芬塔 (VTR) 2005 Q4 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 law. Although the company believes the statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to risks and uncertainties described from time to time in the SEC reports filed by the company. The company believes that funds from operations is an important supplemental measure of operating performance because it excludes the effect of depreciation and gains and losses on sales of facilities both of which are based on historical costs, which may be of limited relevance in evaluating current performance. Additionally, funds from operations 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 calculates funds from operations in accordance with the National Association of Real Estate Investment Trust definition. The measure may not be comparable to similarly titled measures used by other rights. Consequently, funds from operations may not provide a meaningful measure of the company's performance as compared to 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 included 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, my name is Jeremy, and I will be your conference facilitator. At this time I would like to welcome everyone to the NHP fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Douglas N. Pasquale, president and chief executive officer. Thank you, sir.

Thank you, Jeremy. Good afternoon and thank you for your interest in Nationwide Health Properties. Joining me for today's call are David Snyder, vice president and controller; Abdo Khoury, chief financial and portfolio officer; and Donald Bradley, chief investment officer.

NHP's financial results for 2005 reflects substantial revenue and FFO growth relative to 2004. Our revenue in FFO before impairments and extinguishments increased by 21% and 19%, respectively, and associated FFO per share increased by $0.21 per share from $1.63 per share to $1.84 per share.

In 2005 we announced and committed to $404 million of investments. As of today, all but $55 million of these investments have closed, and we expect closure of the remaining balance in February pending only HUD approval. Year-to-date 2006, we have already closed on $54 million of investments including NHP's first medical office building portfolio, our first investment in this important asset class.

During the fourth quarter, we closed on our $700 million credit facility and term note and early in 2006 we instituted our continuous equity-offering program. Our excellent progress over the past two years have allowed us to increase our annual dividend by $0.04 per share while maintaining our dividend payout ratio in the low 80% range. With that overview, David will give our 2005 fourth quarter and full-year financial results.

Thank you, Doug. Now I'd like to give you a brief overview of the results of our operations for the quarter and year. Much like last quarter, to simplify things a bit, I'll refer to diluted FFO and diluted FFO before charges instead of repeating before impairments and extinguishments a half a dozen times.

Our additional rent increases and close investments of over $230 million this year and over $380 million in 2004, have resulted in an increase in revenues of $8.9 million and an increase in diluted FFO before charges of $3.4 million for the quarter versus fourth quarter last year. For the full year, revenues have increased $37.1 million and diluted FFO before charges have increased $20.8 million.

Diluted FFO was $0.44 per share for the quarter versus $0.42 in fourth quarter 2004 while diluted FFO before charges was $0.47 per share compared to $0.43 in the prior year. For the full year, diluted FFO was $1.56 per share and diluted FFO before charges was $1.84 per share, both versus $1.63 in 2004. For revenues this worked out to a 19% increase for the quarter and a 21% increase for the year. For diluted FFO before charges, this translates into an 11% increase for the quarter and a 19% increase for the year or, on a per-share basis, a 9% increase for the quarter and a 13% increase for the year.

Our funds available for distribution, or FAD, continues to seed our FFO because our cash rent collections are higher than our recognized GAAP rent. Cash rent exceeded GAAP rent by $109,000 for the quarter and by $1,004,000 for 2005.

On the expense side, interest expense increased $3.3 million for the quarter and $11.3 million year-to-date mainly due to the 2005 closed 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 short-term interest rates that have further increased the interest expense on our credit facility. The increase was partially offset by the repurchase of $133 million of senior notes in third quarter, the full impact of which was felt this quarter, and the 27.5 basis-point reduction in the all-in costs of the credit facility.

G&A expense is up $0.3 million for the quarter and $0.8 million year-to-date compared to the prior year. The increase is primarily due to starting to amortize restricted stock expense in 2005. We expect that G&A will increase by between $1 million and $1.5 million in 2006 due to additional restricted stock expense and the addition of a couple of new members to our team.

With that, I'll turn it over to Abdo for the highlights of our capital transactions and portfolio management activities.

Thank you, David. Today I will be updating you on both our recent capital management activity and portfolio management, as Brad McKown, our VP of Portfolio Management is not able to join us on the call.

On January 17, 2006, we entered into a continuous equity offering sales agreement with Cantor Fitzgerald. Continuous equity issuance is a low cost, low profile, and flexible vehicle of creating capital by selling our stock into the market to satisfy existing demand. It gives us the ability to sell shares from time to time throughout the year as capital is needed resulting in a more favorable price averaging and a better matching for our equity issuance with acquisitions. This equity issuance vehicle will not replace the more traditional equity issuance programs available to us as it works best when raising small amounts of capital at a time. We expect to raise around $50 million in 2006 from the combination of this program and our dividend reinvestment plan.

As we previously announced in October 2005, we increased our unsecured credit facility to $700 million and as of December 31, 2005, we had $470 million available. We currently have $395 million available and very little in the way of debt maturities in the coming months. In fact, we don't have any maturities until the fourth quarter of 2006, when $32.7 million of notes with a weighted average rate of 7.4% will mature.

The ample capacity on our bank life, the expected proceeds from sale of assets, and the projected equity from the [DRP] and continuous equity offering programs make the timing tight [unintelligible] for our next capital raise dependent on the timing on volume for acquisition pipeline.

Our dividend reinvestment plan continues to be quite successful. During the fourth quarter we issued approximately 172,000 shares of common stock, or net proceeds for approximately $3.8 million, which brings our total net proceeds for 2005 to approximately $16 million.

As we indicated in our press release earlier today, we are initiating our 2006 FFO guidance of $1.85 to $1.87 per share. The reconciliation of this guidance -- sorry -- $1.84 to $1.87 per share. The reconciliation of this guidance range to net income was included in the supplemental analyst information. This guidance assumes no acquisitions besides the transaction closed and announced to date nor does it include the impact of any future capital transactions with the exception for approximately $50 million of expected equity issuance from our dividend reinvestment plan and the continuous equity program described earlier. However, the guidance does assume a range of $7.3 million to $10.7 million of revenue leakage from purchase options, mortgage loan receivable payoff, asset recycling, and lease non-renewals. Those potential asset sales and mortgage loan receivable payoff, I'd expect it to generate net proceeds for approximately $36 million to $72 million and capital gains of $14 million to $19 million.

Our guidance range for 2006 excludes impairments because there is no way to predict these noncash charges and because unlike rent reductions, they have no impact on recurring FFO.

Now let's turn to portfolio management. The composition of our portfolio at the end of the quarter is prepared in supplemental analyst schedule, but I would like to point out the following items in particular. During 2005 and through today, options to purchase 12 facilities have been exercised on mortgage loans totaling $5.1 million were prepaid. The purchase options and the recycled assets that were consummated in 2005 have generated proceeds of $23 million and gains of $3.8 million in 2005 and will result in $2.7 million of rent loss in 2006.

Purchase options that have been exercised but have not yet closed and the loan payoffs will result in a reduction in revenues during 2006 of approximately $3 million and will generate proceeds of $35 million and gains of $14 million. The impact of the remaining purchase options, which could be exercised during 2006 are as follows -- to generate after $25.5 million in net proceeds that could be available for reinvestment could result in gains up to $2.4 million, could result in a reduction of revenues of $2.2 million in 2006.

We continue to identify opportunities to recycle certain assets within our portfolio. These properties have been identified for pruning and for consideration of several criteria including but not limited to asset 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 -- seven properties have been identified for pruning during 2006. These divestitures will result in proceeds approximately $11.3 million to be reinvested in more attractive assets. These transactions will provide approximately $2 million of gains and will result in a reduction in annual revenue during 2006 of approximately $1.6 million.

Of the leases up for renewal in 2006, two leases representing $1.2 million in rent are still pending renewal. Four other leases up for renewal in 2006 have been renewed or new leases have been entered into with different operators resulting in a rent loss of approximately $1.3 million in 2006.

In summary, we anticipate the following impact from various sources of revenue leakage -- total rent reductions in 2006 of $7.3 million to $10.7 million. These amounts are included in our 2006 guidance range. Total net proceeds of $35.5 million to $72.3 million in 2006. Now to Don for a market and investment update.

Thanks, Abdo. 2005 was another record investment year for us with $404 million of announced cash accretive equity investments. We also got 2006 off to a good start by closing on $54 million of accretive equity investments in January with an additional $53 million in the queue for February.

Our 2005 investment activity adds over 80 facilities to our portfolio with an average age of 10 years, over 50 of which are independent/assisted living facilities and the rest skilled nursing facilities. On a weighted average basis, our 2005 announced investments have an initial yield of 9%, annual [ups] of 2.1% and underwritten EBITDAR coverage of 1.3 times -- 1.2 times for the ILAL facilities and 1.5 times for the SNFs.

Turning now to 2006, on January 24th we announced our strategic entre into the medical office building sector. MLBs represent, by far, the largest component of the healthcare real estate market and are a natural complement to our strong senior housing and long-term care portfolios, ultimately providing us with an even more diversified investment platform.

A key hurdle to executing on this strategic goal was accessing on an MOB management platform, which we were able to do through our new joint venture with the Broe Company and its 25-year-old medical office management division, InSite Properties. The joint venture currently is being funded with about 30% equity with NHP putting up 90% of the equity capital and Broe 10%. Profit sharing will start on that basis with Broe having the opportunity to increase its share to 50% to the extent that return on equity exceeds 10.5%.

As we also announced on January 24th, the joint venture made its first investment by acquiring nearly 800,000 square feet of primarily on-campus medical office buildings affiliated with Hospital Corporation of America hospitals and an in-place NOI cap rate over 8%. The aggregate purchase price was 51.4 million, or $67 a square foot for this 21-facility portfolio, but it's about 82% occupied, 17 years old on average, and located in Georgia, Louisiana, South Carolina, Tennessee, Texas, and Virginia.

Three of the facilities representing 11 million in the transaction were covered by secure debt, the assumption of which has delayed their closing until later this month. We expect this investment to be modestly accretive for NHP during 2006, adding a little over a penny per share of FFO, as Broe focuses on improving the quality of performance of certain facilities and we learn more about what it takes to maintain and effective MOB platform.

Moving now to new senior housing investments, on January 31st we acquired what has almost become an endangered species; namely, a cash-accretive, $13 million investment in a brand-new primarily independently living facility. The facility has been leased up and has been added to our strong master lease with Laureate, a longstanding preferred customer of ours. The 134-unit facility cost about $97,000 a unit, and it is expected to stabilize over the next year or so with an EBITDAR coverage of around 1.2 times. Further details of this investment are included in today's earnings release.

We are very pleased with our 2005 investments and the start to 2006 notwithstanding what has been and remains an extremely competitive investment market. We are fortunate to have an outstanding team of senior investment officers in John Sheehan, Dave Boitano, and Bob Noonan, and we intend to add to our team as the year progresses. We expect the rest of 2006 to be devoted to select, opportunistic investments in the ILAL and the MOB markets with moderate yields, totally turbocharged by additional investments with good coverages in the higher-yielding [SNES] sector. Now back to Doug.

Thank you very much, Don. We are now pleased to answer your questions. Jeremy, please open the lines.

[OPERATOR INSTRUCTIONS]

Richard Anderson.

So Broe is incentivized by going to 50% of the profits after you receive a 10.5 hurdle, is that correct?

Correct.

And how big can the JV become?

It does not have a limitation in size.

Okay. Where did you buy the portfolio from in your initial acquisition?

This was the last of the HCPGE portfolio that they started marketing, I think, early last year -- by Granite Properties.

So Broe wasn't involved in that previously? They weren't managing it previously?

No, no.

Turning to some other things -- you mentioned $50 million in equity sort of in your guidance, and the next capital raise is not in your guidance, whatever that might be. Would you say -- or did you say that the next raise would likely be equity beyond that?

We didn't specifically say this time, Rich, but we've indicated in the past, given the 2005 our capital raise was the $250 million of secured debt and expansion in the credit facility that it is likely or not or more likely not that the next one would be equity.

Getting to the purchase option commentary, how much was done in the fourth quarter?

In terms of, what, the rent loss?

Not the rent loss but the proceeds.

We had about 28 million, I believe.

Twenty-eight million in the fourth quarter?

Hold on one second -- $23 million.

Twenty-three million? And do these come at, like, double-digit cap rates, would that be a decent assumption?

Do you mean on the rent yield?

Yes, like, assuming it's sort of -- it's a disposition, and are you really disposing of assets at 10-plus yields.

Right about in the 10, 11.

I was looking at your supplemental information, and one thing that stuck out to me was that your private pay in Medicare percentage of your portfolio is now 62%, and it was 78% last quarter. What was the change there? What happened?

It could be, I'm not -- it has been 64, around that 4 for -- it could be that we used to include private and Medicare together, and that could have been the 78%.

It looks the same, but maybe I missed something -- private pay and Medicare? Maybe it was a typo?

It could be.

Okay, let's go with that.

It's 62% to 64%.

Okay. When you discussed the leakage from the lease renewal activity, first of all, did you say that that has already occurred?

Yes.

Okay, so that happened early on in the year. And is that --

The lease expires in April, but we already negotiated the listing to another operator, and kept other operators, which resulted in this rent loss that will start in May.

And with regard to how it's calculated, I assume is that calculated on a GAAP basis or is that a cash number?

That's a cash number.

Oh, it's a cash number. So from an FFO standpoint, wouldn't it be true that you would have a straightline add-back, and so it may not be entirely that $1.6 million in loss?

From the lease renewal?

Yes.

It's $1,300,000 and --

Oh, 1.3, I'm sorry?

Yes, and that's -- no -- there is no straightlining here.

There's no straightlining, okay. And just the last question on the 2006 purchase options, the certain ones in the highest certainty -- how much of that has already occurred?

When you say "occurred" -- what "certain" means is we have received notice from the tenant saying they want to exercise their purchase option. The high is the probability that we have calculated using certain criteria to determine the possibility.

Has anything happened yet?

There is one facility that the sale was closed at the end of January.

How much -- maybe the best question is how should we most appropriately space out these potential purchase options over the course of the year?

The certain ones, they mainly happen in the end of the first quarter and second quarter.

Okay, and the high probability --

And the numbers we're showing you here in rent loss take into account the timing.

Understood, understood. And in the high -- best to just sort of maybe straightline?

It then sat all over the year, some of them in July, September -- they're all over the -- yes.

Jordan Sadler.

I'm here with Craig Melcher. Just following up on Rich's question on the MOB portfolio. First of all, the 10.5, I assume, is leveraged in order to hit the hurdle for them to start moving up their economic interest -- Broe.

Yes, it's a return on equity.

What was the going-in yield?

The cap rate was over 8% in place.

Over 8%?

That's the NOI from -- just as it stands today, the NOI over the acquisition price was over 8%. We plan on doing some stuff to the portfolio so that's going to change, we hope. Probably for a while, it will go down, and then hopefully it will go way up.

Okay, and who were the -- so north of 8% -- and who were the primary -- is HCA a primary tenant here at all?

HCA is hospital campuses.

Is there any tenancy represented by HCA?

Actually, no. It's individual physician groups and whatnot, but not HCA itself.

Okay, they don't have any ambulatory surgery centers or anything like?

-- surgery centers that I can think of, off the top. If it is, it's a minor amount.

I think you said -- are they all on HCA campuses -- all 21 buildings?

The majority are.

Okay, like, 51% or, like, 91%?

Oh, I would say, like, I think about 150,000 square feet is off-campus, and the rest is on-campus.

My other question was just on future activity. You mentioned the pipeline -- what do you see out there these days, Don?

Really nothing that you haven't heard from everybody on the senior housing side -- the independent living and assisted living, especially in the larger deals -- extremely pricey and very hard to make a living in, so we'll probably be seeing more isolated transactions there, maybe some new development. Skilled nursing still seems like it has some play in it, some attractive play in it where you could make a good investment and good coverage; you could get a decent yield. Frankly, assisted living, some of the cap rates in assisted living have gotten down to sevens as have -- which is, roughly, where you see a typical cap rate for an MOB, and we pretty much thought if we end up ever investing down in that area, we'd rather buy an MOB than assisted living facility because assisted living facility has an operational risk to it that's just not being priced into the equation. So that's sort of our view of the world.

Okay. So in the current environment, do you expect that you'll be transitioning more towards -- or weighted more towards MOBs in the near future?

It really is going to -- you know, we would love to see us be able to acquire a large platform of MOBs if it turns out that our thinking proves to be correct, and we're pretty confident that it's going to, because we really like the asset class in terms of the risk profile for it and how it will bounce off the rest of our portfolio, plus it gives us another place to fish in. So, yes, if there's enough opportunities out there that we like and that look attractive, we'll load up just about as much as we can. We'll load up. It's a very competitive market for MOBs just like it is for everything else, so how much we'll end up being able to get, I really have no idea.

In terms of volume, what are you thinking this year? Do you think the pace that you did last year is kind of sustainable, just based on pricing? I know that you don't give acquisition guidance, but --

Yes, I'm afraid I've got to tell you I can't really comment on that. The minute I tell you I think it is or I think it isn't, I mean, who knows what's going to happen in the next 12 months? I just don't feel comfortable going that far out.

Is there a pipeline with stuff that you're -- I mean -- how has that changed? Maybe you can characterize that -- stuff you're looking at versus --

I think you just have to look at what we've announced that we've got a good portion that we started the year off with and a good portion in the queue for February, and it could all drop off the cliff after that or there could be a lot more coming in. I really don't know.

Okay, quick question on the Laureate ILF/ALF acquisition? What is the occupancy?

Right now I'd say 40%. It's a brand-new facility in lease-up.

Forty percent occupied.

I think it was around low 30s, maybe high 20s when we underwrote it, so by now it's got to be somewhere there in the 40s. But we've got it in our master lease portfolio with plenty of coverage. That's one of the beauties in these master leases where you build up a little coverage as you can bring in things like this and give them the chance to sort of develop.

What do you think your coverage is on the eight properties you own you have with Laureate?

The last I looked, it was over one-five on a DAR basis.

That's pretty good. So the --

They're an excellent operator.

What do you think the stabilized yield becomes on that thing, because you've got a 7.5 initial, it sounds like, but it seems like you get pretty good --

You've got roughly the [inaudible] --

-- you get the --

-- we put the press release --

-- you'll get that, the 2.5?

Yes.

Okay, I think Craig Melcher has one or two quick ones.

On the revenue leakage, what would the annualized loss be rather than the '06 that you're showing -- the purchase options that are starting in the high? You said for the certain ones they were going to be in the end of the first quarter, so it would be around $3 million?

Yes, it will be about $3 million and the others are about probably also another $3 million.

Okay. I have a question on the income statement -- the interest and other income picked up about $500,000. Is there anything one-time in there or is this the going run rate?

Your interest income?

Yes, it went from, like, $2.5 million up to $3 million.

That should be pretty good -- that is a run rate. There's a little bit of one-time in there, but we did close two new mortgage loans during the fourth quarter or toward the end of the third quarter that were in there for the full fourth. So it's rightfully due to those.

Jerry Doctrow.

You had one, I think, impairment in the first quarter. What was that for? Or -- in the fourth quarter, right.

The fourth quarter?

Yes, the $0.03 impairment -- $0.03 spread between impairments -- is it just a write-off on an asset or what's --

Yes, this is an asset that we decided to sell, and we knew that the value of the asset was going to be lower than our net book value, so we went ahead and impaired it, and we have it actually, I think, under contract or being negotiated.

Okay, and I guess just coming back to the MOBs, a couple of questions -- in addition to just the basic [ennoms] the deal, are you getting acquisition fees or what kind of fees are you paying maybe to grow for acquisition management? How does some of that stuff work other than the basic JV?

Broe will be the managing member -- it's almost a flip of our JER joint venture, where we're more the capital and learning, and they're more the person with the expertise and doing the management. We'll have equivalent sort of approval rights, but they'll do the management, there will be a fee, a market-based fee. I don't know what it is, 3% or 4% for actually managing the properties, and after that InSite will be looking for, and I think there's a disposition fee of some modest amount that's in there.

And an acquisition fee, as well? Did they get a fee for --

An acquisition fee, I believe, of 1% -- no? Yes, 1%.

Okay, and then I think -- this is -- you categorized it this way -- but this is sort of an HCP castoff, you know, this is stuff that they didn't want. And so what do you see in it that they didn't, I guess, and why is it attractive?

You're dead-on. That's a question we've pondered over several times, and we figured it would be one that we'd hear a lot of -- "Well, if they didn't want it, why do you want it?" As it turns out, it's primarily because these facilities are not in their core markets. If you look through their 10-K and whatnot, maybe Texas, they had some core markets there, and the facilities they were looking at just didn't fit within that. We don't know what the internal workings of their JV are when they have liquidity events and when they need to cash in and get returns or whatnot. So we don't know how much of that works in there. These are, by and large, very small facilities, as you can tell -- 21 facilities. And they actually didn't manage them. They were so small and so much on the fringes that they hired third parties to do the management. So it just wasn't in their strike zone. So how are we going to do better? Well, we really feel very confident with the Broe management team and with what they have identified as their plans for turning around those that are not stabilized, and they have a track record that goes back a number of years of being able to do just that, and we have a high degree of confident that they will. And if they don't, we are very confident that we have very little at risk in terms of investment, and if they do, we'll be learning a lot, and I hope we make a lot of money on this.

Okay, and did you look at the risk, I guess, given, again, close association with HCP and HCA and just trying to be as paranoid as possible here. Are there -- given that the portfolio is a little old, did you look at the possibility that there is excess land on some of these sites that they could build a competing facility?

We did, Jerry, and not to say that somebody can go off-campus and build something, that's always a possibility, but on campus there really didn't appear to be anything that we were concerned about.

All right, great, thanks.

Jerry?

Yes?

I just want to give a little additional information to what Don said. Don did a good job of answering your question specifically, but stepping back philosophically and looking at it from a broader-based point of view, there are other considerations. First of all, and it was mentioned, but I can't emphasize it enough -- I've had the opportunity to know the Broe Company. I've had the opportunity to do business with them on several different occasions. They have a unique ability of taking assets and taking them to a new level of performance through their management capabilities, and their track record is very strong in that regard.

But in a broader sense, and having answered specifically, I think, what you're looking for, I think it's a question that should be asked on a lot of different fronts. I mean, you have the highest transaction volume going on in most real estate sectors now, and for every buyer there's a seller, so you have to balance things out. What are sellers saying on any asset that they're looking at, or any buyer saying? I mean, it's a well-directed question for this specifically, because it's our first entré in medical office buildings and, hopefully, we've satisfied your question.

But I think the question needs to be extended much more broader to everybody that's making investments. What do the sellers know and what do the buyers know and who is going to be right on this? Because we've talked a lot about pricing getting expensive, and I can tell you, from a philosophical point of view, we're passing on a lot of deals that others aren't, and we're busy. Time is going to tell who is right and who is wrong, but there's an awful lot of transactions going through things now, and I think investors need to step back and really figure out where they're placing their money, who is making the good investments and who is not.

Okay, and you're comfortable with where you are, I assume. Obviously, my focus on it, since I do have a lot of confidence in you guys in the senior housing area, it's just the fact that this is your first one in a medical office.

This is the first one in a medical office, and they have a fair amount of experience in office buildings, and we have a lot of experience in taking partners.

Okay, and does the Broe relationship give you any access to investments in their senior housing business, because is it Aspen that they own?

We're off to a fabulous start with them, and I think there's all kinds of different ways our partnership could expand, whether it's in that specifically or not, it's hard to say. But I think that both of us are highly motivated to try and find ways to benefit together off the foundation that we started.

Okay. Any other asset classes, specifically, you'd look at outside that they're involved in?

They branch out in all kinds of things like railroads and things like that, so we'll probably stay away from that for right now, but --

They've got Band-aids up there [inaudible].

David [inaudible].

When you look back on your 2005 budget, what percentage of the purchase options that you would have considered certain or high were actually exercised, have you got a sense of that?

I think on the high -- the certain we knew about, but the high, I would say, probably about 20, 25%.

Is that what you would have modeled going into 2005 or --

Going into 2005, we had a certain number of high and, out of that, only about 20, 25% did -- actually, a little bit more, maybe including the one that closed in October. Probably, I would say, more like 50%.

So is that more or less than what you would have expected?

Actually, it was less than what we expected for 2005.

Okay. What asset class are the purchase options associated with in a certain or high category position?

A lot of them are nursing facilities. There are a few assisted living, but the ones that we are dealing with in '05 and '06 are mainly skilled nursing facilities.

Okay, and then, lastly, have you looked at the more Medicare-dependent asset classes in healthcare that are facing potential reimbursement changes -- L-Tax and patient rehab?

I'm sorry, would you repeat the question?

Have you looked at the more Medicare-dependent asset classes that could be facing potential reimbursement changes?

We will revisit -- we are always looking. We have shied away from L-tax now for a couple of years because we have been quite afraid of the kind of margins they were getting, and we're afraid that was going to come to the attention of the government at some point, as it has. Depending on how it corrects, it could over-correct, and if it does, we'll be very interested in investing in there.

Robert Mains.

Twenty-three million was property sales that occurred in the fourth quarter, is that right?

Yes.

Did you have any loan repayments in the quarter?

No, it happened in January '06, not in '05.

Okay, and what were total investments made in the fourth quarter?

Total investments made?

Yes.

We just had a few capital expenditure fundings, you know, less than $10 million that actually closed in the quarter.

Okay, so you were net seller in Q4?

Yes.

Okay, and then the other question I had, because everything else has been asked -- when I look at the straightline number -- I know we're talking about kind of small number there -- but the straightline benefit that you got, it was conservatively lower in the fourth quarter than it's been in the previous quarters. Am I assuming that some -- or am I correct to assume that some of the assets sold affected that number in the quarter and would probably -- your benefit would go up in 2006?

Actually, it's probably going to be closer to the number that we showed this quarter. The issue has to do -- we have one rather strange lease, where the payment stream is not one that we wrote, it's one that we assumed in the past. The payment stream goes sort of up and down within that lease, so that particular one was paying substantially more cash than we recognize rent. It's trending down at this stage, and therefore, for a while, it's going to be recognizing a little bit more rent than we receive cash, while the majority of our straightline leases are in the overpayment range right now, where they're paying a bit more cash. So what this one did was -- it was adding to it, now it's detracting from it, but we should still be net slightly even more cash. We expect, at this point, to be slightly more cash than rent recognized in the future but closer to this quarter's number.

So kind of a wiggly straight line?

Yes, it's a very odd lease we picked up here.

[laughter]

Greg Andrews.

On the Broe joint venture, just to be absolutely clear, is the 10.5 like a preferred return on equity after which the cash flow is split 50-50? Is that the right way to think about that?

I wouldn't call it a preferred return. We start off as a 90-10 split, and then if they're able to get up to where we're getting a 10.5% yield on equity, they go to 50-50. So we're incentivizing them to get this thing -- get the occupancy up and get the NOI up so that they can get to that 10.5% return quicker and share 50-50 with us.

Okay, but the 50-50 is incremental after that level?

Exactly.

Okay.

Because we need a 14% return on equity. I mean, ideally, we'll have all of our equity returned, and then this thing will just be kicking back 50% to each one of us.

Right.

That's what they're hoping for, and that's certainly what we're hoping for, because then we hit a homerun.

Okay, and there's some secured debt you mentioned on some of them. Do you have an amount and rate for that?

It's a modest amount. The purchase price is 11 -- guessing -- it's like $4 million.

It's about $6 million.

And the rate is -- 6?

Six -- it's very low.

Very low.

Okay, and then, you know, just from a bigger -- stepping back for a minute, I mean, all these purchase options and renewals where maybe the rents have gone down a little bit really caused me to think that internal growth in '06 is pretty de minimis, and I'm just kind of wondering, you know, from a longer-term perspective, when can we really expect to see some internal growth that net of all this stuff is a meaningful, positive number.

Well, you just have to determine -- there are purchase options in certain leases that exist, and you never know when, depending on the market conditions, availability of capital of that; that tenants may or may not be able to exercise those options. Currently the market is in 2005-2006, the debt market has been very favorable, and capital is available for operators to be able to exercise these options. What will happen in the future is hard to tell. But you have to look at purchase option really more as an investment -- net investment -- because you have proceeds attached to purchase options that you can't redeploy in that. You have to look at net investment rather than internal growth. We do have internal growth getting close to 2% from additional rent that we get year-over-year, but I would look at purchase option as a net investment -- net it against the investment. You get proceeds from selling these assets, and you reinvest those proceeds.

Right, but most of what's being exercised or could be exercised, as yields that are in excess of where market is today. So these options, as I look at what you just reported, are clearly dilutive.

They are.

In today's market.

In today's market, they are, but --

But that's offset somewhat, Greg, by the gain that you have. You also have the profits you can reinvest.

But net net, it's going to be dilutive.

But what you have to look at is you are getting your gain also to reinvest.

We said early on, our preference would be, in a perfect world, that we wouldn't have been hit in 2006 with the amount of purchase options that we're expecting. But that said, there's some good to this, and there really is an opportunity for us to monetize some of the capital appreciation that we've seen. In some cases, these are assets that, frankly, notwithstanding their attractive rent yields, which can be seductive at times, some of these assets we're glad to push on down the road, because they're old assets. So it's a bittersweet pill to swallow, in some respects. Some of these would have manifested just to our portfolio management program, and with the guidance that we provided, we're showing still some upward momentum without predicting or incorporating any capital market events or investments beyond what we've already disclosed. So it is -- Greg, as you described, it's imperfect, and in some respects we shouldn't have them, but in many respects we're not sorry to see some of these assets go, and it gives us a chance to monetize some of this appreciation.

Are the deals you're doing today, Doug, typically including purchase options as well?

We tend not to grant them now. It's something that tenants or prospective tenants like to see periodically if we do give them, and it's -- we far more often don't than do. But we'll either try and stage them a bit or require them to bring us replacement business or any number of things. But there are certain situations where it's just part of the negotiations, and, frankly, it may be a confession that's more acceptable to us than compromising our underwriting criteria in terms of getting our current coverage or something like that. But, for the most part, we try not to give them. I think we've been very successful in that regard.

In one respect, you're hitting right on it, though, Greg. You know, we hate to see the FFO go away. You know, you work hard to get it, and then you see it go away, and then you've got to go reinvest again, and, you're absolutely right, the market tends to be not yielding the same or otherwise they wouldn't be exercising the purchase option.

But one of the nice things about it is what Doug hit on, and this particular case, the one that we're talking about is we're getting rid of some 30-year-old assets, 40-year-old assets, that maybe not today are a problem but down the road could become a problem for us. So it's a nice forced recycling program in that respect. That's the good side of it. The bad side of it is you take the FFO hit. But as Doug says, in terms of the purchase options we're granting now, by and large, they'll be more of a substitution base where you'll come in and substitute new investments in order to be able to acquire one. We don't mind some of our -- in fact, we encourage some of our operators to take an equity position, and some of their properties, there's just that much more commitment and substance into the operating company.

So it's not necessarily a bad thing, but what we're really seeing is the unfortunate results of all the restructurings we had to do in the late 1990s and 2000s when it was extremely difficult to get anybody to come in and take over the operations of some of these assets, especially in the skilled side, where it was very difficult to find anybody still operating, where nobody wanted to come in and take on new trouble. And to get anybody to come in, you almost had to give a purchase option because they wanted to capture whatever benefit and appreciation would have gained from them turning the profits around.

It's just a byproduct of the times that we found ourselves in in that particular era. It's not necessarily indicative of how we do business day-to-day.

Okay, and just to follow on that just a little bit more -- if conditions remain the same for the next year, do you think going into '07 we'll be looking at kind of a similar volume of purchase option, you know, potential purchase option exercise?

We have been taking a look at '07, and, no, it's not the same level.

Okay.

Lower level.

A lot lower or --?

Significantly lower.

Scott O'Shea.

A quick question here on the balance sheet -- if I've added this up correctly on the new investments, it looks like by the end of February, your year-to-date investments will be about 236 million including Wingate and the MOBs. In looking also at your year-end bank borrowings, about 224 million, that kind of puts you at a pro forma, 460 million on the bank credit facility? Is that about right?

I gave you what we are today after closing a good portion of the SRC as well as the MOB. We are at -- we have available $395 million, which means we have used $305 million.

And, Scott, most of the SRC has a lot of HUD debt. That's what's delayed the closing of that. It has a lot of HUD debt associated with it, so we're not coming off our bank line on that.

We've had the sales. We talked about the proceeds from sales and other things.

And the MOB acquisition is about 30% equity financing, about 70% debt financing for that as well.

Okay. Is that going to be kind of a pro forma cap structure, going forward? Seventy percent secured debt on the MOBs?

We're going to have to look at it deal-by-deal. We do have in the JV, we don't want it to go above 75. But the highs will go up, but it's just going to bend on the deal. It may make more sense in some cases for us to put a little more equity in.

I guess from Broe's standpoint, because their breakpoint is 10.5 on a levered basis, they're going to be looking for that extra leverage.

They are.

The next transaction could be different, though.

They are, but they understand that we don't want to push levers too high.

Okay. The joint venture is consolidated, is that correct, because you owe 90% of it. Is that the way it's going to be accounted for, coming up on the third quarter statements?

We are working on it. We are doing some research on it. We may or may not consolidate it. Basically, there are certain new rules that came out in the fall, and depending on how much control we have and say in the operations, we would determine if we consolidate or not. And basically we don't have a lot of say in the operations, but we do have acquisition and sales and dispositions approval rights. So we're researching that to determine if we will or not consolidate.

Rest assured, though, Scott, if the proper determination -- if it is not consolidated, we'll make sure that our disclosures are as thorough and clear as they were with respect to the joint -- the JER joint venture.

The JER, okay.

Which was also not consolidated, as you know.

Yes, that will be fine. A quick question on the 305 million that's outstanding -- is the 100 million term loan fully drawn?

Yes.

Okay, so you've got 205 on the revolver, then. Okay, great.

The 100 is part of the 395. Oh, available, yes, sorry. You're right, Scott, you're right.

Michael Mueller.

A few things just to clarify here -- the 305 on the line that's outstanding as of now -- so if we fast-forward to the end of February and look at the other closings, it looks like another 60 million or so that goes on? Is that -- am I looking at that correctly?

Some of that has some debt with it, too, the 60 that's going to close. So I would say it's probably another 30, 40 that we'll add to that.

Okay, 30 or 40 -- so that will take you to the mid threes. Can you talk a little bit about how you plan on using the controlled equity issuance versus you mentioned more of a traditional. And what's the threshold for when we should expect to see a more traditional offering versus equity? I guess, boiling it all down, if you're at 350 on your line, what's the near-term pattern for the line? Does it stay up there or does it drop down a little bit or do you expect it to come down significantly in the first half of the year?

We do have some purchase options closing in April, and some in February, a little bit, so we do have significant cash coming in -- proceeds from the -- what we call "the certain first options" that are certain. All will depend, really, on our -- the acquisitions beyond those which we talked about, at this point. That's when we'll start to give out what we need to do. A continuous equity issuance, this will be an ongoing -- it's a small amount at a time. We can turn it on and off as we please, and it will not generate a significant amount each month. It will allow us to have some equity coming in like it does through the [drip]. It's like a super drip, if you want.

Okay, and when you think of your variable rate debt as a percentage of total debt, what's the right comfort level in terms of where you want that?

We're comfortable with the 25 to 30% range that we're in right now as a percentage of total debt.

Okay, and then on the transaction side, just looking ahead -- I know you're not giving any sort of guidance or anything, but is there any sort of sense of what the mix could be, going forward, for senior living and MOB?

Not really. You could say if cap rates tend to creep down and remain as competitive as they are on the ILAL side, it's more likely going to see more SNP deals than not. I think that's a natural. But, then, again, we might find a lot of selective ILAL deals here and there that might think that not be the case. But I guess with cap rates where they are, we have said that we would expect to see more skilled than not, but whether that will end up being the case or not, we'll know in December.

Okay, and, lastly, on the MOB deal, what would happen or what would you need to run into where you would take a step back and say, "You know what? The margin -- we don't plan on putting any more capital into this asset class."

We would have to go back and take a look at the rationale upon which we decided to enter into this class and diversify. We would have to be -- it would have to be demonstrated to us, I think, primarily, that our assessment of the risks associated with the asset class was not in line with what we thought it was, because that's really one of the bigger -- there's two big drivers for us getting into this asset class, at least from my perspective, and I want everybody else to chime in. One is the market perceives, and we perceive MOBs, and it makes logical sense to us to be less risky. So by adding them into our portfolio in a meaningful way, we necessarily make our portfolio less risky, which can be make it more attractive to both debt and equity investors, which, in turn, can make our cost of capital lower, which is going to allow us to do a lot more things on the investment side.

The other thing that it does, is it introduces I think 34% at least of the healthcare real estate is in MOBs, and that is a huge -- as Doug likes to call it -- lake that we're not fishing in, and that's just a lot of real estate investment potential that we're not even -- had not been looking at in the past, and when things do get a little dicey in the ILAL side, it's kind of nice to have not just skilled nursing to turn and look at but also maybe another asset class like MOB, because if we can find a fourth that we think fits or model, we'll have four legs to our stool.

It's clear that the market has placed a relative premium in terms of multiples on companies that have greater diversification and have strong presence in this specific asset class so, as Don said earlier, with yields independent and assisted living approaching medical office buildings, we have used the relative risk -- relative to somewhat constant returns would be overall better with medical office buildings. So we have to continue to evaluate it. The structure of the joint venture is one, and with the partner we picked and the transaction we picked one where we think we've dramatically mitigated and framed what our risks are and gives us some significant upside. But, as Don has said, we're just going to perceive what the market tells us as the year evolves and, really, one of the reasons we don't give guidance and projections is it changes dramatically from month to month and quarter to quarter, and so even if we were predisposed to want to do that, we wouldn't be very good at it just because our job is to interpret what's happening in the marketplace and to act on it and to harvest value from it, not stick to a rigid set of parameters, which we don't do, which is why we've said before, and we'll continue to say we're both opportunistic and strategic investors. We know where we want to go over the long term, but in any particular year, we're going to have to evaluate the marketplace.

Jamie Feldman.

Thank you, from Prudential. Just to touch upon the prior question, and I think, really, you said at a 7% cap rate you'd certainly prefer MOB to ALF. What do you think, based on the risk of each asset class, the spread should be between cap rates for the different asset classes?

That's tough to generalize, just because there are so many variables, but there should be -- there should be some spread between the different asset classes and maybe -- I think we talked about this last time, Don, you did, and I don't remember exactly what you said but, roughly, 100 basis points between medical office buildings and independent living, and then maybe another 50 to 100 basis points, closer to 100, for assisted living, and then you jump marginally higher for skilled nursing. But there are so many factors beyond that, it's hard to generalize other than something like I just described.

That would certainly be the order of what the spread is, is exactly like Doug said. It's just -- that's a little harder one to pin down. But in terms of risk, as we perceive it, and as it has seemed to borne out over time -- that would be the order.

Frankly, one of the biggest drivers right now in terms of what cap rates are and rent yields are is the size of the deal, because the larger the deal, the greater attention it attracts and, frankly, there's too much money looking for a home right now. So the larger it is, the more radar screens it's on, the more competitive it becomes, and to some degree or opinion that sometimes people become so focused with the size of the opportunity that they may lose their bearings a little bit with what the underlying risk is as associated with the asset class amongst other things.

And then how much lower can cap rates go on medical office before you become uncomfortable?

We're not a huge fan of the deals that aren't cash accretive, and so as things approached our cost of capital, we'd have to have a real hard look at it, irrespective of what the class was. So our transactions being done that are only accretive on an FFO basis, that's not our preference. I think that it's justifiable in certain circumstances. Some of our competitors have done that, and I think for good reason in select cases. But, for the most part, what you start doing at you're not leaving much margin of error for yourself, and you better be pretty sure there's not going to be a correction in valuation.

Jordan Sadler.

A quick one on the -- back to the MOB. Don, I thought you said you bought it at north of an 8% cap rate. With 70% leverage, assuming -- I don't know, what kind of debt are you expecting to put on this -- 6% -- is that a fair estimate?

What's the current market -- 6% is as good as anything, yes.

So you're getting a 250 basis-point spread over the debt. By my estimate, just back of the envelope, you're already at a 12 return on equity. So are they already getting a 50-50 split -- the Broe Company?

No. We just maybe miscommunicated and are not doing the math right.

Cash flow -- depending if you look at it on a GAAP or not, there's a lot of leasing commissions and PIs that's going to be spent in the first year.

What's the yield on a cash basis?

That's the yield that Don was talking about -- around 8%.

Right, so if that's 8% on a cash basis, then it wouldn't matter what PIs and leasing commissions are, because PIs and leasing commissions are cash, right? Those are out the door already.

That's the thing toward -- the occupancy where it is, one of the things to make this -- some of these properties are very nicely stabilized, some need work, and a lot of PIs will be going into the leasing commissions to get the occupancy up. So there will be a fair amount of cash expenditures, going forward, to get these properties where we want to get them. But what I gave you with the in-place NOI cap rate being over 8% was just to give you an order of magnitude. As I indicated, though, we're going to be spending a lot more money in cash to get these places where we want to get them. That does affect the returns. If they were just -- if we didn't have to put any more cash in it, you're absolutely right.

The number that Don has based it on is the current --

In-place.

In-place NOI at 8% cap.

And so the cash that you guys spend in terms of either capital improvements through TIs, that is deducted from NOI to get to their cash flow yield to require the --

Cash flow distributions.

It's not added to the basis?

Not to get to the return on equity.

Okay, so it's deducted directly from the NOI?

Yes, it's based on the cash flow distributions that each partner would get. So when we get a distribution, until we get 10.5% and they get 10.5%, that's when it switches -- goes to the 50-50.

Just think of it on a cash basis.

Well, what do you think your current return on equity is -- or your first-year return on equity -- another way of putting it?

It's about -- I don't remember the numbers.

Maybe 8, somewhere around the 8.

Okay.

There's just so much that could go on. We could decide to sell one or two, that could change the cash flow; there's just a lot of different elements into it, and we've really tried to shy away from that. That just sort of outlined what it looks -- what the landscape looks like.

And just again to be clear -- your return is the first 10.5 percent thereafter it waterfalls and you guys receive a 50-50 split.

Up to 10.5 -- actually, there's another step in there, too, but at 8%, we're sharing 90-10. So 8% cash comes in, there's a little bit of difference in the first three years where get a little bit of a preferred return, but we'll not mess things up with that. So we're sharing 90-10 at the beginning. Then if they take it up to a certain level -- I don't have that, frankly, off the top of my head. I think it's something like 9-something or something like that -- it goes to a 65-35. Then if they take it to a 10.5 return on equity, it goes 50-50. We don't get the preferred money up to 10.5. The preferred money up to 9.5, we're sharing equally on the way. The only place where we're getting somewhat of a preference is the first few years, but it's really not significant.

Okay, so they actually get a 50-50 split pretty quickly.

We hope.

Christopher Pike.

It wouldn't be an NHP call if it didn't go this long.

[laughter]

Just one quick question. If it takes more than 30 seconds, we can table it offline. Abdo, a couple of quarters ago you guys talked about this risk model that you were looking to apply to your portfolio -- if I remember correctly, to help identify potential impairments, going forward.

I would like to say potential impairments, because impairment -- the way you --

Let me just finish the question. If it takes more than 30 seconds, I guess then we go offline. That whole risk model, I mean, did it kind of show you that, okay, in Q4 there's going to be some trouble and that you may be taking some impairments or how directionally accurate was it?

It's very accurate. In a way, it doesn't necessarily tell you that's what I'm trying to differentiate between impairment and a watch list, and a list of assets that need attention -- special attention. So what the system allows us to come up with is a watch list, and another list that's even more critical than the watch list, and the asset that was impaired on the watch list and then on the critical list before it was impaired. There should be an event that takes place the force your team to have the asset. Or you decide to sell it or the tenant files bankruptcy or there are certain things that happen that make you take the impairment.

Okay, so what does that watch list look like now? Is that something you can share with us?

We will eventually share this information as a percentage of our total assets and revenue in terms of what's on the watch list or what is on -- but we're not ready to do that yet.

Okay, great, thanks a lot.

Russ Nussbaum.

Quick questions -- I may have missed this -- was there any equity issuance in your earnings guidance?

There is 50 million of debt and continuous equity offering, yes, 50 million.

Okay, and not to beat a dead horse, but the purchase options -- what percentage of your leases have purchase options at this point?

There is around a third.

Okay, and how is the purchase price determined -- are the tenants sharing in any of the upside in appreciation of the assets?

They are all kind of ways the purchase option at prices determined. Some of them have a specific price mentioned already, others are based on fair market value, and others are based on our original investment plus an annual escalator. So there are various types of -- some of them it's the greater of original investment plus estimator or fair market value.

Okay, and then final question -- I may have missed this in the release, I don't see it in there -- were there any straightline rents at all in the quarter?

We had the small amount that we talked about that goes actually the other way. So we have about 109,000 of cash in excess of rent for the quarter.

[Maria Brosnan Leeds]

Hello, [Maria Brosnan Livel]. I wanted to confirm some numbers. The price of the portfolio, the MOB, that's 51.4 million?

Correct.

And that includes the three properties for 11 million that still need to close in Feb.

Correct.

Okay, and then deals this year, so far, I had 54 million closed in January, and 53 million planned for February.

Correct.

So 107 million, so far, in your pipeline.

Right. Excluding from that the Wingate transaction, which is a [inaudible].

Excluding Wingate.

So in our 404 number is the Wingate transaction, which also closed in January and another piece will close in February, but it was announced earlier last year. I just didn't want to confuse you with that, and I probably have confused you by bringing it up.

That's why I needed to ask because I heard somebody else say something about 200 million or something.

You had about 230, we said in our press release, over 230 million actually closed. The number was really around 233. That's our C transaction, which we announced late in the year, was around 171. That deal was all committed to, signed up, the only thing left to do was just get HUD approval, which can sometimes go fast but more often goes slow, and it's gone slow. So we got HUD approval for one group, and we're waiting for HUD approval for the next group. It will come. It just takes time. That transaction was really a 2005 transaction, but it's in the 404 total. The 233 that actually closed, and the 171 Wingate transaction. The other stuff we talked about, the 54 that's closed in January, and the 53 that's in the queue, is on top of all that.

There are no further questions at this time.

Merciful -- thank you for your interest, and if you have any further questions please don't hesitate to call any one of us. Thanks very much.

That concludes today's NHP fourth quarter earnings release conference call. You may now disconnect.