芬塔 (VTR) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NHP First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press zero, then star. As a reminder, this conference is being recorded. I would now like to read the earnings conference call disclosure statement.

Certain matters discussed within this conference call may constitute forward-looking statements within the meaning of the federal securities laws. Although the company believes the statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements, due to risks and uncertainties described from time to time in SEC reports filed by the company. In addition, during this telephone conference, reference will be made to funds from operations, or FFO. FFO is a non-GAAP measure that the company believes is important to you in understanding its results and operations. A reconciliation between FFO and net income, the most directly comparable GAAP financial measure, is included in the financial data accompanying the company's press release, which is available at the investor information page of the company's website at www.nhp-reit.com.

I would now like to turn the conference over to our host, President and Chief Executive Officer Bruce Andrews. Please go ahead.

Thank you. Good afternoon. Thank you for joining us for what was planned to be only our first quarter conference call, but obviously now includes the news that everyone has seen, that was released yesterday. I will take a few minutes to explain the thought process, and events that led us to undertake the direct placement and common stock and dividend reduction.

In the past 24 hours since our announcement of first quarter earnings, the equity placement and the new dividend, we have received numerous questions from a number of you. In addition, we are aware of the research notes that have been published last night and today, a number of which raise additional questions. We will try in our remarks to address as many of these questions as possible.

I think most of you recognize that reducing the dividend was something I did not want or expect to have to do. It is important that you understand the sequence of events, as well as our rational for the dividend reduction, and the equity placement. In addition, after understanding the circumstances that led to this action, we would like to focus on what NHP looks like today and how it is positioned for the future.

Let me begin by stating that we firmly believe that the steps we have recently taken, including our equity offering and the reduction of our dividend, were done for the significant good of the shareholders on a near-term, medium-term, and long-term basis. This was the product of a deliberate review and critical assessment of our alternatives. Based upon our precursory review of comments in the marketplace, we feel there is a great deal of misunderstanding out there over what we have accomplished and to what purpose. Unfortunately, because of the time lag between the earnings release and the conference call, investors are usually presented with the end of the movie first, consequently it becomes incumbent upon us to fill you in with the rest of the story.

In this vein, let me provide you with additional background information. First, as you should, the company has significant near-term capital needs, which include one, a $66m medium-term note maturities in 2003, approximately $40m of which come due over the next three months. Secondly, $30m of financing commitments to tenants to fund facility expansions, which will provide rental income upon completion. Three, potential additional debt maturities of $81.5m, the first $40m of which could come due as early as July, if holders exercise their puts in 2003. To address the possible maturities, the company had to be prepared with capital sources of at least $177.5m. In other words, a dividend cut, in and of itself, would not have been sufficient to address these upcoming maturities. From a capital sources standpoint, at the end of the first quarter, the company had currently less than $23m available under its line of credit. As you may have seen, approximately one month ago, we attempted to address our upcoming maturities through a $200m debt exchange. At the time, our credit rating, pro forma for the exchange offer, was affirmed by the rating agencies.

We had been advised that we could expect to issue $200m of seven-year medium-term notes at about the same yields, in part reflecting today's low Treasury levels, in an FFO-neutral transaction. The $200m debt exchange transaction was not completed for several reasons, including first, the significant disruption created by HealthSouth during the marketing process. As you may recall, the debt markets were significantly impacted when trading in the HealthSouth bonds was halted. This was unprecedented in the debt markets. Ironically, although the company is not adversely impacted in any way by the only HealthSouth property in our portfolio, HealthSouth's overall financial problems did adversely impact us, by causing the debt market to focus on our somewhat lessened credit capability.

The second reason was the general reluctance on the part of MTM buyers, who typically customize their MTM maturities based on their own internal investment needs, to exchange into a larger, generic seven-year issue.

Third, a significant owner of our debt, including our printable notes, was largely driving all pricing negotiations.

Fourth, we were looking at pricing that would have resulted in significant FFO dilution for a replacement debt transaction. The dilution was the result of two things. One, higher than expected coupon. And two, the demand by MTM holders for premiums for being taken out prior to maturity. Premiums were as high as 4%, in some cases relating to issues that matured only in a few months. We estimate the dilution of the deal would have been about 10 cents per share in 2003.

Lastly, we were very concerned that a less-than-attractive debt transaction would potential cause NHP to impair its investment grade ratings and potentially raise a host of other issues.

Faced with a significantly dilutive debt offering, the company took a timeout to review its available alternatives. We retained [Cullen & Steers Capital Advisers] to assist us in evaluating our alternatives and the recommended course of action. We have worked with a team at [Cullen & Steers] for the past 13-plus years and consider them to be by far the leading advisers serving the senior housing and health care real estate arena. Some of the alternatives we reviewed included sale of assets, raising public unsecured debt, issuance of preferred stock, including perpetual and convertible preferred, and raising equity. We also considered our strategic alternatives. In our evaluation of all these alternatives, we needed to keep in mind that in addition to satisfying our near-term liquidity needs, the company felt that it needed to address its growing balance sheet leverage, which again, for the first time, becoming a significant impediment, due largely to the HealthSouth fallout. And, to preserve continuing access to low-cost capital, especially the investment grade debt markets.

We reviewed the possibility of selling assets, either to third parties or to our joint venture, as a means to raise capital. We concluded that the significant dilution associated with asset sales, combined with the loss of cash flow to service our debts, could impact our investment grade rating. To give you a sense of the magnitude, if we sold $120m of our assets today, at an average lease rate of, say, 11.5%, the resulting FFO dilution would have been 12 to 15 cents per share in 2003. In addition, our fixed charge coverages would have been adversely impacted. We generally see asset sales as a source of liquidity of last resort. We have done a few asset sales in the ordinary course for strategic reasons, but not to meet cash flow requirements. In addition, asset sales take time and many not have necessarily been consummated in time to meet our near-term maturities.

We also considered accessing the unsecured debt markets, including senior and subordinated debt. However, given our recent negative experience with the exchange offer we mentioned earlier, we believe it was more prudent at this time to pursue more junior forms of capital and solidify our balance sheet prior to going back to the debt markets. Another factor to consider is that the universe of health care paper buyers is the unsecured debt markets is a relatively finite one. Consequently, we would have likely been approaching the same buyers who we attempted to do the exchange offer with. Moreover, what would be the point of incurring dilution on a replacement debt deal and obtain no other benefits than to continue to run in place at a lower FFO run rate.

We also looked at a variety of possible preferred offerings, and reviewed proposals presented to us by third party investors. However, the pricing of a preferred for us, at this time, when viewed in the context of a current 11% yield on our existing preferred, and a common dividend yield of 14%, would have also resulted in significant FFO dilution. Moreover, because of the high fixed charge element of the preferred, had we pursued this alternative, we would have meaningfully reduced our fixed charge coverages and believe such a transaction would likely have been viewed negatively by the credit agencies.

Again, to give you a sense of perspective, assuming we issued a 12.5% participating preferred, we estimate our resulting dilution would have been approximately 15 to 17 cents per share, not withstanding the fact that our coverages would have also been reduced, and we probably wouldn't receive full credit from the rating agencies for deleveraging our balance sheet. In our view, a preferred stock financing at this time could have jeopardized our investment grade rating.

We also felt it was appropriate to review possible strategic alternatives for the company, including a possible sale or merger of the company. Based on our review, we concluded that a strategic deal would not address our near-term need for an immediate infusion of capital as a definite transaction would take time to consummate -- i.e, the process of negotiations, due diligence, documentation, et cetera.

In each of the alternatives we reviewed, whether it was asset sales, preferred, or equity, et cetera, it became totally clear that each alternative was going to yield FFO dilution and would only force our hand to revisit the dividend.

By way of comparison, we estimate the dilution of the equity transaction we announced to be approximately 20 to 22 cents per share. In the end, we concluded that FFO dilution had to be incurred, often times the simpler and cleaner alternative is a better choice and consequently, we opted to pursue an infusion of straight equity, no bells and whistles.

While equity is the more dilutive in the short-term of the alternatives mentioned, it is also the only one in our mind that sufficiently strengthens our balance sheet, improves our coverages, while addressing our liquidity needs and thereby allows us to enhance our access to the broader capital markets. In short, when we weight in all the factors, an equity infusion was the clear winner.

From a sizing standpoint, we believe that this $115m transaction provides us with ample cushion to address all of our capital needs. That is the possible $147.5m in debt maturities. Post-deal, in addition to available investment-grade debt financing, the company will have a largely undrawn $150m credit line, $14m of proceeds from recent asset sales, access to approximately $100m of low-cost secured mortgage financing, if need be, $30m of which we expect to be available shortly. In addition, we believe that this transaction will greatly enhance our access to the MTM market going forward.

Let me now turn to why we chose the direct placement alternative for this deal. Once we decided to explore the possibility of an equity financing, our priorities were speed and certainty of execution. First and foremost, timing was an issue for us, given some near-term maturities we face and the limited availability under our bank line. Pursuing the debt exchange transaction cost us several weeks. Second, we faced the challenge of marketing to investors a dilute equity transaction that would, in all instances, force our hand to lower the dividend. However, the size and pricing of the equity financing resulted in a range of possible FFO dilution, and as a consequence, a range of what the appropriate dividend might be. It was a highly iterative process. It was our view that under these circumstances, the company was better off negotiating the transaction with highly sophisticated investors on an informed basis. We did not believe that a traditional public offering could be organized or consummated within an appropriate timeframe. In addition, because the effect of the deal would not be known until it was definitely negotiated, we did not believe that the potential transaction could be succinctly packaged and described for public consumption.

We also considered a rights offering, which would have allowed all our shareholders to participate, but determined that the lengthy timeframe for execution was unacceptable. As a result, given the complexity of our situation, combined with timing pressures, we felt it best to approach a limited universe of institutional investors, including many existing shareholders, to consider participating in an equity financing. We requested that institutions that were interested in exploring a transaction with us execute confidentiality agreements so that the company and the institutions could have an informed dialogue about the most appropriate course of action under the circumstances. Overall, we approached approximately 40 institutional investors, a significant number of which were existing shareholders. And of this group, approximately 10 entered into confidentiality agreements and held discussions with the company. This process was carried out over a several-week period. In the end, we pursued a transaction with seven large institutional investors, nearly all of which were existing shareholders of the company. The deal was priced based on the orders received during a book-building exercise. While we would have liked to have priced the transaction a higher price, we believe that the benefits of having eliminated our balance sheet uncertainty far outweighed the marginal dilution savings of a higher price. It is important to note that the dilution associated with the discount was not as significant as one might think. By way of example, a deal priced at $13 would have been 2.5 cents less dilutive and at $14, about four cents per share less dilutive.

With respect to the dividend, it was always our intention to sustain our dividend, irrespective of the high payout. As we discussed earlier, our first quarter results were such that could have covered our previous dividend. Notwithstanding this, we believe that we made the right decisions for the right reasons.

As far as the new level, we thought it prudent to reduce our dividend by 20%, to $1.48 run rate, which when combined with our new FFO guidance for 2003, for $1.71 to $1.73, would bring our payout ratio to approximately 89% on a run rate basis, in line with our historical levels. We would note that our peer group, on average, pays out closer to 95% to 100%, thereby positioning us at the conservative end of the range.

Now that we have addressed the background, let's focus on what the equity financing and dividend accomplished for us. One, our $150m revolver will be nearly fully repaid, thereby giving us ample dry powder to address our upcoming debt maturities, including our potentially putable debts, as well as meet all of our other capital commitments for the year. Two, our balance sheet will be meaningfully strengthened, through a reduction in leverage, from 61% to 52% on a book basis, from 53% to 45% on a market cap basis, thereby positioning us more in line with our peers. Our fixed charge coverages will improve also, as a result of our delevering transaction.

Four, we believe this transaction will meaningfully enhance our access to the unsecured debt markets, as well as other capital markets.

Five, our dividend coverage will be reduced to 89%, at the low end of our peer group, and in line with our historical levels.

Six, we also feel our portfolio challenges are largely behind us, and that our portfolio contains meaningful upside potential internal growth, in part due to certain of our renegotiated leases and greater participation levels.

Seven, we would note first that our investment grade peer group currently trades in excess of ten times 2003 FFO, and at an 8.5% dividend yield. We have been trading at approximately seven times FFO and at a 13% to 14% dividend yield. Based on our new FFO and solid dividend going forward, we believe there may be significant upside in our stock.

Overall, we feel we are on a strong a footing as any of our other peers, and in some respects, stronger. While it was not the first choice to raise equity, at these current levels, we absolutely believe this transaction was pursued in the best interest of the shareholders.

We are also aware of the fact that there is some confusion surrounding what we would view as new investment opportunities in our property sector. We had indicated in our third quarter, 2002, conference call that we felt that very attractive, accretive acquisition opportunities of approximately $400m would be available to us in 2003. After that period of time, and by the time we had our year-end conference call, our stock price had substantially declined, possibly due to certain operator concerns at a few of our peer companies. Therefore, during the year-end conference call, we had indicated that it was our desire to maintain our dividend and that consequently, to conserve and make judicious availability of what capital we had available, that we would not be seeking external investment opportunities other than through a possible expansion of our existing joint venture. To clarify matters, we believe there are many attractive investment opportunities in our property sector, primarily due to the lack of many other financing alternatives available to operators of these properties. I'm pleased to indicate that we are in the final stages of our completion of an expanded joint venture arrangement of some $100m to $200m of additional capability, to take advantage of these opportunities. It is anticipated that the company's portion of the equity contribution for these opportunities would be reduced from 25% to 15%, and our joint venture partner taking the remaining 85%. This obviously would enable to minimize capital expenditures but still have the opportunity to take advantage, through the joint venture, of these investment opportunities.

Moving on to our portfolio, and the long and the short of it, as I had mentioned earlier, is that NHP's property sector, the senior housing and long-term care field, largely have their problems behind us. There are still investor concerns regarding state budgets, but those don't appear to be offering any horrendous-type events for operators to contend with. I would also think the company's current portfolio is in the best shape it has been in during the last five to six years. Many of the company's properties today are being operated by smaller, regional firms, with a very close focus on concentrated geographic locations, as opposed to the larger, national firms, that more than not have become the victims of excessive leverage and had experienced problems in the past. Also, about 80% of the company's properties are now structured in master leases. In addition, some of the repricing in the portfolio that has taken certain underperforming properties to rental levels that make sense.

Furthermore, assisted living is continuing to fill the overcapacity that was created during the last number of years, and we continue to see improvement in the portfolio's occupancy and operating results.

Let me now turn it over to Mark Desmond, our Chief Financial Officer, to further talk about our first quarter results.

Thank you, Bruce. Today we reported FFO per share of 46 cents for the first quarter of 2003, which was in line with management's expectations and the consensus estimate. Revenues for the quarter were $41.528m, up over 12% compared to the first quarter of 2002. The increase was largely due to the acquisitions of properties during the second through fourth quarter of 2002. During the quarter, we acquired two skilled nursing facilities and one assisted living facility, for an aggregate investment of $13.7m, at a blended initial rental yield on these two properties was 10.7%. The acquisitions closed in mid-January and were the last of the acquisitions the company had committed to, prior to scaling back our acquisition plans for 2003.

The skilled nursing facilities were leased to a private regional nursing home operator, and the assisted living facility was leased to Merrill Gardens, a national private operator.

Subsequent to the end of the quarter, we sold five assisted living facilities leased to Altera for approximately $13.6m. These facilities were purchased from Meditrust during 2002 as part of a larger purpose involving both the company and our joint venture. These properties were underperforming and had been under contract for sale. We had anticipated this sale, and it is and has been reflected in the company's 2003 guidance. I would like to point out that the company's revised guidance, announced in our press release yesterday, of $1.71 to $1.73, includes the first quarter results of 46 cents per share. The dilution from the issuance of stock will be greatest initially, because the proceeds will pay down our bank line, which has an average interest rate of 2.7%

As we pay off maturing medium-term notes with our bank line availability, the dilution from the offering will lessen. The average interest rate on the $66m of medium term notes maturing in 2003 is 7.5%.

As for the portfolio, we continue to see overall improvement in assisted living occupancy. Only two facilities have occupancies under 50%, one of which was opened in the middle of 2002. Our ALF portfolio continues to show strong rent coverages, at just under 1.4 times, with occupancies averaging 88% There has been some slippage in ALF due primarily to increased health insurance and workers compensation costs, as well as liability insurance costs. However, modest increases in average occupancies above 88% should translate into even stronger rent coverages.

Nursing home coverages in our portfolio remain at high levels. The coverage is reflected in our supplement to our earnings release, reflect only the fourth quarter impact of the Medicare [Clif]. However, even with a full-year impact, coverages would appear to continue to be above 1.5 times.

Our SSA portfolio is improving and the operating budgets we receive from them would allow them to pay the rental level of $2.5m in 2003. However, we have only included $1.5m in our rent in our guidance. They substantially met their budgets in the first quarter and we received $300,000 in cash rent in the first quarter. Continued improving results at these properties could provide significant rental upside for us in 2004.

The only current significant operator concern was Sun Health Care's endeavors to restructure its leases with certain landlords, to provide it with a better operating performance as a result not only of the Medicare [Clifs] that took place last October, but also the wariness regarding the state of budgets on the Medicaid programs. The reimbursement problems were not Sun's major problems, so much as optimistic plan when it came out of chapter and their efforts to date, I think, have created a much more successful ongoing operation for them. As for the company's own portfolio of five properties with Sun, two of the properties will be leased with other operators, and the company has provided a minor concession with Sun on the three remaining properties they will continue to run. The overall impact of this restructuring with Sun will reduce our current $3m annual rent by a little less than $300,000, slightly less than 10%, or roughly a half a cent per share impact.

With that, operator, we will turn over the call to questions.

Thank you. Ladies and gentlemen, if you have a question, please press the one on your touch tone phone. You will hear a tone, indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press the one at this time. Please hold for our first question. One moment.

And we have a question from the line of James Sullivan, Prudential Securities. Please go ahead.

Thank you. Bruce, just to comment on your lengthy summary of the process, which I appreciate. And first of all, I would like to say that I think I agree 100% with your decision in terms of biting the bullet on the equity offering. However, one question I do have -- you used [Cullen & Sears] here as an adviser, which, based on your comments about them, would certainly appear to make sense. However, from the standpoint of executing the equity raise, did you consider using a primary, well-capitalized investment bank that might have been in position to do a so-called ``bought'' deal that might have led to better execution?

I think the primary problem we had with that, Jim-- yes, it was considered. The primary problem we had with that generally did revolve around the necessity to alter the dividend in connection with doing a transaction, and to be able to do that, in any kind of a confidential basis, just did not appear to us to be workable.

And so kind of a related question -- given this transaction, should we assume, going forward, that [Cullen & Sears] is your primary investment banker, or do you have another bank? I think you were looking-- you were using, obviously, CSFB, I think, on the medium-term note issue, and that would be appropriate for the debt markets. But on the equity side, does this represent how you would expect to do equity issues, going forward?

No, really not. I viewed [Cullen & Sears] very much as a specialty situation that involved, I think, a very unique circumstance that we had to contend with at this point in time. We are kind of open on investment banking capabilities from many different sorts of firms. Clearly the new line of credit that we arranged last year is led by JP Morgan Chase, and they obviously are people that we would consider, in addition to the other participants in that line, and in addition to other investment banks, who do a very, very fine job.

OK. Shifting over to the operations for a minute, I wonder if you could give an update on the senior services situation, what kind of progress you are seeing in that portfolio, and what you provided for in your guidance in 2003?

Yes, Jim, we're seeing good progress there.

But you had mentioned in your remarks that it was SFA. Just clarify--

Yes, that was Senior Services of America, though, the comments and my remarks, Jim. They are on their budget, they've given us a budget that would allow for them to pay the $2.5m of scheduled rents. However, we've been conservative in our guidance and put it in the guidance at about a $1.5m level.

And so far, you believe that they're, you know, operating in line with the expectations that they've given you previously, so there should be some upside here, or there could be some upside?

Could be some upside.

OK, and I wonder if you can give us an update regarding the issue of senior management search, Bruce?

Yes, we-- and I don't know how many people may know, we are in a search for a chief operating officer to come in and essentially be a potential successor to my retirement in the next couple of years. The spec calls for anywhere between a one to three-year type of guidance on who we might identify. We've identified three to four very strong candidates and are continuing to interview, do some testing, and have various members of our board of directors involved in interviewing these individuals.

OK, and then a final question regarding ALF, ALF occupancy rates. One of the issues that I think conceptually people have considered and thought through, and you know, I'm not sure there's a resolution on it, but to what extent, given the private pay nature of the admissions, there might be some cyclical sensitivity, and I wonder if you could give us an update, either of you, as to what you're seeing? We've obviously had a slow economy late in 2002, we've had a decline in consumer confidence in the early part of this year. Do you think that occupancy rates are being held back somewhat because of that, and/or pricing, by the way?

That could be very much be that, Jim. I think what the assisted living operators are experiencing is a much higher acuity level of frail individuals coming to them. In other words, maybe much more on a need basis than the actual alternative to being lonely at home. Part of this I think is their view, as best as we can hear from the operators, having to do with sub-standard returns on many of the CDs that they had put in place to live on, number one, and also concerns about the war circumstance that did take place in Iraq, and it created a little bit of dislocation, I think. I think the operators, you know, as we came into this year, were all seeing a little bit of an improvement in that regard, but still a much more acutely frail population base than they had experienced in previous years, which I would chalk up to the war and the economic problems.

OK, very good. OK, once again, congratulations. I would have loved to see it done at $13, but I think under the circumstances, a good transaction.

I would have loved to seen it done at $15 or $16, but--

We have a question from the line of Chris Pike, Wachovia Securities. Please go ahead.

Yes, good afternoon.

Good afternoon, Chris.

Just a real quick question -- in terms of the dispositions, I think I missed a cap on those five ALFs, I believe they were?

Yes, this had a fairly high cap rate on there. These had an 18% yield, and the reason for that was when we acquired them from Meditrust last year, we acquired them subject to the existing leases with Altera, and we bought them at a significant discount off of Meditrust's cost.

OK, great. And in terms of the two acquisitions, I see in the 8K you break out the individual components in terms of cost. Can you provide the yield for the one ALF and then the yield for the two SNIFs separately?

The two SNIFs were 10.8 and the ALF was 10.5

Thank you very much.

We have a question from the line of Ross Nussbaum with Smith Barney. Please go ahead.

Hi. Good afternoon. Two separate questions. First, your guidance -- does that assume that the $81.5m is put back to you?

That assumes that we refinance upcoming MTM maturities with the bank line, but at this point, it's not our assumption that the July puts would be put to us.

I think we had the situation with the puts where, were we not to have had the dry powder to take care of the puts, they would have come back to us, particularly with any concerns that the holder would have that this possibly could have impacted our investment grade rating. The fact that they're not really necessarily in the money, and now the fact that we will have the capital to handle them, if need be, at maturity, it's our expectation they may not come back. And as a matter of fact, we would hope to commence discussions with some of those holders in the next couple of weeks.

OK, my second question is, I didn't hear you discuss a financing option which would be as follows. Perhaps a three-year unsecured loan that would have perhaps minimized the dilution if you did a debt refinancing, or even gone to a floating rate credit facility, a secured term loan. Why didn't you consider any short-term financing options that could have gotten you over the hump?

I think I indicated that we had looked at various types of alternatives of unsecured loans. Again, because of having just been out there, we would be going back to the same purchasers, generally, of those paper-- been out there that did not work well, and it could have been problematic.

OK, thank you.

We have a question from Jerry Doctrow, Legg Mason. Please go ahead.

Yeah, hi, actually, it's Rick Rubin filling in. I just want to understand the rationale for why did we wait so long to actually try to execute a debt offering, you know, given the past difficult experiences with the debt markets?

I don't think we had really experienced past difficulties with the debt markets. Our investment grade ratings have been affirmed, quite solid. We had historically had, you know, very good executions on a very clear term business. With medium-term notes, there really is not the availability to pre-pay them early, so it really was a matter, hopefully, of executing at the time of maturities. The idea with the exchange bond issue would be to get a little bit of jump league on that, but it did not work, for the reason I mentioned. The HealthSouth thing totally impacted discussions and very much put the spotlight on our particular [inaudible] credit capability. But we had not experienced previous difficulties in that respect.

OK. For 2004 debt maturities, it's a comparable amount, or maybe I think a little bit less, $123m that's either maturing or is putable. What's the strategy for that, and if you are planning on, then, doing another debt offering, is that included in this guidance? It sounded like the guidance includes, you know, basically putting the amounts on the credit line for the rest of 2003.

Well, we've got-- if you took '03 and '04, including all the puts, it's about $270m of debt that comes due, post this issue. And the assets sales we mentioned, and approximately $100m of secured capacity, that gets you all but about $20m of the 270. That's assuming you have no access to unsecured debt during '03 and '04, which I think is a fairly ridiculous assumption at that point, and this transaction should enhance access to unsecured debt. So, I mean, you'd be looking at, if all the puts put to you, then you'd need another about $20m of capital to raise, by mid-September of 2004.

OK, thank you.

We have a question from [Patrick Baytag], Invesco. Please go ahead.

Yeah, just, Bruce, I just want you to try to explain to me here, we look at your holdings list and [Cullen & Sears] is number, at almost 15%, and explain a little bit-- it just doesn't look good that, you know, they're doing the deal. And so can you talk a little bit about that?

Yeah, I think the fact that the group of people that we historically have worked with for years and years and years, and who were the primary people in the investment banking arena in our property sector, in senior housing and long-term care, it's somewhat coincidental in the fact that they had joined up with the [Cullen & Sears] group following-- when they left Schroeders. There was really no-- in other words, they did not get the business, so to speak, because [Cullen & Sears] is our largest shareholder. That was not a consideration whatsoever.

OK. And then you mentioned that you did contact 40 institutional investors, and then seven signed confidentiality agreements?

No, 10 signed confidentiality agreements, and seven chose to participate in the offering.

OK. I don't remember us getting a call. What was the determining factor of who got called and why?

Generally we looked at our larger shareholders, and number two, we looked at those people who expressed an interest either to us or to the [Cullen & Sears] people in connection with their activities in this field that said they did have an interest in certain transactions that could be available to them, either from us or in the senior housing, long-term care area.

So does that mean we can get some stock at $12, then?

No, I don't think so. Not today.

OK. Thanks.

We have a question from the line of Richard Coin, private investor. Please go ahead.

Yes, Mr. Andrews, Mr. Desmond, does the stock that you sold have resale restrictions?

No it does not. It's fully registered and is tradable.

So it overhangs the market immediately?

If they would choose to sell it, yes.

And what was the interest rate on the debt that was repaid?

The average on a blended kind of basis in the neighborhood of 5%, about 7.5% on our medium-term notes, and 2.75% on our bank line.

So that poses the question, why would you sell equity that's costing you 11%, 12% in dividends to retire 5, 6, 7% debt?

I think we explained that in my opening remarks. There really was no other option that made good sense, and would really move the company forward. We were looking at dilutive debt for debt issue that, frankly, did not provide any future benefits for the company and would be detrimental to current shareholders without any further improvement in the company's financial posture.

Thank you.

We have a question from [Steven Meade], Anchor Capital Advisers. Please go ahead.

Yeah, hi, Mark. Can you go back and just review with me what debt was going to be exchanged in that original $200m debt exchange, and looking at the putable debt, I don't understand sort of what the origin of that putable debt was and it seems to me you would want to take care of that and then the next question is, sort of take me out a couple of months, or take me out until of the year, give me a sense of what the capital position of the company looks like, and at what point would you be in the position to grow again, in terms of new assets?

Well, I take the-- the first question on the medium-term notes is there were various pieces of the maturities in '03 and '04 that we were looking to exchange, and then part of the problem with the process was some of those required a significant premium, and it didn't deal with all of the 03s, it didn't deal with all the putables, so we would have ended up with about a 10 cent dilution in '03 between a higher interest rate on the new debt and paying premiums to get the upcoming maturities.

But was there putable debt in that?

Yes, some of the puts-- well, that was one of the issues, is that the July puts, to try to buy the July puts, required a premium, when-- which didn't make a lot of sense to us, because worst case is they put 'em to us in July and we pay them off at par.

Right, OK. Well, take me through, as far as, you know, what you expect to happen as far as the capital position of the company and when would we be in a position to grow the balance sheet again?

I'll take that. Generally, what we are looking at is the initial foray with opportunities looking at our joint venture arrangement, with even the possibility going forward of even increasing our participatoin in that to provide it. If we see the opportunity for very attractive and accretive opportunities going out into the future, and that would be available to be quite accretive, over and above then a blended combination of new debt, new equity, we would do that. But, you know, that needs to be generally looked at as it comes forward and taken on a specific kind of basis, as opposed to a speculative basis. We have no desire to issue any equity that would not provide a very accretive return in connection with new investments. And again, one has to look at a blended cost between debt and now a more enhanced debt capability than we had before.

But at the year end-- I mean, what's the-- after you-- how much is the line of credit?

It's a $150m line.

And how much is available after this transaction?

Just about the whole 150.

OK. And all of that, you sort of, in a sense, have to keep in reserve to meet the potential puts and whatever?

No, we think with what we've done, we have also essentially reopened and particularly, as the furor over HealthSouth diminishes, we have reopened our own capability to go back and access the unsecured medium-term note market.

When do you think you can do that?

I think it could relatively on a near-term basis, if need be.

So, and then- but do you still see an environment in terms of available investments that could be accretive to you?

Yes, we do.

OK.

We have a question from Thaddeus Taylor, LPL. Please go ahead.

I'm actually calling as a private investor, but the dividend ratio is currently about, as you stated, 80% to 83% of FFO. Does that--

88 to 89% right now.

I'm sorry. Have you a policy on maintaining that ratio or any specific ratio going forward?

Yes, we have historically desired to maintain a payout ratio in roughly the 80% level, and in fact, on a historical basis, it was sometimes, in the latter number of years, before the difficulties of three, four years ago, to the mid to lower 80s, but yes, that would be what we desire to do to maintain the type of dividend coverage that could provide investors with confidence that the dividend would be sustained.

And perhaps grown?

Yes.

Thank you.

We have a question from Gary Poker, William Advisers. Please go ahead.

Hi. Given the fact that it doesn't look like you're going to be growing to any regards, and the disadvantage with your cost of capital on both the debt and equity, are you still exploring the option of selling the company? And second of all, this type of haphazard that you've got yourself into over the last year, what have you changed in your organization or philosophy that would keep you out of this situation again? And then lastly, how is management compensated in terms of the metrics and what percentage of the compensation is objective?

Let me take the last part first. The company, from a compensation standpoint, has a current bonus program. It also has a dividend equivalent stock option program, so that the management is rewarded in line with the dividends that are paid on the common stock, as a practical matter, so management currently is anticipating, in its long-term program, on this dividend reduction.

As far as growth capabilities, I think we have just enhanced our debt capability dramatically and the ability to access a lesser cost of capital than we had before.

As far as getting into the position that we got into, the problems that were existing in our particular field, as I mentioned, are largely behind us. Unlike a couple of our competitors who have also managed through this field, we had the founding company that founded this REIT, we had a major renegotiation of our overall lease portfolio with them. It was an adverse creature, it was something that we had to contend with from a reduction in earnings and FFO standpoint, that some of our competitors did not have a similar type situation. I don't foresee that again. Our lease now with that company, and I'm talking about Beverly Enterprises, is the more standard form lease that we have, that provides for all-or-nothing renewals and master leases on those properties that are performing quite well, as we were cherry-picked dramatically in connection with that resettlement here a number of years ago.

What percent- is there compensation based on FFO growth, or what's the comp-- is it quality, investment grade rating? What's the compensation based on?

Compensation is based on numerous factors. The primary factor is our performance against our peer group, and that performance is based on a total return consideration, of the stock price, the dividend capability, and what our total return is compared to our peer group. In addition to that, it focuses on dividend growth capability, it focuses on our FFO growth capability. That is what it is.

And are you still-- I mean, given the fact that growth is going to be hard to come by as an option, are you exploring still, or keeping open, the option of selling the company, like you were looking at maybe before this transaction, if it could have happened expeditiously?

The board of directors would consider any opportunity along that line.

The last question is, when do you anticipate coming back to the debt markets, because that is the question on, obviously, being able to grow the company? Do you anticipate doing that relatively quickly or the debt markets are-- quite honestly, I don't really agree with you, that HealthSouth was the problem here. Could you address that, when you think you might be coming back to the debt markets?

Presently, we really foresee no immediate need to, although clearly it's an option that is available to us, again, with the enhanced posture that we have a result of this transaction.

Well, the need would be to grow the company, wouldn't it? I mean, isn't that kind of the need to come back to the debt markets?

Yes, that would be a need, but again, I do not desire to necessarily, with what we had to face here in the last number of years, desire to get out of balance with appropriate capitalization. When you look at appropriately blended debt and equity type of situations, and coverages, we are very dedicated to maintaining our investment grade rating and maintaining that. I think it's remarkable, quite frankly, that we were able to maintain it during the last difficult three year period, and I think going forward now, with what we've done, it's that much better.

Thank you.

We have a question from Jay Habermann, Credit Suisse. Pleases go ahead.

Hi, question on NAV, just hoping to get your comments there, given that you've now issued stock at $12 a share, and previously, looking back a year ago, issued stock at close to $19.50.

Well, I'll just say this, and then I'll let Mark chime into it. NAV in our particular property sector is a little more difficult to handle from the standpoint that the operating profits, the cash flow from our real estate properties, in addition to providing us with a growing return, a growing rental return, it must also provide an appropriate profit to an operator, who obviously needs to do a good job, to maximize the profit potentials. The closest thing one can look at from the standpoint of NAV, and Mark, why don't you comment on this, is generally looking at the lease rates on our property. If they're sold under the lease itself, you know, you want to talk about past sales? You know, lease rates have been as much-- or returns a bit as much as 8% or 9%.

Yes, on some of the asset sales we did in the last year, we had in the 8 to 10 cap range, or rate range on some of those option exercises. You know, you mentioned a year ago, we were at $18 and today we're in the 13s. Has our NAV changed that much? You know, I don't know how you-- looking constantly at NAV is not how you finance a company, long-term.

Thank you.

We have a question from Rob Stevenson, Morgan Stanley. Please go ahead.

Good afternoon, guys. I came in a little late, so I don't know whether or not you had answered this or not, but who were the seven takers of the stock?

The only ones that we're at liberty at this point in time to disclose is Morgan Stanley Asset Management and TIAA-CREF. There will be a filing with the 8K within the next three days that would identify them.

And how much of the $113m did those two take? Are those two of the major ones, or are those just the two that you could tell us?

Those are two of the major ones.

OK. Thanks.

We have a question from Scott Estes, Deutsche Bank. Please go ahead.

Yes, good afternoon. I hope this hasn't been covered. The mortgage financing, I think, Mark, you mentioned $100m. Is that the number?

Yes.

OK.

Available -- I mean, we haven't done that.

OK. What properties would you be looking to secure that with, and what kind of LTV ratios would the lenders be advancing to?

Various of our performing ALFs are available for that. I think a good chunk of our skilled nursing portfolio, we could use on that as well. You know, bear in mind, Scott, we only got about 10% of our assets are encumbered, so--

Right, OK. Does this run up against any limits in the bond covenants on use of secure debt, or is still--

That would be the limitations.

OK.

-to about $100m.

OK. Is this conduit-type financing, then?

Fannie Mae, which we've accessed in the past, is some of it.

OK. What kind of LTV is available, you know, for, say, the ALFs? And then what kind of--

We actually did a transaction with some of our ARV properties where we financed more than our acquisition cost.

Wow. And what kind of pricing, say, on a ten-year basis, would you be looking at?

I don't know, six, six and a quarter-ish range.

OK. So 225 over, something like that, low 200s?

Sounds right today, I think. Yes.

OK. OK, that's great. Thank you.

We have a follow-up question from Richard Coin, private investor. Please go ahead.

Mr. Andrews, I've been a shareholder for approximately ten years, my family, my older relatives, and I think you're aware that in large part, your shareholder base is a more conservative, older constituency that depends upon the dividend. I-- I just want to express my enormous disappointment that in light of prior-- so many prior statements about your refusal to go the the equity markets because the stock was underpriced at much higher prices than that which you sold yesterday, and your frequent statements about the safety of the dividend, that you know, we shareholders really need reassurance, in deed, and not just in word, going forward. And I would hope that the executives of this company would review and defer whether they should be taking bonuses in a year when they're giving the shareholders a pay cut.

I think that's a very fair consideration. As a practical matter, I did not take a bonus last year, nor did I get a raise, and I think in addition to that, obviously, with a reduction in the dividends, between the shares that I own and the shares that are part of the options that have dividend equivalents, I'm going to be taking a substantial reduction in my dividends also.

Thank you. I had to get that off my chest.

Well, I appreciate that, and believe me, the last thing in the world I wanted to do was to decrease that dividend. I thought we had a very clear opportunity to maintain that dividend. We're very pleased about the fact that the troubles appear to be behind us. We're pleased about the internal growth capability within our own portfolio, and we, you know, absent-- although somebody had indicated they did not think HealthSouth was a problem, every indication we had from the investment banker, from other investment banker, HealthSouth caused a major problem in the health care debt market. It was not anything we anticipated. Having a firmed up investment grade ratings, which we had protected to do that, it really bothered me also. I clearly did not desire that for lots of different reasons.

We have a question from [Patrick Baytag], Invesco. Please go ahead.

Yeah, Bruce, just to follow up with regards to your comments on acquisitions, as you did mention in the third quarter conference call, you talked about the fact that you thought that you could do, at that time, $400m in acquisitions for 2003, and then in the fourth quarter, because of the stock price, financing and stuff, basically we're out of the acquisition business. Are you saying now that-- I'm just trying to understand how you ramped that up and ramped that back down again?

It wasn't a matter of ramping it down. The circumstance that existed with the reduction in our stock price was such that along with our desire to maintain our dividend, any sort of equity issuance at that point appeared very, very dismal. We really did not desire to issue equity at these levels, subject to other than the necessity that we talked about here. To do more debt would have threatened investment grade ratings. We choose, essentially, although we felt the opportunities were out there, we chose that unless we were to do some with our joint venture, we really would pass on that, in the interest of maintaining our dividend. When, for other reasons, that's not available, or was not available to us, and causing us to alter our dividend policy, which we did in connection with this issue, not because of our lack of confidence in our earnings going forward, but to accomplish this particular transaction, it does actually provide us with a much stronger base that could look at, you know, again, looking at an increased potential to take advantage of some of the opportunities we do see. So I mean, that is one of the byproducts of this transaction, in addition to the negative disappointments of having a reduced dividend.

OK, well, what- I guess what I was trying to get at is, from an external growth standpoint, I mean, have the acquisition people continued to look at stuff and there has been stuff in the pipeline, or how long is it going to take get things back up to speed?

No, I think I had mentioned that we had been discussing with our joint venture partner what a new involvement could be. Again, that took into consideration our desire to be very cautious with how we spend our portion of the capital. The reduction of our participation in this, along with their increase, does make it available. Our people have been following certain avenues out there, of potential deals, and they're looking at them, so we have-- you know, I have one competitor that talks about the millions of properties that they look at, and only do a few. I think all of us do see a lot of different opportunities, many of them with don't go anywhere at all. We log ours. Clearly, I think in the last quarter, we probably did log, oh, gosh, maybe half a billion dollars worth of things that came from brokers, facilities that were identified by operators that they thought would be attractive to us, and so on and so forth. And of course, you know, at this point in time, we do see things. I think the joint venture will benefit handsomely from it. Hopefully our ability to incubate that joint venture, those properties for ourself, going forward in the future, is also a very advantageous future circumstance.

OK, so if I hear you correctly, if anything does happen on the acquisition front this year, it would be through the joint-- a renewal of your joint venture relationship? Is that correct?

That's right, and also possibly some other type of financing capabilities that can be done on a very thought-out and balanced kind of basis.

OK, thank you very much.

We have a question from John Robertson with [REITS]. Please go ahead.

As an institutional shareholder, I think I'll save my critique for an offline conversation. But I do have a rhetorical question -- with the stock still trading above $13, don't you think you could have gotten the deal done at $13 or better? It seems to me you left a good $10m on the table.

There's no question I would like to have done the deal at $13. I would like to have done the deal at $12.50. I'd like to have done the deal at $14. As a practical matter, when one puts together a book, and it might indicate that our book was larger. We had much more interest than we had, which gave us the ability to get a decent price. I think you need to bear in mind that it's only been a matter of a number of weeks where our stock was selling at $12.50 a share, number one. And number two, most importantly, the differential in the dilution is quite minor. I think as I mentioned, to do it at $14 a share compared to $12 a share is a differential in dilution of four cents a share a year. It's just not a material event when one is looking at the necessity to finance a company and to finance a company in a very responsible fashion.

Thank you.

We have a follow-up from Ross Nussbaum with Smith Barney. Please go ahead.

Hi, Bruce. The question is this -- you hire an adviser to go look at the debt market, then you go ahead and hire another adviser to look at helping you raise some form of equity, and you ended up going the common route. I know that you discussed the possibility of looking at a sale or a merger, and you said that it wouldn't address some of your near-term needs, and I guess my question is this -- did you ever go out, hire an adviser, put books together, and explore whether or not you could actually get this company sold for more than what the stock was trading for, rather than go ahead and dilute shareholders?

The answer to that is no, and the reason being that although we have had certain inquiries as to would we be interested in any kind of a merger or a sale, no one is basically put together any type of a proposal that our board of directors could consider. I know many of the other CEOs that are running some of the other health care REITs, and some of the other health care REITs said that that could be something that might be of interest to them, but there's nothing in any way, shape, or form that our board of directors could consider or believe that they need to take the action to consider.

Well, I would just leave at this, and say that I think that exploring those possibilities would have been a better alternative than issuing equity here. Thank you.

And we have a follow-up from Chris Pike with Wachovia Securities. Please go ahead.

Hi, Bruce, just to follow-up on the JV. So it hasn't been expanded yet, but you're looking to expand between $100m and $200m, correct?

That's correct.

OK, and in terms of a timeframe, it's kind of hard to say?

No, I think we'll be finally wrapped up and inked on it within one week.

So it wouldn't be unreasonable to think that as soon as you have this JV set up, you could start pulling the plug on potential acquisitions that you had in the pipeline for, I don't know, 60, 90 days already?

That's correct.

OK, thanks a lot.

We have a question from [Mike Curis], MH Capital. Please go ahead.

Hi guys. Forgive me. I'm a little bit new to the story, and really what I've heard is that some shareholders who have been watching you for a while, and some institutions who have been watching for a while, and some brokers, et cetera, who were watching you for a while are very disappointed by the pricing in the deal. It sounds as if the deal closes May 2nd. Forgive me for asking maybe what is a stupid question, but could you possibly, under the terms of the agreement, go back to Morgan Stanley, et cetera, and get a better price, given that most of your shareholders seem rather, forgive me, angry about this? And at least, at a minimum, make sure that their stock doesn't come back on the market, because it sounds like everybody's also afraid that, you know, some stock might come back on the market, and people will take quick profits.

I think- let me respond, firstly, going back-- they have executed purchase agreements for the stock at the price that was announced. That's the normal procedure, when you price these issues. They then close up three days later. It's the normal transaction in that particular respect.

Again, the-- we would have liked to done it for more. I don't think at this point time, with executed agreements, that sort of thing can take place, would not take place, and I think there's also the consideration-- you know, unlike a lot of issues, I don't care if they're overnights or public trading, sometimes, in many of those type of public issues, there are people that generally take stock, that take it to then flip it out rather quickly. They hope to do it against a maybe a supporting underwriter type of consideration. Each of these institutions was aware that these were shares being held for what they consider to be an advantageous position. I think they are looking forward to seeing us get back more in line with our peer group, from the standpoint of ratios, dividend yields, and so on and so forth, and see the opportunity to benefit quite handsomely from that. So you're not talking about a normal type of an overnighter or a public trading situation, where they will flip it just for the benefit of maybe taking a reduced commission type of situation, coming from the underwriting firm. So it's different in that regard.

But does that mean that nobody got, like, a 100,00 shares that can flip or anything like that?

No. Basically, what we're talking about seven very large orders, some a lot larger than others, but all seven of the orders being quite large. Purchases, I should say. They're not orders at this point. They're purchases.

OK, thank you.

If there are any additional questions, please press the one at this time.

All right, operator, if there are no further questions, let must just thank everybody that's on the call. The executives here at the company would be available for any further clarifications that anyone would need, and thank you very much. Operator, are you there?

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