with the operators go and what their financial capabilities are and our, sort of, longer-term view which is evolving frankly about what we want our own exposure in Florida to be. So there are a number of factors that we're going to play into it, and I really want to get locked into the goal without getting locked into the method.

Patrick Beytagh (ph): Okay. And then within the type of operator, you know -- I mean, because of, you know, Kindred was a public company and they're probably targeted by lawyers, would this probably be a private operator with the Shell Company in Florida?

The operators who have been doing business successfully in Florida, Patrick, are those who are -- they happen to be private both for profit and 501C3 operators. You can have some data points by looking at the Beverly in the extended care exit from Florida, which they did execute. You can see that these private operators -- I think, actually Steve Monroe talked about it in his recent senior news report -- those operators seem to be making money in Florida. And they do operate on a different structure. First, they're not target at this time for the plaintiff bar, which is really what's driving this whole thing. The plaintiff bar seems to be targeting the large national chain. And secondly, they do operate in a different legal structure, which they believe provides better insulation to them from the plaintiff bar and which further diminishes their attractiveness, frankly, as a target.

Patrick Beytagh (ph): Okay, and then a final question. So, Ventas, you guys are still looking at what you want to do with your Florida assets. In general, is that what you are saying?

What we're doing is basically focused on getting Kindred out of Florida on terms that we like. In -- and again remaining open to the structure that any such transaction would take because again the benefits to Kindred can be quite substantial and quite meaningful in terms of credit improvement, cash flow improvement, equity valuation, and so on. And we also obviously want to put ourselves in at least include if not better situation than where we are today.

Patrick Beytagh (ph): Okay. Any other concerns with other markets such as Texas?

We only have one snip in Texas, and yes I have a concern. But we only have one instead of there is limited exposure there. But as we look at acquisitions, I would tell you that the liability environment and the strength of the skilled nursing lobby are one of the key criteria that we're looking at in terms of locations where we want to invest incremental dollars. We think it's very important.

Patrick Beytagh (ph): Okay. Thank you very much.

Thank you, Patrick.

Our next question comes from Ray Garson with UBS Warburg.

Thanks. Most of my questions have been answered, but Deb, I just wanted if you could give any color with respect to the remaining Kindred shares that you hold? And if there's any plans to continue to sell at these levels?

Okay. As you know, we have about 921,000 Kindred shares remaining. We have generally said that we want to divest our Kindred equity stake in a sensible manner over time. We obviously did not predict the recent liability issue. So, we don't have any intentions really to sell it at this time although we continually review that position. The one, sort of, overlay, Ray, that I want to put on that is that as we enter into these detailed discussions on solving Florida with Kindred, it may be inappropriate from a legal standpoint for us to be simultaneously in the market with Kindred equity. So you should just keep that in mind. Hello.

We will now go to Ankur Gandhi (ph) with Goldman Sachs.

Ankur Gandhi (ph): Good morning everybody. Debra, I was hoping you could comment on tort reform in Florida. There's a view out there, that there is going to be a second round of tort reform. And what I want to get to is, is that going to change in terms of wanting to get out of Florida? Is that going to change anybody's mind or is it going to make it easier to get out of Florida, will it get you a higher valuation per bed? So, just general comments on what effect that could have? Thank you.

Good. May I have your first name again?

Ankur (ph).

Thank you, an excellent question. I mentioned previously that one of the issues that we're - that's really evolving is the long term better view on the assets and obviously, tort reform that's been driving the driver behind that analysis, because obviously Florida has a large elderly population, you would guess that overtime that would be a good place to be if the liability situation is resolved. And having said that, there may be a second round of tort reform. We are frankly not counting on that and if there is a second round, however, I think your point is correct that more people will be eager to invest in this state knowing that the trend on tort reform is positive. And that's obviously would be an important zest to Kindred's efforts to access the Florida market as well.

Ankur Gandhi (ph): Okay. Could you also perhaps comment in on a general level, what's been going on our price per bed basis in Florida? I remember when Connecticut got out, it was had a considerably higher price to what Beverly got out at, could you add a little comment on that please?

Yes, I mean those are really the key data points out there and, you know, I want to be clear that we have no interest in, you know selling our assets at prior sale prices and you know what, we don't have to be that and, you know, we're not going to be that. But you right the expenditure assets yield at higher per bed valuation and the Beverly assets did, you know, I tried overtime to sort of get color on the Beverly negotiations and discussion, because it did seem to have a lot of, you know, fits and starts if you will, which resulted in a declining performance over the course of the negotiations, which probably had an impact on the per bed valuations there at the end. You know, we believe that the outcome here - that the people are interested in these assets. They're interested both in the operations and potentially in the real estate. And that a divestiture of the operations is both feasible and will be very positive. And the real estate is really a negotiable item. We can either keep it or not.

Ankur Gandhi (ph): Okay. Great. Thank you.

You're welcome.

Our next question comes from Andrew Jones with North Star Partners.

Good morning.

Hi Andy.

Can you give us any color at all on the operations in Florida? The -- on Kindred's conference call they said that they were actually loosing money in Florida even before this higher level of liability reserves. I was wondering did you have any expectations that their Florida operations would improve or is there anything about them that would suggest that maybe people wouldn't want those assets?

Not -- not at all. You know, I would tell you that the information we received on Kindred's Florida performance is by and large received in a public way, in the way that you learned of it in the call, but then principally under confidentiality agreements regarding their operational performance. And so I really would just reaffirm what they said but also reaffirm that there is significant interest in the assets by people who presumably can operate more efficiently and at lower costs -- principally liability cost in the state.

Is that really the issue -- is there any kind of public information that you could see in Florida that would show maybe some metric of incidents per home or per bed or however -- did this show that these guys have a higher, you know, higher problem level therefore higher legal costs?

Yes, I don't believe that they -- in fact, few have a higher incidents or severity than the other operators generally. In fact, I believe that they're more or less in line with the market. The difference is that they had been -- like Beverly was targeted by the plaintiff lawyers. What has occurred as they pointed out in the press release is that there was an acceleration in the cost trend regarding severity of claims, which basically means the amounts to settle. And the actuaries when they did the third quarter review basically looked at that trend line, got nervous, extrapolated that amount to settle or severity of claims to the whole panoply of, you know, potential claims against Kindred in Florida, and that's how they came up with the -- you know, this is a big number.

And how about the 40 percent of the increase that was outside of Florida? You said you were concerned about taxes. Are there problem states or problem issues for them that we should be focusing on?

Well, they announced in their release that about two thirds of the amount was allocable to the Florida skilled nursing facilities. And so the -- and the rest is allocable probably in, you know -- they didn't go further than that, frankly; and I probably should not either.

Okay. Thank you.

You're welcome.

We'll now go to Charles Lynch with CIBC World Markets.

Hi. Just a one quick follow up. Debby, you mentioned, you know, some of the variables in your overhead. One, of which, was insurance trends; and this has been, you know, a far greater issue at the operator level. But I'm just kind of curious, in terms of quantifying in rough terms, what percent that you might pay in insurance cost out of your overhead? And what kind of trend rates you've seen in that? Thanks.

I'm happy to do that, Charlie. Remember, after 9/11 - okay -- every business in America has experienced or expects to experience very significant insurance increases on -- and I'm not talking about professional liability now; I'm talking about P&L [ph], I'm talking about property insurance, I'm talking about general liability insurance, I'm talking about terrorism insurance, property and causality insurance. So, again, this is not specific to us. It is really in the world, at large; and, I think we experienced about -- between a 33 -- about a 33-percent increase, when we renewed insurance on May 1 of this year. But, you know, we stay pretty abreast of the insurance market, and I'll give you one data point. If we tried terrorism insurance for our portfolio on May 1 -- and it was an additional $1 million, okay -- now, if the rebody [ph] is successful in getting Congress to pass a terrorism insurance bill, we expect those costs to decline; in which case, we will probably procure such insurance assuming that it doesn't have, you know, huge exclusions like it does now. But that's a data point that's, you know, sort of 2 cents [ph] for you right there. And in keeping abreast of the market on things like P&L and property and casualty, we are hearing through, sort of, you know, resources, and board members, and so on that other companies are experiencing very significant increases as the insurers are building back up their reserves from what they lost on account of 9/11. It's slowing through, sort of, all insurance markets. Is that helpful?

Yes, I'm just kind of curious on an absolute basis if it's -- you know what kind of piece of your overall corporate expenses that your general insurance coverage is?

Currently, it's you know 12 to 15 percent.

Of overheads?

Yes.

Okay, great thanks.

You're welcome.

It appears there are no further questions at this time. So Ms. Cafaro I'll turn the conference back over to you for any additional or closing remarks.

Well, I really appreciate everyone joining our call this quarter. We do have some interesting work ahead of us, which I believe is quite manageable. We're very focused on it, and we're looking forward to speaking to you all again soon. Thanks again.

Ladies and gentlemen that will conclude today's Ventas Conference call. We do thank you for your participation and you may disconnect at this time.

Thank you.

End