芬塔 (VTR) 2005 Q3 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 timing 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 predicted on operating funds flow analysis and is widely used by industry analysts as a measure of operating performance for equity rights. The Company, therefore, discloses 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 operation as income before extraordinary items adjusted or certain non-cash items, primarily real estate depreciation less gains, losses on sales of facilities. The measure may not be comparable to [similar] titles, measures used by other rights. Consequently, funds from operations may not provide a meaningful measure of the Company's performance as compared for that of other rights.

Funds from operations does not represent cash generated from operating activities as defined by accounting principles, generally accepted in the 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 to cash flow as a measure of liquidity.

Good afternoon, ladies and gentlemen, my name is Derrick, and I will be your conference facilitator. At this time, I would like to welcome everyone to the NHP Third Quarter Earnings Release Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during that time, please press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star, followed by the number 2.

I would now like to turn the call over to Douglas M. Pasquale, President and Chief Executive Officer. Thank you, sir. You may begin your conference.

Thank you, Derrick. Good afternoon, and 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, Vice President, Portfolio Management.

NHP's financial results for the 9 months ended September 30, 2005 reflects substantial revenue and FFO growth relative to 2004's comparable period. Our revenue and FFO before impairments and extinguishments have both increased over 20%, and the associated FFO per share increased by almost 15%.

In light of these improvements, we have increased our 2005 guidance range, excluding impairments and one-time charges, from between $1.76 per share and $1.80 per share to between $1.82 and $1.83 per share.

Year to date, we have completed $231 million of new investments, and we recently announced a $171 million transaction, which is expected to close in the fourth quarter. Our investment strategy will continue to reflect our interpretation of dynamic market conditions, specific investment opportunities, NHP's strategic goals, and our view of long-term asset values and opportunities.

During the third quarter, NHP retired $132 million of high interest-bearing debt and $10 million of our 7.68% Series A preferred stock. To enhance our financial flexibility, we increased our credit facility by $200 million to $600 million and added a $100 million 5-year term loan.

Now, the details behind the headlines, starting with David.

Thank you, Doug.

The repurchases of debt and preferred stock that Doug mentioned resulted in charges totaling $9,360,000, $8,565,000 of which related to the senior notes and $795,000 of which related to preferred stock. With that background, I'd like to give you a brief overview of our financial results with and without the charges related to repurchases this quarter and the impairments recognized during the first and second quarters.

To simplify things a bit, I'll refer to diluted FFO and diluted FFO before charges instead of repeating before impairments, extinguishment, and redemption charges a half a dozen times.

Our acquisitions and investments of over $230 million this year and over $380 million in 2004 have resulted in an increase in revenues of $9.3 million and an increase in diluted FFO before charges of $5.7 million for the quarter, as compared to the same quarter last year.

On a year-to-date basis, revenues have increased $28.4 million, and diluted FFO before charges has increased $19.5 million. Diluted FFO per share was $0.33 for the quarter, while diluted FFO before charges per share was $0.47, both of which compare to $0.42 per share in the third quarter of 2004.

On a year-to-date basis, diluted FFO per share was $1.12, while diluted FFO before charges was $1.37 per share, which compared to $1.20 per share for the same period last year.

For the quarter, these changes represent a 20% increase in revenues and diluted FFO before charges and a 12% increase in diluted FFO before charges on a per-share basis.

Our funds available for distribution continues to exceed our FFO because our cash rent collections are higher than our GAAP rent recognized. Cash rent exceeded GAAP rent by $243,000 for the quarter and by $895,000 year to date.

On the expense side, interest expense increased $3.6 million for the quarter and $8 million year to date, mainly due to the acquisitions noted above that were financed by draws on our credit facility, the issuance of $250 million of 6% notes in May, and the assumption of around $70 million of debt this year.

The other significant contributing factor has been rising interest rates that have further increased the interest expense on our credit facility.

The increase was partially offset by the repurchase of senior notes that was mentioned earlier.

G&A expense is up $0.6 million for the quarter and $0.5 million year to date compared to the prior year. The increase was primarily due to starting to amortize restricted stock expense in 2005. We believe that G&A for the quarter is a good benchmark for the fourth quarter.

With that, I'll turn it over to Abdo.

Thank you, David.

This has been another busy quarter for us on the financing front. As Dave mentioned earlier, in August, we addressed potential refinancing risk in a rising interest rate market by retiring $131.8 million of our unsecured medium-term notes with interest rates ranging between 7.06% and 9.75% and maturities ranging from November 2006 to March 2009.

This debt retirement will improve our fixed-charge coverage and extend medium-term maturities to 2015 as the dedicated source of funding for this transaction was the $250 million, 6% unsecured notes issued in May 2005.

During the quarter, we also prepaid $13 million of secured debts that [were] interest at 7.6%.

On October 20, 2005, we closed on our new $700 million unsecured credit facility, replacing the existing $400 million facility due to mature in April 2007. The new facility includes a $600 million revolver with a 3-year term that we made and at our option for 1 additional year and a $100 million 5-year term loan.

Both the revolver and the term loan bear interest at LIBOR plus 90 basis points in addition to an annual facility fee of 20 basis points.

This transaction was oversubscribed by $240 million for a total of $840 million in commitments, which demonstrates a high level of confidence in the credit of the Company and its prospects and shows a strong support from the unsecured lending community.

We decided to upsize the facility's $700 million in order to provide us with greater financial flexibility in signing our capital market's issuance and to take advantage of favorable pricing that is 27.5 basis points below the all-in cost of the previous facility.

We were very pleased with the syndication effort that expanded our lending relationship to 9 new banks. We currently have $468 million dollars available in our credit facility and very little in the way of debt maturities in the coming month. We don't have any further senior note maturities until the fourth quarter of 2006, when $32.7 million of notes with a weighted average rate of 7.4% will mature.

Our dividend reinvestment plan continues to be quite successful. During third quarter, we issued approximately 150,000 shares of common stock for net proceeds of practically $3.4 million, which brings our total net proceeds for the 3 quarters in 2005 to approximately $12.1 million.

Our guidance range for 2005 excludes impairments because there's no way to predict these non-cash charges and because unlike [indiscernible], they have no impact on recurring FFO.

Our updated guidance range for 2005 FFO before impairments and extinguishments is $1.82 to $1.83, which is an increase from last quarter of $0.06 on the low end and $0.03 on the high end. The increase is due, in large part, to fewer purchase options being exercised by our tenant than we had expected by the medium-term notes tendered and the preferred stock repurchase and by the $16.2 million of investment close and $171 million of investments, and now since our last guidance update in August.

No investment beyond those announced to date are included in our guidance range. Most of the unexercised purchase options that we expected our tenants to exercise by now 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.

Before I turn it over to Brad for an update on our portfolio management activities, I would like to draw your attention to the new portfolio data we have added to the supplemental information.

This quarter, we have added investment and revenue information on our top 5 states, the breakdown for rent by payment type, and a summary of potential 2005 and 2006 revenue leakage. But most importantly, we have provided rent coverage information after a 5% management fee and after a CapEx reserve calculated based on the age of each facility. We hope that this added information will provide a clearer picture of our portfolio and its performance.

Brad?

Thank you, Abdo.

The composition of our portfolio at the end of the quarter was detailed in the supplemental Analysts' Schedule, but I would like to point out the following items in particular.

To date, options to purchase 12 facilities have been exercised. These options, once consummated, will generate proceeds of $23 million during the fourth quarter of 2005 and $27.2 million in 2006. These transactions will provide gains of $7 million in 2005 and $11.4 million in 2006.

Further, exercise of these purchase options will result in a reduction in revenues during the remainder of 2005 of approximately $500,000 and a $2.5 million decline on a full-year basis 2006.

In addition, mortgage loans totaling $5.1 million were prepaid during the fourth quarter. This will result in a reduction in revenues of approximately $81,000 during the fourth quarter of 2005 and $650,000 during 2006.

The impact of the remaining purchase options, which could be exercised during 2006, are as follows. It could generate up to $25.5 million in net proceeds that would be available for investment, could generate -- pardon me, could result in gains up to $2.4 million, and could result in a reduction in revenues of $2.9 million on a full-year basis here in 2006.

We continue to identify opportunities to recycle certain assets within our portfolio. These properties have been identified for pruning after consideration of several criteria, including, but not limited to, the asset's age, remaining useful life of the property, rent yield and coverage, and other risk and return factors. The following is a summary of current asset recycling activities.

Eight properties have been identified for pruning during the fourth quarter of 2005 or early 2006. These divestitures will result in proceeds of approximately $23.5 million to be reinvested in more attractive assets. These transactions will provide approximately $2.8 million of gain. This will result in a reduction of annual revenue during 2006 of approximately $2.7 million.

Of the 6 leases up for renewal in 2005, we have finalized the renewal of 4 leases covering 23 facilities and representing annual rent of $12 million. The 2 remaining leases for the renewal in 2005 cover 5 facilities and represent $2.3 million in annual rent. All terms have been agreed to with respect to these 2 leases, and we expect the execution of the renewal documents here in the fourth quarter.

In summary, we anticipate the following impact from the various sources of revenue leakage --

Total rent reductions during the remainder of 2005 of $0.6 million and $9 million to $12 million in 2006.

The 2005 impact to FFO is $0.01 per share and is reflected in our revised 2005 guidance.

Settlement proceeds of $28 million in 2005 and $51 million to $76 million in 2006.

And now to Don for the investment update.

The big investment news for the quarter was our announcement of a $171 million definitive sale master lease-back transaction with Senior Residential Care and Wingate Healthcare that is expected to close in December. Assuming that happens, that will bring our total 2005 announced investments to over $400 million. This includes a couple of smaller but high-yielding investments of $16.2 million we closed in the quarter, including $24,000 per bed for 2 skilled nursing facilities, with a blended initial yield of 10.2% and 2.2% estimated annual loss.

We are really looking forward to closing the $171 million transaction with SRC and Wingate. As those of you who have seen the pictures on our website have been able to confirm for yourself, these are Class A facilities that we are proud to add to our portfolio.

In our view, the exceptional facility and operational quality, high-end locations, strong Q mix in the 40s, and strong in-place coverage of 1.4 times after management fees and CapEx, coupled with the up to $70 million expansion upgrade and acquisition commitments, easily warranted the 12% cap rate, $92,000-per-bed price, and 8.5% start rate with estimated 2.15% annual [ups].

We are continuing to explore and underwrite a variety of other quality opportunities that we hope to be able to close by year-end. With a few exceptions, going forward for the near term, skilled nursing opportunities continue to dominate with fewer reasonable independent or assisted living investment opportunities. Regardless, our mantra remains that we will continue to compete aggressively for new investments and only make those that over the long term provide appropriate risk-adjusted yields consistent with our underwriting criteria and overall investment strategies. Doug?

Thank you very much, Don. We're now pleased to answer questions. Derrick, if you would open the lines?

[OPERATOR INSTRUCTIONS]

[Jordan Salder].

My first question was just on financial flexibility. Could you maybe outline what you view as your available dry powder at this point and your comfort levels in terms of leverage?

We currently have about $468 million available under our new credit facility, so that will give us quite a bit of dry powder to work with, and so --

That's the $600 million revolver piece, right?

That's correct.

The $100 million term loan is fully drawn, I'd imagine?

It is fully drawn.

Okay. And any leverage covenants that came along with the up-sized revolver?

Nothing different from what we had, and we are very comfortable under those -- we meet these covenants, and we are very comfortable where we stand.

Okay. And what is your sort of target leverage?

We have always tried to say that most of our new acquisition would be in the 50/50 or 60 equity/40 debt, so we will try to maintain that.

What is your current leverage?

On a book basis?

Or a fixed-charge coverage basis?

Just one second.

I guess I could ask another one in the meantime while you guys are looking that up.

Sure, looking at that.

In terms of the leakage question, the column on the new disclosure, the rent loss, for 2006, is each of those an annualized number, each of the rent losses numbers? So for the $27 million in proceeds from the purchase options that are certain in 2006, so $1.958 million in rent loss, it's a full year's number, as opposed to the [timed] full-year number, whenever that might happen?

That is the annualized number in 2006, yes.

So from the timing perspective, would those repurchases occur on January 1?

Oh, no, I’m sorry; they'll occur during 2006. That is an impact during 2006, not an annualized --

It's not an annualized number?

No, it's not.

Do you have --

And it's an annual impact during 2006.

Okay, so you expect an impact on '06 directly?

Yes.

What -- do you have an average cap rate on these or an average full loss of income, full-year loss of income? Just so we could calculate the impact on 2007, for instance, relative to 2005?

Yes, give me just one minute.

On the -- you wanted the --

Fixed charge coverage?

-- fixed charge -- two-and-a-quarter currently.

Okay. And you'll manage towards -- is that something that you guys are focused on, fixed charge coverage, or not so much?

[Indiscernible].

That's such a -- it is very important for us to monitor, Jordan.

The covenant is 1.75, so we have plenty of room.

Okay.

And we manage to that.

Okay. And then just in terms of leakage, if we could get total annualized yields on any of the stuff that's being exercised or to be exercised or possibly being exercised, it's just much easier for us to model that stuff if we have the full-year number, particularly as it relates to the out years beyond '06.

Sure.

So if you could do that, that'd be helpful.

Not surprisingly, some of the options that are being exercised are -- with respect to assets that have higher rent yields to us, that's part of the motivation from a tenant's point of view to exercise the option.

Cheaper financing?

Yes.

That makes sense. Now, is Wingate in the new guidance in terms of the FFO range? Have you assumed that you will close Wingate?

We have assumed that we will close it; it's just a matter of when, and that is part of what plays into the range.

Okay. But it looks like sometime in December?

Yes.

In your assumption?

Yes, sometime in the month of December.

Okay. And I guess that's it on my questions. If you guys could just follow up on those [indiscernible] things when you get a chance?

Certainly.

Thank you.

Thank you, Jordan.

Jerry Doctrow.

I've got a couple things. On Beverly, assuming it's bought out, anything good or bad that happens to you in connection with that transaction? Do they have purchase options additionally, or do they have to pay more rent for you to approve the tenant?

To release it, they need our approval and so our sole discretion.

Okay.

And we have not heard from anyone yet.

Okay. So presumably, you wouldn't give it without perhaps some increase in cash or some other consideration?

I don't know what we will do.

Okay. And did I hear just acquisitions for the rest of the year, that there are likely to be some more in addition to the 171 or --?

Hi, Jerry. It's Don. Actually, just saying we're looking at others. We're underwriting those. Whether or not anything will come to fruition before the end of the year remains to be seen.

Okay. I think what Jordan was trying to get to backing into your debt covenants and all that stuff was just something I'll ask directly, which is it looks like the next thing you need to do is equity, and is that sort of an accurate assumption in any sense of when you need to do it, or your thoughts there?

We'd like to keep, Jerry, all our options open with respect to capital raises. Clearly, with what we've done year to date in 2005, it's been focused more on the debt side of the equation; 2004 was just the opposite, where it was almost exclusively on the equity side of the equation. So we continue to monitor that, and we'll do so.

That said, we're raising a fair amount of capital through these purchase options, and Brad outlined some of the gains that we would expect to enjoy with the disposition of those assets. He also mentioned some of the assets we, as part of our asset recycling program, expect to sell, and some of the gains that we expect to enjoy on that. The dividend-risk investment program is doing very well. So there's a lot of things that are going on that's kind of quiet capital that's occurring.

And our profit retention, with respect to our decreasing dividend payout ratio, which we have dropped considerably over the last year-and-a-half or even a little longer than that, is another source of capital, too. So things are happening that don't carry within the big headlines like a common stock underwriting, but they are occurring that's on the equity side. But it's not to say that we won't continue to very closely monitor the equity markets in the right time and with the SRC deal expected to close in the fourth quarter and other things we're looking at. At some point in time, it's going to happen. It's not clear when that's going to be.

Okay. Would you redeem any more Series A? Is that something that's still on the -- sort of on the agenda? I mean it's fairly high yield and it steps up.

Yes, we're not really worried bout the step-up, and David and Abdo can explain to you why on that, and it's a little bit off, still. There were others when we made the tender that offered their shares up but just not at attractive prices. So we'll continue to monitor that. And if we can get a good value on it such that it's the right decision, we would certainly do that, but not at prices that are unattractive to us.

Okay. And just one or two more, if I could. The coverage from the [SNIP] portfolio was down just a little bit, which kind of surprised me since we haven't seen [indiscernible]. Was there anything going on there? I mean it wasn't much, but just --

Nothing specific, but -- Jerry, this is Abdo -- just variations from one quarter to the other was, you know, rounding and stuff like that. Sometimes it rounds up and sometimes it rounds down. Nothing major is happening, though.

Okay. And then my last thing is just dividend policy. I mean, typically, I think you've reset the dividend in the first quarter of '06. Is there sort of a target [indiscernible] ratio, whatever we should be thinking of? And is that -- am I right about that schedule that you typically look at it?

To be honest with you, Jerry, we'll have to look to some of the Company historians. Since I've been with the Company, we've not increased our dividend, and it was not a focus for us. We had bigger goals to accomplish. We would like to see and continue to work our dividend payout down into around the low 80s, maybe even the high 70%.

Okay.

And you know, directors -- or decisions regarding our dividend policy are the domain of our Board of Directors, but it's something that we look at at least on a quarterly basis and think about. We're more focused on our cost of capital right now and doing the right things for our balance sheet. But if we continue to have the opportunities and ability to close quality transactions and we continue to make progress, it's not beyond reasonableness to think that there might be new opportunities to increase our dividend at some point in time and still do that in tandem with what we're trying to do balance sheet-wise, count ratio-wise, and all those kinds of --

Okay. This is my last one, if I could. On the Wingate transaction, you know, I guess I’m assuming it was fairly competitive, and I was wondering maybe if you could give us a little bit of color because some of your colleagues as well are talking about just how difficult that environment is, you know, why you got it, was it strictly a matter of price? Were there other things going on? And I’m particularly trying to just understand whether there are any sort of competitive advantages that you may have compared to some of your peers, or is it just a pricing issue?

Actually, Jerry, it very much was one of our competitive advantages that we tell, and that's the background as an operator. This is something that one of our guys had been involved with for many years, knows the family personally. In fact, very good friends with them. And this has been something that has been tracking for some time. And they talk operator talk very easily.

In fact, when we first went there, the transaction was set up as an auction to sell the Company, and we sat down, and we suggested to them that a better approach, given what we saw as a potential future, up side potential on the operations side, was to do a sale leaseback and take out some money now and reap the benefits of some of the concepts they had come up with to even drive operations to higher levels than they currently are. They very much like that idea, liked they were coming up with it, and suddenly, the transaction took on a new look from one of sale to one of refinancing.

And I think -- Don's a modest fellow -- that he and the investment team did a terrific job on that. Not only were we able to persuade them to walk away from the auction environment and to do all the things that Don said, but look where we ended up. We got the transaction on terms that we think are great. The coverage is fantastic. It converts to a cap rate, as Don mentioned in his remarks, in excess of 12%, and we've been thinking about growing the business now. We've earmarked and committed for $20 million I think it is, Don, for improvements and up to $50 million for expansion of the business.

That's right.

So you take a mindset that was focused on let's get a transaction done to, okay, this may be a nice time to monetize some of the asset value, but the real opportunity is in growing the business. So that's what we try and do whenever possible. Just -- from a REIT's point of view, you're not going to get the best pricing whenever you're in an auction-type environment. So we tried to find a way to look at things and improve things for our clients and potential clients in a way that benefits our shareholders as well.

And so in the end, it was indeed just a negotiated deal basically, you said?

At the end of the day, it was -- you know, you have to in your mind understand that if you're not dealing in terms that really work and painting a clear picture of how the value creation is going to be greater by staying in the business, the threat of an auction always looms in the background, unfortunately, but when you negotiate well and you're really looking up to create value for both parties, you can get to the results that we did in this transaction.

Okay, all right. Yes, nice deal. Thanks.

Robert Mains.

One follow-up on the leakage. If I look at the schedule, can I surmise that, for instance, the asset recycling may be kind of a more beginning-of-the-year event with purchase options more spread over the course of the year?

Yes, I think that's true, yes.

Okay. And then question on just the 2 nursing homes that were bought in the quarter. Are those both folded in to existing master leases?

One's folded into an existing master lease, one that covers well over 2 times; the other one is crossed -- is a loan that's crossed to fall into that master lease.

Okay. And one of the numbers that you gave out this time I hadn't seen before was the quality mix on the non-nursing home assets. The CCRC quality mix is 71%. Is the Medicaid portion of that waiver for assisted, or is that nursing home that's Medicaid?

Nursing homes.

[Inaudible], okay.

Yes.

And then the last question, the cap rate that you gave us, Don, on the Wingate transaction, is that first year?

That first -- I -- yes, sorry.

Okay.

Two thousand five (2005).

Okay -- oh, 2005, this year's cap rate?

This year annualized.

Okay. All right. Great. Thanks a lot.

Thank you.

[Robert Velder].

First, again, on your leakage guzzle, specifically on the lease renewal category -- now, you mentioned there were 4 leases, and then I missed the second part of that. I think it's during the new leases there. Could you just provide a little more detail on the rent roll-down you expect there and what kind of facilities they may be and how much was yield compression that could result from the renewals?

Yes, on the 2 remaining leases that are still being negotiated?

Correct. And just the entire package where you expect a rent reduction of $1 million, next year's.

Next year, really. Yes, most of that is just with a couple lease portfolios that they were negotiated amounts. Actually, there were mechanisms that rent was going to be calculated based on appraised values or market values.

But I’m assuming that the market value of these facilities has gone down?

Probably -- most probably, the rent that was charged previously, the yield, was much higher and the formula has -- and it's based on the Treasury, certain basis points over the Treasury. And because of the Treasury, 10-year Treasury is down compared to what it was at the time the lease was entered into. That resulted in a reduction in the rent in one of the cases of those 2 leases.

And are these nursing homes, Abdo?

Yes, they are nursing homes.

Okay. And just moving on again to your capital markets activity, a follow-up question on that. The way I’m calculating your fixed charge coverage, I pretty much have seen your Company maintain it above 2.5 times and you know, without an equity issue in the near term, it, you know, looks like it's gone down below that. I guess my question is, are you -- would you maintain it below that level at least in the near term? Is that something that you'd be comfortable with?

In the near term, yes. We will be comfortable with it. It gives us plenty of room before any covenant is figured, and temporarily for a while, we can live with that, definitely.

But --

[Inaudible] and David, Robert, have had discussions with the rating agencies and reviewed our plans from before we consummated some of these transactions, and we'll have subsequent [indiscernible]. And they know what we're doing, and they all seem to be comfortable with it.

Okay, great. And then just one last question. In the acquisition market, has there been any improvement in cap rates that you've seen on transactions that you're currently negotiating with the increased interest rates?

No.

Okay, great. That's it for me. Thanks.

Thank you.

Philip Martin.

A couple questions here. You know, first of all, Abdo or -- in terms of the acquisition pipeline, and maybe this is for other numbers there, too, but kind of 2 questions -- an update on the acquisition pipeline and when you look at your acquisition pipeline, what percentage of that is being generated from your existing [pen-in] phase? And more to you, Abdo, from an internal growth standpoint and expansion opportunities or opportunities within the portfolio, could you just give us an update on that?

Yes, Philip, this is Don Bradley. On the acquisition pipeline, really nothing to quantify there other than, as I said, my comment that the most attractive opportunities, by and large, tend to be in the skilled sector, and those can be smaller deals that tend to be more higher yielding, and they can be also included in larger deals that might have a little tighter -- a little over cap rates.

And are those being generated, though? You know -- and you may not be able to quantify it -- from your existing relationships or --?

The lower-yield deal -- I mean the higher-yield deals, the smaller ones, tend to be existing relationships. You're adding a couple of properties to existing master leases. There are a few larger portfolio transactions where we're teaming up. A lot of those, like SRC, Wingate, and like some of the others we've announced this year that were a little bit larger tend to be newer customers.

Okay.

But we are looking for opportunities where maybe we'll find a 40, $50 million portfolio and team up with one of our customers to bring that into our fold. That'd be something we very much would like to be able to do. It really just depends on how the transaction comes in the market and whether or not existing management is wanting to stay on with the opportunity or not.

Well, and that's the -- are you finding that that's the -- I mean what is the trend there if there is a trend? There may not be. But --

It really depends on the ownership. Everybody says they are willing to listen to a structure that is for management, but if the ownership tends to be private, they're interested in one thing, and that's to get every last dollar they can out of the transaction.

Okay.

And that tends to not include management in the end. Privately held transactions, more like the SRC Wingate, where management and the ownership is allied, tend to look at both sides of the transaction and are more interested in negotiating something that we like to see.

But one thing to add to Don's comment, there have been transactions done, that I won't comment on specifically, but have taken place over the last 18 months where existing management has not survived based on the objective to maximize sales proceeds at the point in time, and in a lot of cases, I think that over time, we're going to see that that was myopic. And not having management involved, when you have a management team in place that knows what they're doing, that understands the asset, there's just a tremendous amount of turbulence that an organization goes through when you have changeovers, and so I wouldn't be surprised at some point in time where the soul focus was on maximizing sales proceeds and you lose existing management because people are going to be disappointed in the performance of the asset if there's a transition to new management.

These operating businesses are very complicated. Corporate cultures are a delicate thing. And when you have turmoil behind the scenes, it ultimately, in my experience, impacts the operations and ultimately the value of the assets. That's why I think that in corporate America, the success rate for mergers and acquisitions is so low because so little -- that is such an undervalued feature, and so, hopefully, over time, we'll see people give more consideration to the value of keeping management in place.

Okay. And on the internal growth component, Abdo, can you give us an update as to -- I know that's an ongoing process for you and the Company, but is there any more than you can share with us there in terms of future potential opportunities internally?

We have somewhere between 1.5 to 2%, and in terms of -- so that's about -- you know, that's what we're looking for in terms of -- and as we continue, most of our new acquisitions have 2% and higher. So as we go down the road, that will go over 2 and higher. So --

And 1.5 to 2 -- you broke up there -- 1.5 to 2% of what?

Of our current trend. It will be -- it would be escalation for next year, which will be internally generated rent increase.

Okay. But I mean in terms of potential expansion capability. I mean, for example, the Wingate and the SRC, I mean there's $50 million of expansion that you're looking at down the road in terms of that when you look at the rest of the portfolio in terms of potential expansion opportunities, etcetera.

We have a significant number of opportunities that we've been exploring, but the tenants are currently very busy focusing on their operations and have not been focused enough on the -- what it takes to really go through the process of doing these expansions. So we can continue to work with our customers to continue to make these happen. But we've had a few already done this year, and that we're hoping that next year we'll see much more of those.

And in terms of a potential dollar amount, is there anything you can share? Is it $20 million, $10 million, $30 million over the next, let's say, 24 months that could potentially --

It's very difficult to quantify, but it could be somewhere between 10 to $40 million.

Okay.

Philip, it's getting folks' attention, and there's -- you know, as Doug has said before in prior calls, one of the first things that everybody got rid of was their development groups when the industry went sideways, and they haven't really replaced those. They've remained focus on the operations. So there really isn't anybody dedicated to really handle expansions.

Yeah, and that's what I think. That's sort of what I’m getting at. You're becoming -- with some of these management changes and, like you're saying, the development people going away, you become that relationship. Now --

We're very much trying to do that. It's still -- you know, the learning curve or the acceptance curve isn't as quick as we would like. We would like to have had a lot of these underway much earlier in the year and continue to press to try to get these because we -- even in this very low-risk development, but you've got to get -- both sides have got to agree it's something they want to devote time and energy to.

Okay, that's [indiscernible]. No, that's fair enough.

Now, on the Wingate and the SRC, this $50 million that is there for expansion, is there some timing associated with that, or is that --

Actually, there are 2 pieces, Philip. There's $20 million that's more dedicated for upgrades, expansion-type things, like, for example, the average age in the portfolio is 14 years.

Okay.

One of the properties in the portfolio is about a 36-year-old or so [sniff]. It's one they've identified, and we've very much endorsed, as something that would probably start expanding the minute we close the deal and start renovating that and try to bring that to -- more in line with the other assets in the portfolio. That's a 2-year line, and there's a good chance that most, if not all of that, given the kind of plans that they have, will get used up.

The $50 million line is more for going out and finding new opportunities, buying new buildings, bringing them into the fold, and we'll just have to wait and see. There are things we're looking at. Whether or not they and we will be successful in nailing those down remains to be seen, and that's a 3-year commitment on our part. But, frankly, with what we've seen of this operator, until they get to a point where they would be, you know, there's too big a concentration for us, if they continue to operate like they are now and continue to associate themselves with the kind of assets they have now, I mean we're going to be more than happy to extend that commitment and increase that commitment by a lot more.

Okay, now in terms of the expansion, but certainly the CapEx dollars, have you structured any participations in any of these leases, or are these pretty straight leases? You've priced in all of this CapEx at the time that you acquire, at pricing, you know, the pricing?

Make sure I understand your question correctly, we start off the lease, say, with $171 million, and the rent rate is based on that $171 million we pay. As we add, they do expansions, and they draw down the line $2 million, whatever, that goes in at the lease rate, then, in effect, on the expansion side. On the acquisition funds, the $50 million, that's a separate formula that's price based on our then cost to capital.

Gotcha. Okay. Perfect. Okay, thank you very much.

Thank you.

Rich Anderson.

It's okay. I'll talk to you at NAREIT.

That was your question?

It's just gotten too long.

It might've been a warning.

Do you have to go trick-or-treating, Rich?

My questions have been "already answered."

Greg Andrews.

In terms of the new disclosure on coverage ratios, with respect to CapEx, can you just tell us what kind of CapEx assumptions you're using for the different property types, please?

It's based on the age and the size of the building, and it varies between $300 to about $850.

A bed or unit, you mean?

Yes, depending if it's bed or unit, yes.

Okay, so it's a very property-specific deduction?

That's correct. It's based on the age of the property, and it's based on its net beds and it's also units, and it also takes into account if the property/facility is smaller or bigger than 80 units or 80 beds.

Okay. But is it safe to say, though, that for something at the newer facilities, the 300-per-bed or unit would be kind of the minimum?

Yes.

Okay, thanks. And then with respect to a couple of your top operators, I noticed some small changes -- Life Care Centers, your investment went down a little bit?

They exercised purchase options.

Okay, great. And then Complete Care went up a little bit? Would that --

That was the [sniff] transaction that we announced.

Both of them.

Yes.

Right. Okay, great. Thanks very much.

You're welcome.

Michael Mueller.

Great afternoon. Couple of quick questions here. Everybody else has pretty much been answered. But out of curiosity, when you put your '06 guidance out -- I guess it will be on the fourth quarter call -- how are you going to look at the leakage schedule that you're starting to provide now, which I think is very good? Because you're certainly, certainly going through and laying out some asset sales that you expect to occur. I mean will it be as you're providing it now, with nothing future going in it, or do you anticipate stepping back and saying, realistically, we think we'll do a rough number in acquisitions so we can see here what -- in terms of what the asset sales are going to be?

We'll probably -- we'll continue our current policy of not providing -- not including acquisitions in our guidance. It's very difficult to predict where the market is going to be, and we don't like to try to put out some numbers that we can or can't achieve or exceed quite a bit, so we'd rather continue our current policy of not providing guidance on acquisitions.

Okay.

But we will continue to provide details on the leakage side of it.

Okay. Do you anticipate that, for example, if I’m looking at the 2006 lease? It's just $76 million of sales. Will that be excluded from guidance as well, do you think, or will it be --

No, that -- the rent related to that will be included in the guidance. The proceeds themselves that we will receive, obviously, the first thing we'll do is pay down our credit facility. But then as your investments come in place, those funds will be used to finance, to fund, new investments.

Okay. So, basically, you assume -- you're going to assume, you think at this point, asset sales will occur, but you're just paying down a credit line, and nothing's being reinvested, so the guidance may be dampened to some extent?

That's how the guidance will look. Yes, you're right.

Okay. And just a second question. For the asset sales that you list here, is there any debt -- just property-specific debt attached to those, what, 76 or 2,800-and-some million dollars of asset sales?

Not all of them are asset sales. You're talking, also, about the options?

Yes.

Including the options and all of that?

Yes, so is there any debt that would go away?

Very little debt is attached to these.

Okay, thank you.

You're welcome.

You have no further questions at this time.

Okay. Thank you very much, Derrick. Thank you very much, participants. We appreciate your interest. If you have any follow-on questions, please feel free to give us a call. Thanks very much.

That concludes today's NHP Third Quarter Earnings Release Conference Call. You may now disconnect.