芬塔 (VTR) 2005 Q2 法說會逐字稿

...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 times of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to risk and uncertainties described from time to time in the SEC reports filed by the Company.

The Company believes that funds from operations is an important supplemental measure of operating performance because it is predicated on the operating funds flow analysis and is widely used by industry analysts as a measure of operating performance for equity, REIT. The Company therefore disclosed funds from operations, although it is a measurement that is not defined by accounting principles generally accepted in the United States.

The Company defines funds from operations as income before extraordinary items adjusted for certain non-cash items, primarily real-estate depreciation, less gains, losses on sales of facilities. Measure may not be comparable to similarly titled measures used by other REITs.

Consequently, funds from operations may not provide a meaningful measure of the Company's performance as compared to that of other REITs. Funds from operations does not represent cash generated from operating activities as defined by accounting principles generally accepted in United States. Funds from operations does not include changes in operating assets and liabilities and therefore should not be considered as an alternative to net income as the primary indicator of operating performance or cash to flow as a measure of liquidity.

(OPERATOR INSTRUCTIONS)

I would now like the call over to Doug Pasquale, President and CEO. Sir, you may begin.

Good afternoon. This is the Nationwide Health Properties second quarter earnings call. We thank you for your interest in NHP.

Joining me for today's call are Abdo Khoury, Chief Financial and Portfolio Officer, Don Bradley, Chief Investment Officer, David Snyder, Vice-President and Controller, and Brad McKown, our new Vice-President of Portfolio Management.

Notable headlines since our last call in early May include the appointment of Abdo as NHP's Chief Financial and Portfolio Officer and the promotion of David Snyder as Vice-President and Controller. Both of these appointments are very well-deserved and I'm confident that our shareholders will benefit from both of these gentlemen's expanded responsibilities for many years to come.

To further enhance and extend our portfolio management endeavors, we added veteran Brad McKown from Beverly Enterprises to our lineup. Abdo will fill you in more about Brad's background. but suffice it to say we are pleased to have Brad with us.

Our 2005 second quarter and year to-date financial results reflect substantial revenue and SFO growth relative to 2004's comparable periods. Accordingly, we have increased our 2005 guidance range, excluding impairments, to between $1.76 and $1.80 per share. Year to date, we have completed 214 million of new investments and raised 250 million of capital. While these facts are not necessarily indicative or predictive of how we will finish 2005, we are nonetheless pleased with these midyear milestones.

Our investment strategy will continue to reflect our interpretation of dynamic market conditions, specific investment opportunities, our strategic goals in view of long-term asset values and opportunities. Similarly, our capital strategy will support our investment in general business requirements.

Now we will give you the details supporting the headlines, starting with David.

Thank you, Doug. We were pleased to report diluted FFO of $0.45 per share for the quarter compared to $0.42 in the second quarter of 2004. Diluted FFO per share for the second quarter 2005 before impairments was $0.46 per share. On a year to date basis, diluted FFO per share was $0.78 per share, the same as in the prior year, while diluted FFO per share before impairments was $0.90 in 2005 versus $0.78 per share in 2004.

In absolute dollars, diluted FFO before impairments increased $5.4 million, or 19%, for the quarter, and 13.7 million, or 27%, year to date. This improvement was caused by investments of over 380 million in 2004 and over 214 million to date in 2005. The impairment of 0.9 million during the quarter related to the write-down of a facility in Texas. Abdo will discuss the circumstances in more detail in a few minutes, but I will say that this is what we consider a positive impairment, as it was caused by the replacement of a 42-year old facility with a much newer one.

Our funds available for distribution continues to exceed our FFO because our cash rent is higher than our GAAP rent. Cash rent exceeded GAAP rent by 352,000 for the quarter and by 652,000 year to date.

Our revenues for the quarter were up 8.7 million, or 19%, from the same period last year, and for the six-month period, they were up $19 million, or 22%. This revenue improvement is due to the investments I mentioned a moment ago and to additional rent increases throughout the portfolio.

Interest expense increased $2.4 million for the quarter and $4.4 million year to date, largely due to the issuance of $250 million of 6% notes in May, the acquisitions discussed earlier that increased our credit facility balance prior to the note issuance, the assumption of around $70 million of debt during 2005, and increases in interest rate on our unsecured, revolving credit facility.

The full effect of the $250 million notes won't be felt until the third quarter, when a full quarter of expense will be reflected, compared to only a half a quarter of expense in the second quarter. G&A expense was basically consistent with the prior year for the quarter and year to date, and with the first quarter of 2005, excluding the separation charge. We expect that G&A for the quarter should continue to be a pretty good benchmark for the remainder of the year.

Now, over to Abdo.

Thanks, David. This has been a busy quarter for us on the acquisitions and financing front. After closing the JER transaction in early April, we took advantage of the low interest rate environment and issued $250 million of 10-year notes with a 6% coupon in mid-May. This debt issuance, the largest in NHP history, allowed us to replenish our credit facilities, the balance of which has grown to $335 million with the JER acquisition.

We also refinanced the $59 million in secured debt we assumed as part of the pressures of the joint ventures assets, with five year debt at a fixed interest rate of 5.56%. The refinancing results in annual interest savings to NHP of about $1.1 million and extends the maturity of the assumed debt by three years. We currently have $315 million available in our credit facility and very little in the way of debt maturity in the next several quarters. The 14.4 million of debt maturing during the second half of 2005 is all secured and has a rate of 7.6%. We won't have any further senior note maturities until the fourth quarter of 2006,when $63.5 million of notes with a weighted average rate of 7.4% will mature.

Our dividend reinvestment plan continues to be quite successful. During the second quarter, we issued approximately 203,000 shares for net proceeds of approximately $4.5 million, compared to net proceeds for approximately 4.2 million in the first quarter. This brings our run rate to approximately $18 million per year. Our guidance range for 2005 excludes impairments because there is no way to predict these non-cash charges and because unlike rent reduction, they have no impact on recurring FFO.

As a reminder, we modified our guidance last quarter to reflect the fact that we have conformed our definition of FFO to the Nareit definition which caused a reduction in our expected FFO for the year by $0.01. Our updated guidance range for 2005 FFO before impairment is $1.76 to $1.80, which is an increase of $0.06 on the low-end and $0.04 on the high-end. The increase is due, in large part, to fewer purchase options being exercised by our tenants than we had expected, as well as the additional investments we have made since we provided our original guidance in February.

The updated guidance includes the incremental expense impact of the $250 million debt issuance. Most of the unexercised purchase options that we expected our tenants to exercise have open option dates that allow the tenant to exercise the option any time during the remaining lease term. So we believe it is likely that the purchase options may be exercised later this year or in the future.

Now I would like to update you on our progress in the area of portfolio management. First, I would like to tell you about our newly appointed Vice President of Portfolio Management, Mr. Brad McKown, who formally was the Vice President of Acquisition Strategies for Beverly Enterprises, Inc., one of our largest customers. During his 11-year period with Beverly, Brad worked in a number of roles including asset management, acquisitions, dispositions, and finance.

Brad's appointment to this position affirms our commitment to our portfolio management program, and the significant experience at the operator level and background in finance and operations will insure excellent ongoing attention to our portfolio. Brad's appointment also continues an NHP tradition of each officer in NHP having meaningful operating experience.

Second, we continue to make progress on the design and the implementation of our web-based application that will automate a number of our routine portfolio management functions. Third, in addition to building a state-of-the-art infrastructure, we continue to address a variety of issues including compliance with our leases, mitigating FFO leakage, and looking at ways of replacing some of the old facilities in our portfolio. For example, working with one of our tenants during the second quarter, we purchased a facility built in 1989 to replace one of our 42-year old buildings in Texas. After we acquired the new facility, the residents were transferred from the old building to the new one and the old building was closed.

The tenants will pay rent at 10.15% on the new facility, a 3.3 million investment, and will continue to pay the existing rent on our remaining investment in the old facility. This transaction replaces the 42-year old facility with a newer one and significantly improves our tenants' position in the marketplace. The 900th Avenue payment will book this quarter related to the old building that we closed and sold at an auction.

Composition of our portfolio at the end of quarter is detailed in supplemental analyst schedule but I would like to point out a couple of items of particular. To date, options to purchase 11 facilities have been exercised. These options, once closed, will generate proceeds of $23 million in the third and fourth quarter of 2005, and $25.6 million in 2006. They will also generate gains of 6.5 million in 2005 and 11.2 million in 2006. The purchase options with third quarter closing will cause a 500,000 reduction in 2005 revenues and 2.5 million decrease on a full-year basis.

The estimated impact now of 2005 operations of the remaining options that we believe may be exercised is as follows. Could generate up to about 39.6 million in net proceeds that will be available for reinvestment. Could result in gain on sales of up to about 4.3 million. Could cause up to $1 million reduction in 2005 revenues, based on the date of option exercised, and up to a $4 million reduction on a full-year basis.

Of the six leases up for renewal in 2005, we have finalized a renewal of four leases covering 23 facilities and representing annual rent of about $20 million. The two remaining leases up for renewal in 2005 cover five facilities and represent 2.3 million in annual rent. We expect these two leases to be renewed.

In summary, we anticipate total rent reduction due to purchase options, lease renewals and restructurings during the remainder of 2005 of 0.5 million to 3.4 million, which represents an impact to FFO of $0.01 to $0.05 per share and is reflected now in our revised 2005 guidance. Now, to Don for an investment update.

Thanks, Abdo. We had another strong quarter on the investment front with 148 million of quality accretive investments, bringing our total for the year to $214 million. The cornerstone of the quarter was our previously announced $121 million acquisition in May of the entire interest of JER and our Alterra properties joint venture. In addition, during the quarter, we added accretive investments of 27 million at what we consider conservative prices and strong yields in today's market, namely, 85,500 per unit for two assisted living facilities at a blended initial yield of 9.4% with 2.3% estimated annual ups and 36,000 per bed for two skilled nursing facilities at a blended initial yield of 10.3% with 2% estimated annual ups.

Our investment pipeline for our quality skilled nursing facility remains robust. But we are seeing fewer and fewer reasonable independent or assisted living investment opportunities. The apparent abundance of interested investment capital continues to drive yields in these asset classes down to a historically low levels. How long this cap rate compression will last and whether it will spill over in the skilled sector remains to be seen. In the meantime, we are pleased with what we have accomplished so far, and will continue to compete aggressively for new investments and only make those that over the long-term, provide appropriate risk adjustment yields consistent with our underwriting criteria and overall investment strategy. Now, back to Doug.

Thank you, Don. Operator, please open the lines for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Jordan Sadler.

Hey guys. I just noticed going through the schedules that the skilled nursing coverage jumped up nicely from 2 times to 2.3 times, sequentially. Is anything in particular going on there?

Well-- this is Abdo. Basically, I think a lot of our operators have tried to increase and have been successful in increasing their Medicare census. So, they have changed their quality mix. If you look at our percent private pay and Medicare skilled nursing facilities, went up from 34% to 43%, reflecting the change in the Q mix which improved profitability of our operators and improved our coverage.

I guess, Don, in your closing comments you talked about the pipeline being robust. But a lot of competition and we have heard that across the space. But you also said it is not clear if it is going to spill over into SNF, or skilled nursing facilities, at this point. Are you guys active on that front? And what do you think the prospects look like for you guys?

We are certainly actively looking at that. That is what our pipeline consists mostly of right now, in terms of attractive opportunities. And like I said, I'm not quite sure what is going to happen in the pricing in that sector. I am not hopeful that we will be able to get good investments, good yields, but that remains to be seen.

Okay, and the guidance for this year of $1.76 to $1.80 reflects no incremental acquisitions?

That is correct. Just the investments made year to date that we have announced.

And do you have anything under contract at this point?

No.

Okay, and what are you seeing as yields in terms of-for skilled nursing facilities at this point?

Don Bradley. For the one ups and whatnot, you can still see yields ranging all the way up to 12% frequently. That means you are looking at an older skilled nursing facility. We are not quite as attracted to those. Sometimes you get a turnaround facility in that area. To say, state-of-the-art, high-quality, brand-new facilities in well-located markets, you might see the yields come down to 9 or even lower.

And you guys are interested at that level?

If it is high quality and well-located markets and it has a good Q mix and good operations, yes.

Okay. And then lastly, maybe Doug, could you just give some commentary to what you're seeing in the assisted living space right now given your background? It sounds like construction is picking up. Clearly, yields and cap rates have come down way low and it sounds like banks are even getting more aggressive now. Maybe talk a little bit about development.

Sure. That's an important thing to talk about, Jordan. The supply has picked up a little, or excuse me, the new construction, which will lead to new supply, has picked up a bit. American Senior Housing Association just recently published a report that I received in the last few days. And interestingly, it has not picked up yet as much as I think some people think.

Using 2005 projected from this study compared to 1998, which was the peak of the new supply for assisted livings, which was about a little shy of 33,000 units, projected increase in assisted living units this year is expected to be around 7,000 units. So, it represents just under 20% of the 1998 peak. If you look at the peak period for additions to new assisted living, which ran from 1997 to 1998, and take an average of that, the projected new additions to supply in 2005 are still running under 25%.

So, while there has been year-over-year, incremental new construction, it's still nowhere approaching what it was in the peak period of between 1997 and 1999. However, getting to your earlier point, with respect to the cap rate that assets are trading at and the initial rate yield, it does suggest a couple things, I think.

One is, the assets that are trading at low initial rate yields and low cap rates have tended to be a mix of independent living or assisted living, and in some cases, more focused on independent living. And they have tended to be higher quality assets. So not all assisted living assets are created at those low cap rates.

But as the cap rates fall, at some point in time it will trigger a round of new development. But as we have said before, the ramp-up time for that is not instantaneous. It will take some time to occur. But it seems to be that that's starting again. But it will probably be at least a few years out before you're seeing it reach another substantial peak.

Great, thank you. That was it for me.

Thank you.

Your next question comes from Jerry Doctrow.

Good afternoon.

Good afternoon, Jerry.

I just had a couple things. I guess, in terms of some of the nitty gritty, could you just identify the actual closing dates of some of these acquisitions and dispositions so that we can kind of figure out how much was in the quarter and how much more we pick up next quarter? I guess JER, which we may have in a press release, but then the other ones that you specifically did.

JER was named third? Early May on that one.

Okay.

Everything else was pretty much spread throughout the quarter. I don't have them right in front of me, unfortunately.

Okay. We can just circle back on those because it's just helpful to get the modeling. And could you give me a little more color on the asset swap with American Retirement? What kind of assets you gave, what kind of assets you got and sort of how that plays out?

Sure. We had two assets in Houston that were not performing up to the levels of our expectation or the tenant's expectation and through some discussions with American Retirement Corp., we agreed that it would be in their best interest and our best interest to swap these assets. It was two assets that were doing better and have better outlook in the future, and we adjusted the values based on appraisals and stayed 1 million 5 above the value of the ones we swapped to them.

For American Retirement Corp., they can go out and refinance that, maybe, putting some equity and doing some capital restructuring that would work in their favor. And in our end, we had received two properties that will do better in the future and improve our portfolio.

And it's AL on both sides?

Yes.

And on the - what about yield are you getting on the incremental 1.5 million?

We were 9.25. And Jerry, just to be clear on that, that was something requested by ARC. That's not something we went to them with. It was trying to help out a client that saw an opportunity to improve their portfolio situation and we benefited at the same time.

Right, okay. I was curious if you've ever been approached by Beverly or a suitor of Beverly in terms of the potential sale of the company. Again, you've got some leases with them that might be affected, and my sense was there might be some upside there.

To date, we have not been approached by them yet.

Okay.

We acquired Brad.

Well, he must know something. So maybe I should talk to him separately. And just to maybe get a little bit more sort of esoteric about this, and you kind of touched on it, but I guess whoever wants to tackle it-- at least one of your competitors is getting more aggressive about pricing, doing initial yields closer to 7, again on some high quality assets with much higher rent bumps, and is sort of convinced that lower cap rates are here to stay. And that's kind of what they need to do to be competitive.

And you and I would say most other REITs seem to be not comfortable going to that kind of initial cash yield. And I was just wondering how you think a little bit about cost to capital and what is the right criteria in terms of yield and maybe coverage numbers and that sort of thing to get you comfortable?

It's a good question, Jerry, and let us try and approach it both directly and diplomatically. First of all, every situation is different and every company has its own sets of facts and circumstances. So, I think that caveat needs to be stated up front.

We-- with respect to our low cap rates here to stay, I would say-- I would modify that slightly by saying lower cap rates are here to stay. I think that there are excellent arguments that can be made and have been made to suggest that real estate and REITs have come of age and are being discovered and the investor base is much broader and deeper than it used to be.

And that suggests that there probably has been some pricing mechanism that has occurred that will-- probably has legs to it and some longevity to it. Whether or not low cap rates, that is to say, the exact pricing that we see today is here to stay, is, I think, prone and subject to more debate. I personally believe that there is a strong correlation between interest rates and cap rates. And so you have to start asking a lot of questions.

What are interest rates going to do? If you're of the opinion that interest rates, over time, will drift back up and that is our position, then that would suggest that at some point in time, cap rates will go up. Once that occurs, assuming reasonable interest rate increases, will the cap rates remain lower than they were prior to capital being attractive to real estate? We believe that the answer to that is yes. But they may rise from where they are today.

Yes, okay.

Secondly, we have been in certain circumstances, and may well be in the future, more aggressive in our pricing, depending on the circumstances. And the circumstances include a number of things-- quality of assets, how well it fits with our strategic plan, the specific opportunity, where we are at a point in time with respect to both the debt and equity markets and those kinds of things.

What we hope to be able to do is to make sure that we have good coverages going into the investment, and that means different things to different people. We are a little less aggressive than some companies are in that respect and, consequently, depending on what asset class we're talking about, we want a premium to a one-to-one coverage. How much that is again, depends on a variety of circumstances that I'd be happy to numerate if you'd like.

But in the specific situation you're talking about, I think that probably the-- or what I think you're talking about-- the announced one-to-one coverages, it's probably really higher than that, simply because some of the assets are in lease-up and it's not an unreasonable expectation to assume that the assets, based on the quality of that portfolio, will get to that. Yet you can't look at it as just a point in time, either.

Okay.

Did I answer your question?

Yes, I think so. And again, I wasn't looking so much to bash one of your competitors, but just try and understand the thinking because there does seem to be some divergence here in how people are thinking about investments.

But I think a lot of people can have right answers that are just slightly different, too. These guys know what they're doing and I'm sure they've made a very good investment. We probably would not have been able to make that investment for-- we would have chose not to for reasons that are unique to us.

Okay. All right, great. Thanks.

Your next question comes from Philip Martin.

Good afternoon, everybody.

How are you?

Pretty good. Surviving in the hot, windy city here. But a couple questions here. First of all, with regard to purchase options, Abdo, I just wanted to make sure, was that 23 million in '05 and 25 million in '06 right now?

Yes. You refer to the proceeds?

Yes, the proceeds.

Yes.

Okay. So, those are the proceeds.

These are based on the-- what we have to date, in terms of notices of exercise. These are the-- what we expect, 23 million will close in the third and fourth quarter of 2005 and 25.6 million in 2006.

Okay, got you. What percentage of the portfolio, approximately, is right now in a period where they can exercise purchase options?

It's very hard to-- what we gave you, in terms of what we think is our best estimate on the ones that had not exercised yet, that there is about $39.6 million that could be over the next -- the remainder of this year and next year.

And all of-- so, another potential $40 million on top of -

That's correct.

Okay. So, that - can you characterize or give us an idea of the typical profile of the operator who is choosing to exercise the purchase option?

Mainly, so far, I can just tell you about the ones that have, so far, exercised. They're probably looking at-they're operators that have maybe the ability to use some equity to get some debt put on the property and be able to, maybe 70 to 75% leverage, be able to do better than having 100% financing transaction with us. So, those are the type of operators that are, so far, exercising their options.

Are they primarily in the skilled nursing space?

Yes.

Okay, okay. Secondly, in terms of portfolio operations overall, certainly it looks like over the last year, things have gotten better. I know in your own portfolio, from a coverage ratio standpoint. But on the assisted living and independent living front, can you give us an indication of how things are tracking there? It appears that occupancies are really pretty strong. And secondly, that a lot of the operators have the ability, more so today than even a year ago, to push through higher rents. Are you seeing much of the same thing? And what do you think that could do to coverage ratios over the next six to 12 months?

Activities are improving slowly. You're still looking at overall occupancies in the 88 to 89%. So there's still room there for improvement in the occupancy in the assisted living. But yet, the ability of pushing rates has started. Some of the operators have been able to do that. And you can see that reflected in our improvement in our coverage. And I think that we'll continue to see that in the future, as occupancies continue to rise and increases continue to happen.

And Peter, any meaningful rent increase at the level of occupancy that Abdo is speaking about that's in our portfolio and pretty much industry-wide, will produce better profits than incremental increases in occupancy and, consequently, better coverages.

Yes, exactly. Okay. Are you seeing the ability of the assisted living providers and operators to push through higher rents?

Overall, yes. They are-- overall, yes.

And how much, in terms of, if it was in the 3 to 4% range last year, what is it today?

I don't know if I can really answer that specific a question of how much increase it has been. But it's probably in the same range, probably 5 to 6%.

Okay.

And Peter, on the side of the equation--

It's Phil.

Oh, sorry.

I'm usually one of the apostles, Peter, Paul or Phillip.

That's a good place to be generally.

I know, generally.

On the other side of the equation, Phillip, is the fact that health premiums have moderated somewhat. Insurance premiums have moderated so much too, so that should be helping the assisted living operators in their margins, as well.

Okay, okay. Lastly, in terms of - I've asked this in the past and I know you've had some pretty good answers on it. But I just wanted to follow up on-- any more color on potential expansions within your own portfolio? Certainly with senior living demands, it's pretty consistent in increasing and the lack of new supply coming online and expected to come online. Are you seeing some of the operators look to utilize you for some expansion financing?

Yes. We've been talking to some of our tenants about this and we have several-- identified several subsidiaries that have high occupancy and good market, and we are trying to work a program in place to do some of these expansions.

Is there anything meaningful to report there, in terms of dollar amounts or timing or anything like that?

They will be coming, not all at the same time. We're doing an expansion with Beverly and we're under discussions with Alterra to do some. So at this point there isn't a volume I can give you. And they will come, not in a lump sum, they will happen over a certain period of time.

Would it be safe--

It's good for us. It's good for our tenants, as well as for us. So, it's a win-win situation.

Exactly. And would you-- is there any estimate as to what percentage of your portfolio has expansion opportunities? Is it 10, 25, 30% of the portfolio has some sort of expansion over the next three to five years or so?

It's somewhere between 10 to 20%.

Okay.

And Phillip, I think that this will build momentum over time, but it's not - as Abdo said, it's not going to occur all in one fell swoop. You have to remember that, particularly on the assisted living side, the people that are running these companies now are not focused on development and some of them don't have any development expertise. The people that have the development expertise were replaced when the companies got into trouble.

So, there's still some relatively low-hanging fruit for them in their view or they're still trying to catch up with themselves organizationally. And so, it's going to take a little while for that momentum to really catch up to itself, I think. When it does, we'll be there. And in fact, we're exploring ways where we can super charge that by helping them with maybe some skill sets and services through kind of a preferred provider program to get them focused on it sooner than they otherwise might be able to just by saying 'Hey, here's a turnkey type of expansion program for you. What do you think?'

Well, that's the thing. That is where, I think, even having Abdo over the last year really go through the portfolio and start to really look at what the opportunities are there. And again, it gives you a chance too, to really help a lot of these operators that are still-- that could use some advisory type services. And Nationwide happens to be a very good potential partner to assist in a lot of that. And help give direction, et cetera. So--

Can we quote you?

There - - okay, remember Philip one L. Well, I appreciate the answers and congratulations on a good last twelve months.

Good, thank you very much.

Your next question comes from Greg Andrews.

Good afternoon.

Hi Greg, how are you?

Fine, thanks. You commented, Doug, in the press release about a skilled nursing facility replacement program to improve the skilled nursing portfolio. And that is-- the language there is subtle, but it is sort of a notch above just the one case that you described this quarter. So I'm interested in just understanding more precisely what you are after in that program and maybe how expansive it is?

Well, it really is the same thing that Abdo was describing, where we acquired a newer facility, sold the old facility, transferred the bed license and residents from one facility to the other. And we hope to do that with --

We doing it in (inaudible) you can talk about that.

And we are also continuing to do some new developments which I will let Abdo speak to. And we hope to be able to replicate it as often as we can. We, our portfolio has a number of 30- or 40-year old assets in our skilled nursing that at anytime that we see an opportunity to replace them, as long as the market is solid, with a newer facility, we think that is a good thing to do.

So, the goal here is focusing on kind of on update the age, I guess the average age of the portfolio?

It is really two-fold, Greg. It is one to update the quality of the facilities in our portfolio, but also somewhat defensive. As these facilities get older, the risk of a new facility being constructed in there and taking away all their clientele represents potential FFO leakage for us. So, we are trying to be a little bit proactive and be the one whose is bringing these start-of-the-art facilities into a market that can support it and be the one who doesn't see the leakage happen. So it is really two-fold.

Well, I'm just thinking about this more broadly. One of the sort of padded benefits of the triple net lease model that healthcare refuses, that the tenant pays for the upkeep of the building, right? As we all know, even with a lot of upkeep, buildings just get older over time. So, there is kind of a true depreciation that needs to sort of be captured.

Well, and the other thing is some of these facilities, depending on the location, they were built 40-years ago and people didn't really give a thought to where they were built. And now you can, in some of these areas, again this is all dependent upon geography. But some of these places you can find a nice little site right by a medical office building complex or a hospital. And you can upgrade the attractiveness of your facility dramatically.

As to your point, Greg, concerning the depreciation. You have to look at the value of those buildings, facilities also. They sometimes are 15,000 a bed to 20,000 a bed versus the new facility that costs much more. So the depreciation is already built into it.

That is exactly right, Abdo.

It doesn't need to be further depreciated.

Okay. Yes, I accept that. In this particular case, this quarter you ended up taking an impairment, which I think sort of makes --

Only-- that building sold for $15,000 and it is only 900,000 compared to what we have achieved and completed by doing that transaction. But this impairment is really not significant.

Had we sold it as a skilled nursing facility, we would not have had impairment.

Absolutely. You're right, Don.

What we did is take a building out of play and then it didn't have any, or it really doesn't have any use, after that point. So now you are really selling for the land.

I see. Great, thanks.

We didn't lose the rent on it.

Right. Okay thanks. And then on the -- just a couple of this and thats. On the refinancing of the JER debt. Was there any cost extinguish the old debt? Were there any fees or whatever that hadn't been fully amortized?

There were some that -- and we expensed that -- our share of it, the 25%. And the rest is capitalized as part of the acquisition costs.

Okay, and the -- just lastly, looking at the income statement. I don't see the actual impairment charge showing up on the income statement?

It is in discontinued op.

Okay. So, it is combined in that line item. Thank you very much.

That is correct.

Hey, Greg just because we want everybody to be clear on the impairment, the new investment was 3.3 million. The new facility that we acquired. And the net book value of the old facility was around 900,000. And the tenants paying rent effectively on 4.2 million, or the net book value of the old building that we impaired plus the new investment.

Okay, got it.

Greg also for the joint venture, just in case you want to feel a little bit more about it, you can look at footnote 5 in the 10Q that we filed today. And it will give you all the details on those numbers that you are talking about.

Okay, thank you.

Next question comes from Rich Anderson.

Thank you. Good afternoon.

Hello.

I guess a question on purchase options. And you mentioned 39.6 million that could potentially happen, over and above what you sort of know is going to happen. If that stuff that could potentially happen happens, I assume it is not in your guidance and there is the potential impact to guidance if that should happen?

We have included some of it in our guidance. That is why you have the range that we are giving.

Okay. And, on the $0.01 to $0.05 impact, negative impact, from the purchase options in '05. Would it be a similar number in '06, do you think?

I don't know. We have not computed what it will be in '06 and this is just -- and by the way, I want to clarify something. It is not only the purchase options, it is purchase options, restructuring, and lease renewals. The $0.01 to $0.05.

Okay. And the last question I have is on the portfolio review process. Could you tell me where you guys are in the process of sort of going through the portfolio, as you've started doing, last year?

We have completed, as you know, we had planned on doing about a third of the portfolio each year and we have about 50% for what we planned on doing in 2005.

50% of a third?

Yes.

Okay, got it. Thank you.

Thank you, Rich.

Thank you.

The next question comes from Robert Mains.

Good afternoon.

Hi. How are you, Robert?

I'm great. One question on the purchase options. I know you did a fairly careful analysis in trying to figure out what the exposure was there. Any insight into why what you have seen to date has been a little bit less than what you had expected?

Well, some of the tenants that we thought might be able to exercise their option, obviously have not been able to line up their financing equity that they need to exercise the options. So that is basically the main reason.

And just to amplify that a bit. It is easy for either our prospective customer or an existing customer that has detracted the debt markets and they can see some good pricing on long-term debt financing. So that gets them excited. And what they tend to underestimate or forget about is that they have got to make up the difference with equity. And acquiring equity, particularly for some of the smaller to mid-sized companies, is not an easy thing to accomplish, from an outside source and when they realize the ramifications of that are for their ability to run the business independently. And then they find out what the cost of it is. So sometimes they will step back after evaluating the total cost and the embedded ramifications of that and what might have appeared like a good course of action to them, if they have all the facts in front of them, become somewhat less attractive.

Okay. So on kind of an 80/20 type financing, it is not the 80 it is the 20 that is becoming the holdup?

Yes, yes.

That's the ballgame.

And some of them have funds (ph) from the 80's, so to be clear.

Okay, that is all I had. Thanks a lot.

Welcome.

The next question comes from David Sipress (ph).

Thanks, David Sipress from Merrill Lynch. Good afternoon. Considering that your dividends payout ratio is down to 80% on a run rate basis and you've done $200 million plus of acquisitions year to date and you issued debt in the quarter. How do you weigh your priorities between going FFO, paying down debt and/or increasing the dividend?

That is a great question and it's one we have spent a lot of time thinking about and obviously those are competing priorities. As you know, decisions regarding dividends are the domain of our Board of Directors. But, that said, we have worked hard to get our payout ratio down to where it is now. And frankly, what we would like to do is to continue to reduce it a bit more.

As you know, one of the disadvantages of REITs, or the REITs structure, is that you have to pay out a significant amount of you profits. In the extent that you can provide to your investors competitive returns on their investment and maintain a low payout ratio, we think that that is a good thing to do. And there have been several studies done and I think that they show that over time, the REITs that maintain a relatively low payout ratio tend to perform over the long-term better than REITs that have a higher payout ratio.

So our goal is to continue to reduce the payout ratio, a target that we have set internally as a management team is around the 80% threshold, give or take. A couple percentage points in either direction of that. And so we still have a little bit of room to go. And once we get to that threshold, we can reevaluate paying out our dividends. In terms of using capital to pay down debt, we are looking for ways to maintain as low of cost of capital as we can. There is some debt in our capital structure that bears higher rates.

On an ongoing basis, we explore ways to try and bring those down. But of course there is lockout periods and other complications and people want premiums for those to be bought out. So, we have to evaluate the overall economics. But we have looked at that and we will continue to look at that. Hopefully, we will find a window of opportunity where maybe we can act on that.

In terms of growing FFO, that is influenced of course by the capital structure and we have had very good success in growing absolute FFO. We had less success in growing FFO per share in 2004 than we have so far in 2005. And that is primarily due to the fact that we used as our capital source in 2004 equity through a common stock and preferred stock issue.

This year, our capital raise has been just the one debt issue that we did, the $250 million. And hopefully, we will be able to continue to find the kind of quality investment opportunities that we have been able to over the last 18 months. And so that there will be a need to raise capital again this year and that could come in many forms because we choose to retire some debt that is more expensive or other things that would bring down our cost of capital. And should we go to the capital markets again this year, it is more likely than not, particular with equity prices, we think better reflecting inherent value that we would look to the equity markets for our next capital raise.

Okay, great. The other follow-up question would be how often does the board consider the dividend payment? Is it quarterly, yearly?

We speak about it at every board meeting we have. Every regularly scheduled meeting, quarterly and then we review it at great length at our strategic planning process, which occurs at the end of every year. We talk about a full philosophy where we are relative to various benchmarks every quarter.

Okay, great. Thanks a lot.

You are very welcome.

Your next question comes from Michael Mueller.

Hi, just a few things. Not to beat a dead horse, but going back to purchase options, I just want to make sure I have everything in the right buckets. The 23 million for this year, the 25 million for next year that you referenced in terms of proceeds. The other data point was I think you said, 40 million above that as a potential. And how does that all tie into the guidance of 39 to 74? Is the 39 to 74 above what was already there or was that part of it?

What is-- the 23 in this year's guidance? 23 million.

Yes. Okay.

And then the 39.6, that is part of the range of the $0.01 to $0.05 that we mentioned.

Okay, so the 39 to 74 is just the range for '05. It is not to be looked at 23, 25 and then the others, correct?

Correct.

Okay. So the 23 and then it could be anywhere from 16 to whatever above that this year?

That's correct.

Okay. The other question is, just thinking in terms of business, the changing slope of the yield curve, does that have any impact on your business?

The interest rate?

Yes. I mean, not on the financing side, but thinking on the investment transaction side?

Well, I think it has to just from the standpoint -- again we think interest rates and cap rates are correlated. And we think it will have an impact, although right now you are not seeing it.

You are seeing -- there is so much capital looking for a home in this sector right now. That is what we think is having a push down effect on cap rates. And an increase in what people are willing to pay. At the same time you are starting to see, although the debt markets have been terribly capricious and have fooled most people I think, including Chairman Greenspan, particularly on the long end of the curve. And so, there seems to be that confusion. If, however, there is a clear trend toward raising long-term interest rates, we think that over time, that has to have an impact on cap rates. And cap rates will start to gravitate upward.

The impact of short-term rates rising you just haven't seen anything?

It impacts us on our credit facility. That is the direct impact you see, but other than that we are not seeing a whole lot.

Okay, great. Thanks.

You're welcome.

Your next question comes from Steve Foot (ph).

Good afternoon.

Good afternoon.

Abdo, a little bit more, I'm sorry, on the purchase options. The 23 million for this year, have any of those occurred or is that what is outstanding for the second half?

They haven't closed. They just -- we were just notified that they would like to exercise the option and the closings will take place in the third and fourth quarter.

Okay, and are those assets now held in the held for sale?

Not yet, because we haven't signed the purchase and sale agreement yet.

Okay. And then on the potential negative impact of $0.01 to $0.05 a share. Is that revenue or is that kind of a net income impact?

That is FFO impact.

FFO impact. And then, just one final question on the guidance. I just want to confirm when you say that your guidance does not include the impairment charge. That doesn't just mean not include impairment charges that are yet to occur, but that also does not include the impairment of charges that have occurred so far this year?

That's correct. All the impairment charges are excluded from that guidance.

Okay, thanks.

You're welcome.

You're welcome.

We have a follow-up question from Rich Anderson.

Hey, Rich.

Hey, how you guys doing?

We're doing okay.

Just one more question on the purchase options. Did you mention a cap rate on what you are getting on the 23 and the 25.6?

We didn't mention it. But --

What would it be if you could mention cap rate?

These are set options. We didn't calculate what the cap rate is on them. They were at set prices. They weren't like fair market value, these were set prices and we haven't calculated what the cap rate. We don't have much negotiating or say on what the price is going to be.

Understood, but they were probably negotiated several years ago, I would assume. Is that right?

Some of them are based on our original investment class and escalated on an annual basis.

Okay. Would they be above 10%?

I really can't tell you. I didn't look at that way.

Okay, thank you.

You're welcome.

Your next question comes from Robert Belzer (ph).

Hi Robert, how are you?

Good, good. I am going to be consistent with the last several questions and ask you another one on the purchase options. As I understand it, isn't there some kind of a window where the operator would have to exercise the option and at some point, that window would close? Or is this a special kind of a lease term where they have the ongoing ability to exercise the options?

Some of them are open-ended. They can exercise them at any time and they have no specific time when it ends. So it goes until the end of the lease. Some of them are like that, not the majority of our options.

Most of those, Robert, were in connection with restructuring and due to somebody to take the property.

And just one more question. Is there any portfolio pruning in the assets you expect to sell? Is there anything kind of opportunistic that you are moving out of the portfolio?

Some of those that are in the purchase option we are very happy to see go. So it is a nice pruning that is taking place, yes. And at the same time, we're also looking at other assets, too.

Okay, guys. That's all my questions today. Thanks.

You're welcome.

You have a follow-up question from Michael Mueller.

I actually was going to try to take myself out of the queue. I was going to ask the cap rate question, as well. Thanks.

There are no further questions.

Okay, thank you very much. We appreciate your interest. If you have any follow-up questions, just give us a call. Thank you.

This concludes today's conference. You may now disconnect.