芬塔 (VTR) 2004 Q4 法說會逐字稿

Welcome to the fourth-quarter 2004 Ventas earnings conference call. My name is Ann Marie, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. T. Richard Riney, Executive Vice President and General Counsel. Please proceed, sir.

Thank you, Ann Marie. Good morning, and welcome to the Ventas conference call to review the Company's announcement yesterday regarding its results for the full-year and fourth-quarter 2004. 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 risks, 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 31, 2003, 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 as 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.

Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure are available in the investor relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman, President and Chief Executive Officer of Ventas. Debra?

Thanks, Rick. Good morning to all of you. Thanks for joining us for the Ventas 2004 year-end earnings call. Today I'm joined by Rick Schweinhart, our CFO, and Ray Lewis, our Chief Investment Officer, as well as other Ventas colleagues. During the call today which will be a little bit longer than usual, I will provide a summary of our accomplishments for the year, describe our diversification progress, discuss our FFO guidance and dividend increase, comment on our Kindred portfolio and reimbursement trends, outline the Kindred master lease reset right process, and provide our outlook for the year. Following my comments, Rick Schweinhart will report on our financial results. And after Rick's comments, we will be happy to answer your questions.

Last year was another productive and eventful year for Ventas. We continue to be focused on building lasting value for our stakeholders. During the year, we closed over $400 million of new acquisitions in the senior housing and healthcare sector. We remained focused on profitability and grew normalized FFO per share by 17% to $1.80 per share. We improved our credit rating, lowered our cost of debt significantly, and maintained a strong balance sheet. We completed two attractive dispositions with our principal tenant, Kindred Healthcare, at year-end. We continued our excellence in corporate governance, receiving a 99th percentile ranking from ISS, and we also added another independent director to our Board, respected hospital executive Chris Hannon.

For the year, we delivered total shareholder return of 31% and over 59% compound annual return for the last five years, making Ventas the best performing REIT in the Morgan Stanley REIT index during that period. And finally, we increased our enterprise value to over $3 billion, which qualified us for inclusion into the Russell 1000, an index of the largest 1000 publicly traded companies in the United States.

Since our third-quarter earnings call, we've closed over 87 million in new acquisitions. They represent most of the $100 million dollars of pending acquisitions we disclosed to you in October. With these investments, we've now increased our rents derived from private pay, nongovernment reimbursed facilities to 16% of our total current annualized revenues. We've also reduced our Kindred rent concentration to 76% of our total current annualized revenues. And finally, we've increased our non-Kindred assets to 65% of our total gross asset value.

While we grew this year, we kept a strong balance sheet and drove down our marginal cost of debt. With our bank deal in place at LIBOR plus 125, significant capacity on our revolver, our bonds trading in the low 6's, no exposure to floating-rate debt, and our low overall leverage, we should be able to continue to grow and diversify accretively in 2005. We expect to deliver strong FFO growth again in 2005, due to our industry-leading internal growth from our master leases, as well as from external acquisition activity. Our investment pipeline remains vibrant, and we intend to continue executing our strategic growth and diversification plan this year.

As our sector has become more attractive and predictable, and other real estate investment yields have declined, cap rates for our asset classes have fallen too. Yet we remain confident that we will find a way to deliver value to our shareholders again in 2005. With that in mind, we've today reaffirmed our 2005 normalized FFO guidance of between $1.89 and $1.93 per share. As in the past, we have not included any acquisition activity, capital events or dispositions in our 2005 FFO guidance. The quality of our FFO should remain high in 2005. Our real cash flow from operations during the year should approximate our reported FFO results. This cash flow funds our investment strategy and also supports our dividend payments to you.

The Ventas Board of Directors has increased our dividend by 11% to $0.36 per share for the first quarter of 2005. This indicated annual dividend level of $1.44 per share represents approximately 75% of our expected 2005 normalized FFO. The dividend increase follows through on our commitment to share our increasing cash flow with you. It should also convey our confidence in our future cash flows, our assets, our tenants, and in our future.

Next I want to share some specifics about the reliability of our future rent stream. Focusing on our master leases with Kindred, our core portfolio of skilled nursing facilities and long-term acute care hospitals remains highly productive. The EBITDAR to rent coverage in our Kindred portfolio is excellent at 1.8 times after a full 5% management fee. The EBITDARM to rent coverage is also superb at 2.4 times. These coverages are above market and show that there is strong underlying operating cash flow in our assets to support future rent payments to us.

In addition, Kindred's credit quality continues to improve. Currently Kindred enjoys over $1 billion in equity value, and recently announced a great fourth quarter. Cash flow from operations at Kindred totaled $268 million for the year. Kindred also announced that it expects its 2005 corporate EBITDAR to approximate $540 million compared to about $260 million in expected fix charge obligations. In short, Kindred has become a credit-worthy and desirable tenant.

A few words on reimbursement. First, it's important to remember that reimbursements for SNF and LTAC has been rising over the past few years. Skilled nursing providers received a 6% and a 3% increase in Medicare rates for 2004 and 2005 respectively. Medicaid rates this year have been up about 5%, and even more if you take into account the impact of provider taxes. LPACs received a 6% to 7% Medicare rate increase July 1, 2004, and CMS recently proposed a net 5.5% increase for the year beginning July 1, 2005. Against this backdrop, we expect that reimbursement for our two major asset classes will continue to be in an accessible range in 2006.

As you know, the President's budget calls for reductions in Medicare reimbursement to SNF providers totaling 1.5 billion for fiscal year 2006. And MedPAC recommends again this year that nursing homes should not receive an annual cost of living increase. Finally, the federal government is seeking to reduce or at least reform Medicaid payments to the states. We, like everyone else, must wait and see what happens in Washington. We expect uncertainty over SNF rates to last into the summer and until the budget is finalized. But again, it is our current expectation that reimbursements for nursing facilities will remain relatively stable when all the dust settles. Regardless of the outcome, Ventas rents won't change and will still be reliable, increases in LPAC reimbursement rates should mitigate any margin shrinkage for the SNF in our Kindred portfolio, and our major tenants have the financial strength and operating talents to manage through a fluctuation in reimbursement.

Before I conclude, I want to discuss the reset rights contained in our Kindred master leases, now that January 2006 is just around the corner. Many of you have asked us about the value of the reset rights and the process for determining fair market rental under the leases. We believe that based on currently available information and market factors, if we were entitled to and did exercise the reset right now, our Kindred-based rent would increase perhaps materially over current levels. Recall that the reset right is a unique one-way right built into our Kindred master leases that allows Ventas to increase our Kindred rents to market. This reset right was an important element of Kindred's complex multi-party restructuring in 1999 to 2001.

Then Ventas shareholders contributed more than $500 million to Kindred's successful reorganization. We crafted the reset right as an innovative REIT compliant way for our shareholders to benefit from the expected recovery in Kindred and in the long-term care sector. Here is how we expect the reset right to work. We can give a reset notice under the leases as early as January 2006. At that time, Ventas and Kindred have 30 days to work out a mutually acceptable fair market rental for our property. If not, Ventas will select a qualified healthcare real estate appraiser. Then Kindred will do the same. The two appraisers will appoint a third similarly qualified appraiser. The third appraiser will view the work and his conclusions are final on the parties. His job will be to determine fair market rental and fair market escalations for each of our four original master leases.

Simply stated, fair market rental is what a willing tenant would pay a willing landlord to rent our facilities in an arm's length transaction. The master leases provide a roadmap for the appraiser, which we believe most closely approximates the income appraisal method. While other factors may be considered, we believe that the appraiser will have two key conclusions to reach. First, what is market EBITDARM for our assets? That is EBITDAR before deductions for overhead or management fees. The appraiser is likely to start with Kindred's historical performance, then adjust the results based on what is typical in the marketplace. Or stated another way, how much EBITDARM other good operators could generate in our properties.

So, for example, if Kindred is performing extremely well at a particular site, the appraiser may reduce margins for that facility in determining market EBITDARM if he does not believe another operator would perform as well there. But conversely, if Kindred is underperforming the market at a facility, the appraiser is likely to increase market EBITDARM for that asset. The appraiser's conclusion on market EBITDARM will be the numerator of a fraction, and the first of his two key conclusions.

Next, the appraiser will determine what market coverages are for our healthcare assets. We believe he will look at how sale leaseback transactions for similar assets are being priced currently in the market. For example, if the appraiser determines that market EBITDARM coverage is 1.5 times, then a facility with $150,000 in annual market EBITDARM would have a market rent of $100,000, 1.5 to 1. If the existing base rent on the facility was previously $75,000, then rent at that facility would increase by $25,000. Obviously, in this example, the facility would still be profitable to Kindred.

Finally, the appraiser will provide Ventas with four sets of numbers; proposed rent for master leases one, two, three, and four. He will also specify a new annual market rent escalation. Ventas will then choose on a lease-by-lease basis whether to accept the proposed rent and escalation. If we do not like the appraiser's numbers, we can simply reject them and continue to collect our current rent and annual 3.5% escalation. There is no downside risk in the reset process for Ventas.

Ventas can accept the new rental and escalation rent for one lease or more than one lease. We will make our decision at the time, depending on the appraiser's conclusion and our judgment about discounted cash flows, our growth profile, and other factors. If we give the reset notice in the first half of 2006, the new rent would be effective in July 2006. We intend to maximize the value of the reset right for the benefit of Ventas shareholders. Assuming that we receive full value, we would certainly prefer to do so in a way that is most positive for Kindred. Because the companies have worked together to complete several transactions that created shareholder value for both sides, we can imagine the scenario where the reset right is consensually resolved by the Company's management teams.

However, it is also possible that the reset right will be determined through the appraisal process. Either outcome is acceptable to us. The value of the reset right remains speculative and is dependent upon market conditions and facts at the time of determination. Therefore, it is premature to give you guidance on our expectations of value at this time, but we very much look forward to doing so when we can be more specific.

Moving on to our 2005 outlook, we're confident and optimistic about this year. Every company has certain challenges and we are not exempt. But we work hard to remain on top of our business and to identify and manage issues as they arise. This year we expect to make attractive acquisitions across the healthcare and senior housing spectrum, with a tilt toward private-pay asset classes. We expect to grow our earnings and our cash flows, engage in selective opportunistic divestitures, lower our incremental cost of borrowing, monitor our assets and our tenants, continue to follow best practices in corporate governance, maintain a strong balance sheet, and retain and motivate our excellent team. As a result, we believe that Ventas will once again deliver superior risk-adjusted returns to our shareholders.

Now I'm pleased to turn the call over to Rick Schweinhart to review the financial results in detail.

Thank you, Debbie. For the fourth quarter, normalized FFO per diluted share increased 18% to $0.47 compared to $0.40 cents for the fourth quarter last year. Normalized FFO for the fourth quarter totaled $40 million compared to $32 million for the fourth quarter last year. The $8 million increase is attributable to $12 million of revenue increases offset by an increase of $500,000 for property level expenses due to our 2004 acquisitions of medical office buildings, $200,000 increase in combined general, administrative and professional fees, $2 million increase in interest expense, and the remaining decrease of $1 million is due to the net of income from discontinued operations and the swap rate.

GAAP net income for the quarter was $47 million, or $0.55 per diluted share, compared to last year's $77 million or $0.96 per diluted share. Excluding discontinued operations, GAAP net income for the quarter was $27 million or $0.31 per diluted share, compared to last year's $50 million or $0.18 per diluted share. Last year's net income was reduced $5 million for the previously mentioned swap rate. The gain on sale of assets to Kindred was $19 million this year on sale of two assets, compared to $55 million last year on the sale of ten assets.

Rental revenue and interest income for the quarter totaled $62 million, compared to $50 million last year. The increase was due to the May 1st Kindred escalators which added $1.6 million, the first-quarter ElderTrust merger and Brookdale acquisition, which added $7.4 million, and the second through fourth-quarter acquisitions which added $3.1 million. Interest expense increased $2 million from the fourth quarter of 2003 to the fourth quarter of 2004, due primarily to acquisition borrowing, offset by a decrease in our effective interest rate due to a 125 basis point pricing improvement in our new revolving credit agreement.

Items of note on the balance sheet compared to the September 30, 2004 balance sheet are, real estate investments increased $38 million, reflecting our fourth-quarter 2004 acquisitions of $43 million net of sales. Debts decreased $11 million from $854 million at September 30th to $843 million at December 31, 2004, principally due to the proceeds from the sale of assets. Note that $9.5 million of the sale proceeds were escrowed for a 1031 exchange. During the quarter, we issued $125 million of 6 5/8% senior notes. The proceeds were used to pay down the revolver. The revolver had an outstanding balance of $39 million at year-end. Fourth-quarter acquisitions were funded with operations and, to a lesser extent, from the DRIP.

Weighted average diluted shares increased from $81.2 million in the fourth quarter of 2003 to $85.2 million this year, reflecting our March 2004 two million share equity offering, option exercises, and continued interest in our DRIP, which produced $5 million last quarter. Outstanding shares at December 31, 2004, were 84,599,000. Our recent acquisitions are summarized as follows; real estate assets increased $43 million, annualized rents on those assets totaled $4.1 million or $1 million per quarter, but due to the timing of these acquisitions, only $300,000 of this revenue was recognized in the fourth quarter. These properties are expected to yield over 9% net of property level operating expenses for the medical office buildings.

Now, let's focus on the year's results. For the year, normalized FFO per diluted share increased 17% to $1.80 compared to $1.54 last year. Normalized FFO for 2004 totaled $152 million compared to $124 million last year. The $28 million increase is attributable to $42 million of revenue increases, offset by an increase of $1.3 million for property level expenses, due to our 2004 acquisitions of medical office buildings, $1.8 million increase in combined general, administrative and professional fees, a $5 million increase in interest expense, offset by a $5 million decrease in interest on the United States settlement. And the remaining decrease of $11 million is due to the net of income from discontinued operations and the swap rate.

Excluding discontinued operations and gains on the sale of assets, GAAP net income for 2004 was $100 million or $1.19 per diluted share, compared to last year's $96 million or $1.20 per diluted share. If you further exclude last year's reversal of a contingent liability of $20 million, the gain on the sale of Kindred stock of $9 million, and the $5 million swap rate, net income for 2004 would have been $100 million compared to $62 million. The gain on the sale of assets was $19 million this year compared to $52 million last year. GAAP net income for 2004 was $121 million or $1.43 per diluted share compared to last year's $163 million or $2.03 per diluted share.

Rental revenues and interest income for 2004 totaled $237 million, compared to $195 million last year. The $42 million increase was due to the May 1st Kindred escalators which added $6.3 million, the July 1, 2003 Kindred master lease amendment, which added $4.2 million, and 2004 acquisitions which added $32.1 million. In the last year, real estate investments have grown $427 million, and debt has grown $203 million, consistent with our long-term capitalization strategy of 50% debt and 50% equity.

Other items of note on the balance sheet compared to 2003. Real estate investments reflect the profitable disposition of assets to Kindred. Cash in 2003 was held in anticipation of the ElderTrust and Brookdale transactions which occurred in early 2004, and escrow deposits include $9.5 million related to a Section 1031 exchange. At December 31st, our balance sheet remains strong with a net debt to EBITDA ratio of 3.5 times. Our debt to capitalization at the end of the year was 27%. Weighted average diluted shares increased from 80.1 million in 2003 to 84.4 million this year, reflecting our March 2004 two million share equity offering, option exercises, and continued interest in our DRIP. The DRIP produced $13 million in 2004. Beginning in March 2005, the DRIP discount will be 1%.

The consolidated statement of cash flows can be recapped as follows. Total cash sources for 2004 were $500 million. Net cash provided by operating activities of $150 million, together with $25 million of asset sales and receipt of mortgage principal payments, plus $82 million of stock issuances, $125 million of senior note issuances, $39 million of revolver borrowings, and $79 million of cash on hand combine for a total cash in of $500 million. Cash uses totaled $500 million, composed of purchases of real estate of $324 million, which is net of the Sim (ph) debt, debt repayments of $67 million, dividends of $104 million, and payment of a financing cost of $5 million.

Finally, we are also affirming our 2005 normalized FFO guidance of $1.89 to $1.93 per diluted share. The acquisitions done in the fourth quarter of 2004, and thus far in 2005 are in line with the $100 million of assets under letter of intent announced when we introduced guidance. Consistent with our historical practice, we are not doctoring any additional acquisitions, dispositions, or capital transactions into our numbers. Our guidance also excludes the impact of gains and losses on the sales of assets, the future impact of non-cash swap ineffectiveness expense, and other non-cash items.

The main take-aways for 2004 are that FFO grew nicely. We made huge strides with tenant and asset class diversification. Effective interest cost continued to improve, and the balance sheet remained in excellent condition. Back to you, Debbie.

Thanks, Rick. Ann Marie, would you please open the call to investor questions?

(OPERATOR INSTRUCTIONS) Tony Howard with Hilliard Lyons.

Good morning and congratulations on a good year, and we appreciate the dividend increase.

Thank you, Tony.

A clarification, Debra. What was the percent that private pay went from and to (indiscernible)?

On a run rate basis, private pay is 16%, 16, of our annualized total revenues.

Do you know what it was last year?

Well, not too long ago, it was zero. So we've made tremendous strides in balancing our portfolio with some private-pay assets.

Second question is on the loans receivable; it's been kind of stuck at 25 facilities. Where do you expect that part of your business to go?

Our loan receivable is really one loan, and at the present time the balance of that is about 12.4 million.

And where do you expect that to go? It has not grown recently.

Over time, that will ebb and flow as we make investments. We expect that particular loan at some point to go down this year, but we may make other mezzanine type investments and other secured mortgage loans as part of our business.

Thank you.

Thank you.

Jerry Doctrow with Legg Mason.

Good morning. I had a couple of things. One, and if it's too complicated to do online, we can do it off line. But just the exact timing and yields on some of these investments, you sort of said north of 9%. We've had general timing, but wanted to try and zero in on that.

Sure, Jerry. This is Ray Lewis. I think for the acquisitions that we made in the fourth quarter of last year, you should assume a weighted average closing on those at the end of December. And then for the acquisitions that were made so far this year, you should assume a weighted average closing on those transactions in the middle of January. As far as yields go, you should assume yields at or around 9%.

Then just sort of on a go-forward, Ray, I guess while I've got you, you guys have been successful and I congratulate you for it on your finding some private-pay investments here in what I think everybody's been categorizing as sort of a more competitive market. Can you just give us a little more color on how you see the environment out there and rates, that kind of thing?

Sure. You know, I think you are right in characterizing it as a competitive environment. Yields are ranging between 8% and 10% on average for quality assets with good operators and market type coverage. By property type, independent and assisted living are the most competitive and are going in lease yields generally between 8% and 9% on average. However, large portfolios which are actively marketed could be 100 basis points or more below that range. Skilled nursing leases are generic pricing between 9% and 10% going in yields, and then medical office we're seeing between 8% and 9%, but again, larger transactions in that space are trading below the range there. And then hospital leases at or around a 10% cash yield, and then we're seeing escalators sort of between 1% and 3% across the board on those deals.

I think you said earlier or Debbie said earlier that the pipeline you're still feeling good about, relatively robust. Is that --?

Yes. The pipeline is strong. We're working on a number of opportunities, both individual transactions and portfolios, consistent with the types of transactions that we've done up until this point. I think looking forward, Jerry, I think we will see an increase in the velocity of transactions coming to market this year. So the pipeline looks good and I expect it to build from there.

Would you want to suggest what market coverages these days are for (indiscernible)?

Well, I can take that question. I think that is pretty consistent over time. We see EBITDAR coverages going in at about 1.1 to 1.2 times, with EBITDARM coverages being maybe 0.35 above that.

Great. One or two other things if I could, just quickly. I guess debt costs, you did some of the refinancing right in this quarter. So I was just wondering if you could give us a little sense of what you think debt costs will be sort of going forward on kind of a run rate basis? And then also just thoughts on additional capital raises, whether you'd be giving any more terming out or when do you see common perhaps coming?

Jerry, what we're seeing, obviously, is interest rates that are quite favorable. We did $125 million at 6 5/8. It's trading down lower than that. It's down almost 4/10, 5/10 a point below that. So we're seeing a very interesting market with regards to availability. The revolver, obviously, is very well priced at the 125 basis points over LIBOR, so we're very happy with that. We're at a very low rate on the revolver, a low amount on the revolver right now, having just paid off the bulk of it. So the next $200 million in acquisitions can be done on the revolver, and then we'll have to do something else which will probably be going to the debt markets and/or perhaps something on the equity side as our ratios reach from 3.5 up to 4.0.

Great, thanks.

Robert Mains with Ryan Beck.

Good morning. New company, new phones; still figuring them out. A couple questions. First of all, thanks for the discussion of the reset. Just I want to clarify one thing. You said you can accept or reject the reset on a lease-by-lease basis. That's master lease-by-master lease?

Yes, master lease-by-master lease. And for this purpose, master leases 5 and 1 are considered one master lease. So there are four sets of numbers that we will get to choose on.

Thanks for that clarification. Just wanted a little bit of detail on the recent acquisitions. First of all, the ALF that you bought in Massachusetts was like 174,000 -- that's ALF and ILF, I guess -- 174,000 bed. Could you talk a little bit about some of the (indiscernible)?

This is a recently-developed, about a four-year old independent living and assisted living facility in a high-income suburb of Boston. The property is stabilized at occupancy in excess of 90%. It's a high-end facility and is a strong performer.

So it sounds sort of like the one that you bought in the third quarter in terms of high-end?

I would say that would be a comparable facility.

And then anything you can tell us about the 49 million that you've invested so far this year, sort of size of the buildings or any other characteristics of them?

The 49 million that we've invested this quarter, as we've said, there's an assisted living facility in there, two medical office buildings, a hospital -- I'm sorry, three medical office buildings and a hospital. The properties are all more recently constructed, all in good markets, and I think priced pretty appropriately relative to other comparables we've seen in the marketplace.

You've been doing a fair number of these kind of one-off type transactions. How much competition are you seeing for the smaller deals?

Well, our investment strategy has been to create a very wide funnel so that we're able to select from a number of different opportunities and find the ones that provide the best risk-adjusted returns for our investors. So what we've been able to do to a certain extent is to find a way to compete away from the competition, although as I discussed earlier, when we see the larger transactions, those tend to be actively marketed, and we will be competing against more competitors for those deals. But the smaller ones have generally been situations where we've been able to deal off-market.

So not auctions.

Not auctions, correct.

Okay, great. That is very helpful, thanks a lot.

Rich Anderson with Maxcor Financial.

Good morning. Do you have any comment on what you have in the LOI pipeline today in terms of acquisitions?

Well, we obviously still have to close the balance of the acquisitions that we had previously announced, but once we go forward this year, we would expect to follow our consistent practice which is to wait until we've actually completed transactions to give the market guidance. But as Ray said, we're working it hard and we see a lot of attractive opportunities.

In terms of the market coverages that you cited previously, does that factor in at all any sort of expected or potential reduction in Medicare or Medicaid cuts next year?

Well, the coverage going in that I quoted in terms of deals being done in the market does not factor that in. Our research shows that over long periods of time as reimbursement has fluctuated, you do see when reimbursements get cut, sometimes you see coverages getting skinnier going in, in anticipation of future increases. And so we think that whether or not there is some fluctuations in Medicare rates for 2006, that's not going to have a major impact on the value of the reset right.

Right, because it would affect you as well as everybody else.

Correct.

Last question is, I think you sort of went through this, but what sort of possible recourse does Kindred have if in the appraisal scenario, the appraisal comes back not to their liking? Is their only recourse just to go to the negotiating table with you?

Well, yes, but at that point when the appraiser comes back with the numbers, it's a thumbs up or thumbs down from the Ventas guide, and that is final.

So you could choose we don't want to negotiate; this is what we're going to take, period?

Once the appraiser's numbers comes back, that is it unless the two parties decide for their own reasons that they would prefer a different outcome.

Thank you very much.

Thanks a lot.

Larry Raymond with Credit Suisse First Boston.

My questions have been answered. Congratulations on your success.

Thank you, Larry. We will try to keep it up.

I'm sure you will.

(OPERATOR INSTRUCTIONS) A follow-up from Jerry Doctrow with Legg Mason.

I was just wondering, I know you don't want to tell us maybe specifically what you're going to do about the reset, but if you could maybe go through some of the factors that would lead you to decide to say pull the trigger January 1, '06, versus sort of a delay and what you see the pros and cons. Is it advantageous to sort of do that early to sort of get you through the negotiation window quickly, or is it better to kind of, particularly if you're having some negotiations, sort of wait some and see whether that plays out before you pull it? If you could give us some feel for what the timing consideration?

Okay, Jerry. We fully intend at this time to give the notice in January of '06, assuming it's not resolved before that date. If things change, of course, we would assess that, but right now we have every expectation of pulling the trigger January of '06.

And (indiscernible) get a little funding cut on the nursing homes.

Absolutely, because there are many, many factors that go into value, and we do not think it's going to have a huge impact on the value.

Great, thanks.

Hank Ronch (ph) with Liberty Mutual.

Good morning. Could you give us an indication of what you think is driving the increased velocity in deal flow?

I think it's our crack investment team, but I'll let them answer differently.

Well, I'd like to take credit for that, Debby. I think the market conditions that are driving it are really -- there's been a lot of improvement in our sector as the assisted living and independent living facilities have absorbed. There's been no new construction coming online. So the underlying fundamental performance of the facilities has continued to improve. At the same time, there were a number of private equity investors that made significant investments in the operating companies in the '96, '97 time frame. Their fund lives are beginning to mature, and I think they're looking at the low interest rate environment, the performance of the underlying properties, and the timing of their funds. And it's all sort of coinciding at a good time for them to transact and create liquidity for their investors.

The other question that I had was about cash flow from operations. It seemed a little bit lower than I would have expected for the quarter. Was it just a seasonal thing? Did it relate to the asset sale or acquisitions? What is going on?

From our operations?

Yes, cash flow from operations for the year was about 150 if I pulled the number correctly. I would have expected a number slightly higher than that.

I guess we're a little surprised about the question, because it's right in line with kind of the earnings. Obviously --.

It is growing.

It doesn't appear odd to us.

Okay. Am I incorrect, because it appears to me that cash flow from operations was actually down slightly year-over-year. I know it was up quite a bit in the third quarter. I just wondered if there were any timing things in it that you were aware of, or it's just the way it fell out?

Obviously, there's always a, we'll call it noise in the number if you look at some of the numbers. But if you go back to the cash flow from operations, it's right where it should be for the quarter. Another way of saying that is there is really nothing increasing or decreasing on the balance sheet that should cause that to happen.

Okay, thank you.

Thank you.

A follow-up from Jerry Doctrow with Legg Mason.

Just I guess one other thing, since it seems like we have a little time here. With the Beverly transaction out there and some of these deals in the nursing home space being done in a fashion where people are essentially wanting to borrow essentially on an asset-by-asset category rather than on a master lease. You know, they're breaking them all up and to minimize their liability cost. I was curious, is that sort of the deals -- are you seeing some of those deals out there, how you would think about them in terms of underwriting and stuff? If somebody broke up Beverly and came to you with 100 individually licensed facilities to do, how would you think about that kind of investment?

Okay, Jerry. Well, first of all, we love it that some of the smartest investors in the world like nursing homes, because we do believe in the asset class and we think it has a good future. And the transactions at Mariner and Beverly are demonstrating that. If someone came to us with a Beverly type or Mariner type transaction, we would look to be opportunistic and certainly would look at such a transaction. We have a risk profile that we feel very comfortable with, and it's something that is a good investment tenet of our company. So we would be cautious and thoughtful, I think, about how we would participate, if at all, in structures like that. But we certainly are open to finding ways to make money for shareholders, and if we saw something opportunistic that fit with our strategic plan, we would certainly look at it.

I guess I was wondering if you could give us any color, and maybe you haven't gotten down to this level of detail, but sort of how much risk do you really think gets added by the structure where each facility is licensed separately and you don't have kind of the corporate deep pocket on the other side?

Well, it really does depend on how the deals are structured and exactly how much funded reserves there are in the operating side, how the operators capitalize and all of that. So it is very hard to say. It's a case-by-case analysis. And as you know, I think as a lawyer myself and as someone who went through this PropCo-OpCo separation with Vencor and Ventas, we're highly subsidized and I think very thoughtful about those risks are, but also how they can be mitigated.

Great, thanks.

You're welcome, Jerry. Thanks for joining.

A.J. Rice with Merrill Lynch.

Two questions probably, I guess. First, in the press release I know you're talking about the deal that was done that includes, it looks like the major asset in there was an acute cure hospital, I'm guessing. I don't know how big the office buildings were, but can you give us some more flavor; did that come out of a system where there might be more opportunities down the road, or is that -- would you view that as a one-off deal? Just maybe give us some more color on that if possible.

That hospital was a $21 million investment. It's in Lexington, Kentucky, right in our backyard. And that transaction really arose out of a series of relationships with a private equity sponsor, the operating company seller, as well as the new buyer. So we like the hospital space and hope to participate more in it.

Debby, I know you mentioned and you spent some time talking about that there are more people looking in some of your traditional areas of long-term care, assisted living and skilled nursing. Are you spending more of your time looking outside of that sort of box and into other areas? I don't know if you'd care to give us some flavor for -- I know you said you wanted to develop your nongovernmental pay base. Can you maybe give us some flavor as to whether we're likely to see some significant transactions outside of that traditional area of focus this year?

Sure. Our basic footprint, as you know, is to participate and invest in assets along the continuum of healthcare and senior housing. So independent living at the low acuity level all the way through hospitals and long-term acute care hospitals at the high acuity level and everything in between. Our job is to deliver consistent superior risk-adjusted returns for our shareholders. As we've said, as these assets have become more attractive and more valuable, there's more competition for them. So I think throughout the year, we will spend time perhaps finding if we could capitalize on adjacent opportunities within the healthcare and real estate area, but we expect to really continue to play in our principal footprint, which is independent, assisted living, skilled nursing hospitals, etc.

Thanks.

Rich Anderson with Maxcor Financial.

Sorry about participating in the re question fray, but one more for you. Why is it the Ventas coverage EBITDARM to EBITDAR comes down 60 basis point, where you cited the market coverage comes down 35 basis points?

Because we typically impute a 5% (indiscernible) fee, and market might be a little bit less than that, so --.

Thank you.

It also depends on whether it's a hospital or a nursing home.

Fair enough, thanks.

You have no further questions at this time. I'd like to turn the conference back to management for any closing remarks.

We want to thank you all for joining the conference call. We look forward to speaking to all of you soon, and thanks again.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a nice day.