芬塔 (VTR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2007 Ventas earnings conference call. My name is Michelle and I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Robert Brehl, Chief Accounting Officer. Please proceed, sir.

Good morning, and welcome to the Ventas conference call to review the Company's announcement yesterday regarding the results for the quarter ended March 31, 2007. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the Company's expectations, whether expressed or implied.

We refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2006, and the Company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements.

Many of these factors are beyond the control of the Company and its management. The information being provided today is as of this date only, and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations.

Please note that quantitative reconciliation between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure are available in the Investor Relations section of our website at www.ventasreit.com.

As you know, the Company has filed a lawsuit against Healthcare Property Investors arising out of its conduct regarding Sunrise REIT. Please respect our policy of not commenting on pending litigation and refrain from asking questions about this topic during today's question-and-answer session.

I will now turn the call over to Debra A. Cafaro, Chairman, President and Chief Executive Officer of the Company.

Thanks, Rob, and good morning to all of our shareholders and other participants. On behalf of the entire Ventas team with me here today, I want to welcome you to our first-quarter 2007 earnings call.

Today we have so many good things to talk about that I had a hard time deciding where to start. In today's call, we will discuss our excellent quarterly earnings results; the recent closing of our transformational acquisition of Sunrise REIT; our robust acquisition and development pipeline; Kindred's recent renewal through 2013 of 64 assets and its agreement to acquire 22 underperforming assets from us at premium pricing; and our business expectations for the balance of 2007. It is a very dynamic time for our Company, and we are glad we have positive news to report. Following my comments, our CFO, Rick Schweinhart, will report in detail on our quarterly financial results, and then we will be happy to take your questions.

Let me begin with the easy part -- excellent earnings. In the first quarter, Ventas delivered normalized FFO per diluted share of $0.68. This represents year-over-year growth of 24%, resulting from our productive portfolio, the successful conclusion of our reset right with Kindred, and our accretive acquisitions. Our growth in cash flow and earnings allowed us earlier this year to increase our dividend by 20% to a current indicated annual dividend level of $1.90 per share. The Ventas dividend remains reliable and positioned for consistent above-average growth, as it should represent less than 75% of our expected 2007 normalized FFO.

We are very excited about the April 26 closing of our acquisition of Sunrise REIT. We want to remind everyone what our corporate objectives are and how this acquisition advances our strategy. Our goal in running Ventas is, was and will remain to provide our shareholders with consistent, superior, risk-adjusted total returns. We believe we will do so by increasing earnings per share while simultaneously creating a more reliable company. Over long periods of time, if we are successful in achieving these two simple objectives, I believe we will deliver premium returns to our shareholders.

The acquisition of Sunrise REIT should both increase our earnings growth profile and also reduce enterprise risk. I want to take some time to go back to basics and refresh everyone on why we were so eager to acquire Sunrise REIT in the first place.

Here are the basics. The Sunrise REIT portfolio at closing consisted of 77 new, private-pay senior housing communities, 66 in the United States and 11 in Canada. These new, uniformly high-quality assisted living communities represent the most coveted senior housing portfolio in North America. All of the properties are well positioned in high-barrier-to-entry locations and clustered in major metropolitan markets, exhibiting excellent demographic growth. Substantially all of these assets were developed by Sunrise Senior Living Inc. in its award-winning Sunrise Mansion design.

From a financial standpoint, they are highly productive, with industry-leading occupancy, rental rates, revenue growth and profitability per unit. Although we are not including Sunrise REIT's first-quarter results in our earnings because our acquisition closed in Q2, we were pleased to see that the portfolio performed in line with our expectations during that period. Specifically, the stabilized portion of the portfolio is 94% occupied and achieved revenue per resident level of over $4700 per month, reflecting strong demand for high-quality senior living services and environments.

As you recall, Sunrise Senior Living Inc. manages all these communities under long-term management contracts and is a minority partner with us in 59 of the acquired communities. Of the 77 assets acquired, five are currently in lease-out. Three of the 77 acquired communities were purchased by Sunrise REIT immediately prior to our merger closing under fixed-price contracts with the developer manager Sunrise Inc. These three are located in affluent submarkets in Scottsdale, Arizona; Sandy, Utah; and Rockland, California.

Because these assets are acquired effectively at cost, they have significant embedded value and should deliver stabilized unlevered yields of between 9% and 9.5%. We also expect to acquire a brand-new community in Staten Island under a similarly favorable fixed-price contract later this month.

Next, I want to explain how the Sunrise Senior Living acquisition is truly transformational for Ventas and how it supports our dual goals of reducing enterprise risk and growing FFO per share. Let's look at the first prong of delivering consistent superior shareholder returns -- that is the increase in enterprise reliability, or stated differently, the reduction of Company risk. Because of the Sunrise REIT acquisition, we expect about 40% of our annualized revenues to come directly from the residents in our operating senior housing communities. This is because the assets are owned by Ventas' taxable REIT subsidiaries and will be managed for Ventas by Sunrise Inc. Take a minute to reflect on this concept, because I really want it to sink in.

Owning these senior housing communities that are managed by and not leased to third-party operators is very positive for Ventas. Because we will receive revenues directly from the multiple occupants of the real estate, Ventas will enjoy the ideal diversification, granularity and stability you would typically see in an apartment REIT, but with better underlying fundamentals.

Because these senior housing communities are managed for our account, Ventas is the true owner of the operating cash flows of the assets. This structure should lower our Company's overall risk profile because it provides Ventas with a stable base of revenue derived from individual residents. Obviously, this is a major departure from our triple net lease business and one that provides different challenges to us as we integrate and oversee our senior housing community operating portfolio.

We should be clear that the addition of these operating communities is likely to create at the margin more seasonality and uncertainty in our FFO results. But the key point is that it also should provide a very stable base of private-pay individual revenues similar to an apartment company and should enhance our Company's big-picture reliability as we move forward.

Finally, this acquisition improves Ventas' overall reliability because it diversifies our total portfolio by tenant, by geography and by asset class. We expect that at June 30, our annualized revenues from Kindred will represent less than 30% of our total annualized revenues, but our private-pay portfolio will account for about two-thirds of our aggregate annualized revenues and that our business will be nicely diversified by asset type. Skilled nursing facilities should compose about 22% of our annualized revenues; hospitals should represent about 11% of our annualized revenues; and international community should contribute 7% of our annualized revenues, all computed on the same basis.

We also believe our portfolio is reliable because of the strength of our Kindred hospitals and nursing homes and the fact that we have reduced our exposure to Kindred as a single tenant and limited our exposure to Medicare reimbursement to appropriate levels. We continue to believe in the long-term acute care hospital and skilled nursing businesses, both of which are need driven.

For these two asset classes, Medicare reimbursement levels are currently quite stable. The final long-term acute care hospital rule for fiscal year 2008, which begins July 1, 2007, was recently published, and it is in line with expectations. Kindred has stated that their final rule should reduce its LTAC Medicare reimbursement by about 2.5% before mitigation. Kindred has already incorporated this change into its 2007 guidance.

On the flip side, the skilled nursing space is experiencing a very favorable operating and reimbursement environment right now. Three trends -- the growth in the over-85 population, [debedding] in the sector over these last seven years; and CMS policy that pushes patients to the most clinically appropriate lowest-cost setting are combining to favor the skilled nursing operators. In fact, Medicare just proposed a 3.3% increase in rates for fiscal year 2008, which begins in the fourth quarter of this year.

As an aside, two public skilled nursing operators are in the process of going private right now, and they are each being valued at extraordinary levels approaching $100,000 per bed.

The important takeaway for Ventas' stakeholders is that we and Kindred have benefited significantly from the fact that our facilities continue to offer the best alternative for the large and growing elderly population who needs medical care. We have also benefited from the structural hedge embedded in our Kindred portfolio because, frankly, when SNFs have been up, LTACs have been down, and vice versa. This counter-cyclicality in Medicare reimbursement cycles, coupled with our pooled multi-facility master lease, is, to my mind, the best and safest way to invest in the healthcare services sector.

So at the present time, our portfolio consists of 532 well-diversified senior housing and healthcare assets located in 43 states and two Canadian provinces, and our enterprise value approximates $9 billion. We believe that we are delivering on our goal of becoming a stronger, more reliable enterprise with substantially lower enterprise risk because of our increased size and breadth; the addition of operating assets providing revenues directly to us from the individual residents of the communities we own; the reduction of our Kindred concentration; the minimization of our exposure to government pay assets; the continued upgrading of the quality and age of our portfolio through opportunistic sales and high-quality acquisitions; and the strong structure, coverage and credits behind our skilled nursing and hospital assets. Clearly, this combination of lower-risk attributes should lead to an improved equity multiple, additional investment-grade credit ratings and a lower cost of debt capital.

The second prong of delivering consistent, superior total shareholder return is the increased normalized FFO per share. Growth has always been the fun part of the equation, and we believe that the Sunrise REIT acquisition should also provide our shareholders with above-average growth prospects. That is because the operating fundamentals in the senior housing space are extremely strong, driven by powerful demographics and controlled supply. In fact, a strong case can be made that the senior housing and healthcare sector has better fundamentals than any other segment of the real estate business.

The demographics and low construction trend, coupled with the desirable locations, strong Sunrise brand and attractive physical plants of the 77 senior housing communities we recently acquired, should drive above-average NOI growth for this portion of our asset base. And finally, the recession-resistant nature of these communities should favor us even in slower economic cycles, unlike apartment and office assets.

Our long-term growth prospects should also be significantly enhanced by the Sunrise acquisition because of our access to a robust development pipeline with Sunrise Senior Living Inc., who is quite simply the best developer of senior housing in the world.

Our agreements provide us with exclusive rights of first offer to acquire, essentially at cost, all senior living communities developed by Sunrise in Canada. Importantly, we will also have exclusive rights of first offer to acquire senior housing communities developed by Sunrise in specific geographical rings surrounding other Ventas/Sunrise-managed communities in the United States.

This proprietary development pipeline is strong, as you heard yesterday on Sunrise's call, and we have already started working with Sunrise on a significant number of potential development opportunities both in the United States and north of the border. You can see that the three recently developed U.S. assets we acquired in the first quarter are expected to generate stabilized unlevered yields of between 9% and 9.5%.

Finally, this development pipeline should enable us to continually upgrade and refresh our overall portfolio so that we can achieve our objective of assembling the best, most productive and diverse pool of senior housing and healthcare assets in the business.

We funded the $2 billion acquisition of Sunrise REIT through our assumption of about $900 million in attractively priced mortgage debt and a flexible bridge facility from our lenders that is composed of a perpetual preferred equity tranche and a debt piece, each of which is currently priced at LIBOR plus 125. We intend to have a long-term balanced capital structure to replace our Sunrise interim facility. We are looking at a combination of debt and equity securities to effect an optimal outcome for our shareholders. In addition, we're working on joint ventures for existing assets and asset sales.

We recently took the first step in our permanent financing for the Sunrise deal by announcing an extremely attractive disposition transaction with Kindred. Under the signed agreements, we will sell 22 underperforming assets to Kindred for $171.5 million plus a $3.5 million lease termination fee. This represents about a 6% capitalization rate on 2007 cash rent for our worst assets. These sales should close by June 30. Kindred intends to then turn around and dispose of these assets for between $80 to $90 million.

It feels very good to announce a deal with Kindred that effects positive change for the benefit of both sets of shareholders. In a single transaction, our deal provides Kindred with a way to divest of assets where it was losing money. It enables us to prune underperforming assets from our portfolio and improve coverages on our remaining Kindred assets. And it provides us with recycled capital to pay for the Sunrise REIT acquisition. We are examining other portions of our portfolio for potential attractive divestiture opportunities, whether to end-use operators, third-party investors and/or joint ventures where we would manage and retain an interest in those assets.

We were also very pleased that Kindred recently chose to renew through 2013 all 64 assets whose base lease term was scheduled to expire in April 2008. These 56 skilled nursing facilities and eight long-term acute care hospitals were contained in seven renewal bundles within the four master leases between the companies. For these assets, we now have predictable growing rental streams from Kindred through 2013.

Kindred's renewal also shows the value of our Kindred master lease structure and renewal bundle mechanism contained in those master leases. The thoughtful construction of the master leases and the renewal bundles a very valuable but I believe underappreciated aspect of Ventas' Kindred portfolio. Obviously, the cash flows from our Kindred master leases should command a significantly higher valuation as the result of the property level coverages, the lease structure and Kindred's balance sheet that stands behind all of its lease obligations to Ventas.

One final point on Kindred before I move on. We were also happy to provide Kindred with certain lease amendments that gave a greater operating flexibility within our portfolio. Generally, these amendments permit Kindred to utilize excess bed capacity at our facilities to create subacute SNF units within our hospitals and to create semiprivate and private rooms at our SNFs in place of existing three- and four-bed wards. These lease amendments should benefit our assets by driving cash flows and enhancing the competitive positioning of our facilities in the markets they serve.

We have also agreed to provide Kindred with greater latitude in bidding out its insurance coverage to a broader array of third-party insurers and to proceed with its announced spin-off of its KPS pharmacy division. These agreements also provide direct, tangible benefits to Kindred and should make Kindred a better tenant and a better company.

We welcome the chance to work cooperatively with Kindred and reach agreements that create value for both sets of shareholders. Most importantly, I believe these transactions set the stage for the two management teams to collaborate further on matters of mutual importance to both companies.

Turning back to Ventas, you can see from our $40 million aggregate investment in medical office buildings this year that the MOB segment of our business is rapidly gaining momentum. We have established strategic partnerships with several regional developer-operators, and we expect this trend to continue. These strategic relationships are already leading to additional opportunities for us, and we intend to continue to build our MOB portfolio during the balance of the year.

The acquisitions we have made should be accretive going in and show nice, steady growth. They should also position us and our partners to compete effectively for adjacent development opportunities on the hospital campuses where higher going-in returns are the norm.

With all of our announced acquisitions and divestitures, which should give us a higher growth profile and a lower risk profile, we have revised our 2007 normalized FFO guidance to between $2.55 and $2.65 per diluted share, excluding merger-related costs, the impact of development and lease-up assets, and all future unannounced acquisitions, divestiture and joint venture activity.

Please note that our change in guidance reflects only the impact of the Sunrise REIT acquisition. If you recall, our original FFO guidance for the year was between $2.70 and $2.75 per diluted share. If you start with the midpoint of that range, or $2.73 per share, we said that acquiring Sunrise REIT for $15 per share could be $0.05 to $0.07 dilutive. That takes you to about $2.67 per share of normalized FFO for the year.

The additional $1.50 per share on 75 million Sunrise REIT shares we were forced to incur to obtain the Sunrise REIT vote, plus the cost of delay and additional expenses incurred, have significantly exceeded $100 million. The financing costs caused by that additional increment of the purchase price results in an additional $0.07 per share in dilution, which gets you to $2.60 per share, the midpoint of our revised range.

Note also the wider guidance range is designed to reflect three things -- positive or negative changes that could occur as we effect a permanent capital structure -- for example, movements in interest rates or spreads; variations in NOI at the assets; and a significant but as yet undetermined amount of merger synergies. Remember also that our Sunrise operating business will show seasonality and ramp-up in NOI at the Sunrise portfolio. So please note in your models that our results will vary from quarter to quarter and should increase sequentially during the balance of the year.

Although our guidance does not, as usual, reflect any additional acquisitions, I can assure you that our acquisition program remains active. In addition to our development pipeline with Sunrise REIT, we are working on a number of interesting investment opportunities, on stabilized assets across our major core asset types. We expect another experienced investment professional to join Ray Lewis' acquisition team this month to focus on the long-term care and senior housing space. In multiple areas across asset classes in the broader senior living and healthcare market, the huge themes of institutionalization, privatization and consolidation should continue to create significant capital needs and lead to extensive investment and capital recycling opportunities for Ventas in the near term.

Before I turn the call over to Rick, I want to make one important final point, and I promise it really is the last one. I have never been so proud of the Ventas team as I have during the past six months as they have worked tirelessly on structuring, negotiating and closing the Sunrise REIT acquisition. We all know that they did so in the face of substantial complexity and adversity.

It is really a professional privilege to lead such a multidisciplinary team of dedicated and skilled Ventas employees, tremendously talented outside counsel on both sides of the border, experienced tax advisors, bankers and our Board of Directors, all of whom came together, joined by the single and exclusive goal of obtaining the best outcome for Ventas' shareholders.

Thank you for your attention. We've had an intense and productive beginning of the year. We are fully committed and engaged to making our Sunrise REIT acquisition a success and continuing to achieve our goal of delivering consistent, superior risk-adjusted returns to our shareholders. After Rick's review of our results, we will be happy to take your questions.

Thank you. First-quarter 2007 normalized FFO per diluted share grew 24% to $0.68 from $0.55 last year, and first-quarter FAD per diluted share grew 28% to $0.64 from $0.50 last year. The increases are primarily due to our strategic diversification program and the Kindred rent reset effective in July of 2006.

Normalized FFO totaled $72.1 million compared to $57.5 million for the first quarter last year. Normalized FFO excludes $5.8 million of gains on two Canadian dollar option contracts. The $15 million increase in normalized FFO from last year's first quarter is attributable to $24 million of revenue increases, offset by an $8 million increase in interest expense and a $1 million increase in general, administrative and professional fees, mostly due to noncash stock-based compensation.

Revenues for the quarter totaled $122 million compared to $98 million last year. The $24 million increase was due to the Kindred May escalators and rent reset effective in July, which together -- our asset acquisition, which was effective November 7, added $12 million, and other acquisitions and escalators, which added $2 million.

Interest expense increased $7.6 million from the first quarter of 2006, due primarily to acquisition borrowing, offset by a decrease in our effective interest rate. The first-quarter 2007 effective interest rate of 7% improved from 7.4% in the first quarter of 2006.

General, administrative and professional fees for the first quarter of 2007 totaled $7.6 million, which grew from $6.6 million last year, but fell to 6.2% of revenue from 6.8% of revenues last year. In addition, approximately $0.02 per quarter or $0.08 per year of our G&A comes from performance-based noncash equity compensation. In 2007, all of the executive management team's long-term incentive compensation is equity based. In the Company's overall compensation structure, equity compensation increased and cash compensation decreased as a percentage of the total. These changes create additional alignment with our shareholders and incent long-term value creation.

First-quarter normalized FFO per diluted share increased $0.01 sequentially over the fourth quarter of 2006. Weighted average diluted shares grew to 106.8 million in the first quarter, up from 104.3 million shares in the first quarter of last year and 105.7 million in the fourth quarter of 2006, reflecting the weighted issuance of 1.7 million shares in the senior care transaction.

Items of note on the balance sheet at March 31 compared to the December 31, 2006, balance sheet are -- real estate investments increased $38 million due to the first-quarter acquisitions. Debt increased $41 million to $2.371 billion at March 31 from $2.329 billion at December 31, 2006. The increase was mostly due to the acquisitions. Our debt to total capitalization at quarter end was 35%. The revolver balance increased to $209 million at March 31 from $57 million at December 31, 2006, due to repayment of $115 million of mortgage debt and the senior care transaction and borrowings for the first-quarter acquisitions.

Our first-quarter acquisitions are composed of all medical office buildings. These investments increased almost $40 million, and the NOI yield should initially be about 7%. Due to the timing of these investments, only $400,000 of this revenue was recognized in the first quarter.

Michelle, we will now take questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citigroup.

It is Craig Melcher here with Jon. I wanted to a little bit understand more in terms of the fee which you would expect to get -- the long-term financing in place for Sunrise REIT and maybe when you assume that occurs in your guidance?

We have a very flexible and attractive bridge facility in place. So that gives us ample time to look at all of our alternatives and effectuate a long-term structure. The debt markets, obviously, are on fire right now, and we have been actively looking at that market.

Should we assume that the transaction will be funded with debt and equity mix, consistent with what your current capital structure is, like 35% equity, 65% debt?

We would expect that we'll have a balanced capital structure, which as you know ebbs and flows over time. And we're looking at really a menu of things that include debt and equity securities and other kinds of executions, as well as additional asset sales and potential joint venture opportunities. So as soon as we have more definition around those executions, we will share it with you and be happy to refine guidance as necessary.

And on G&A, where do you think that level will go for the balance of the year relative to what you've reported for the first quarter?

Good question. I think we have embedded something like $33, $34 million of total G&A, which includes everything in the full model for the year. And the first-quarter total was --

$7 million --

About $7.5 million.

And is that with merger-related costs or that is excluding?

That is excluding merger-related costs, which would be things like transitional employees, office closing costs and things like that.

And the last question, I was just trying to understand on your guidance, FFO versus the normalized FFO -- your FFO guidance is $0.09 above normalized FFO?

Yes, this is an oddity of accounting. And we can understand the confusion. We were actually somewhat confused ourselves last night. It is basically because we're having a large gain on the hedge, which is offset by the merger-related costs and the development and lease-up assets. So it comes out to be a positive number, which we are then excluding from normalized FFO, which is the reverse, admittedly, of the way you would normally see it.

So the gain on that hedge is more than just the $0.05 that was realized in the first quarter?

Correct.

That's correct. The rate continued to move, and as the rate moved, that number got to in excess of $0.20.

Jerry Doctrow, Stifel Nicolaus.

I just had a couple things. You are excluding the losses on development of leasing. And I guess at some point you're obviously going to take the benefits of those developed and lease-up assets. So is that -- I guess you're thinking about that, and it seems to me that if you are really operating the properties, those things ought to get included.

A good comment. I think some of our desire to exclude them is just as we determine exactly how we're going to deal with the development assets, whether we're going to do it on-balance sheet, off-balance sheet, etc. And right now we've got sort of three to five of those things. And we should, as you say, experience stabilized yields at 9% to 9.5%, which we'll take the benefit of.

But as we are making this transition, I think it is easier for us and our investors to put those development costs, earnings and the drag from those assets in, like, a little holding pen, and we will clearly break them out for you. And over time, I think, as we integrate this portfolio and our analysts and we become more used to presenting this mixed portfolio with development in it, we will try to present it in a way that makes the most sense for everyone and certainly is the most transparent.

And just in terms of trying to model this better, are the Sunrise REIT first-quarter numbers, which I confess I haven't looked at at all, are they going to be available, and is that a reasonable run rate to use in terms of modeling the operating economics on the portfolio? Obviously, it will improve over time, but just looking for a baseline that --

The first-quarter numbers have not been published, and that's why you haven't looked at them. You're not being delinquent. But the second-quarter numbers obviously will be reflected in our second-quarter results, and we will be able to share them with you, obviously, and then I think it would be good to use those as a base off of which to project for the rest of the year.

Is Sunrise REIT going to issue first quarter, or they just won't because they are gone?

No, they are gone. They are lucky they didn't have to do a first-quarter report.

So we'll just have to wait for second quarter. And then one of the issues came up on Sunrise Senior Living was the operating expense growth being kind of above the growth, actually, in revenues on their assets. And so I was curious, I guess, about -- in all of your properties, are they a minority owner? And are there other things you've got in place to control or monitor expenses and things on the portfolio?

This is Ray. You will recall that they are a minority owner in the majority of the properties, but not all of the properties in the portfolio. And so our portfolio in terms of first-quarter performance is tracking in line with our expectations, and didn't really see any abnormally large expense growth in the portfolio that we had.

I do think it would be helpful if we got something on the portfolio for 1Q just to be able to model. But I can come back and talk to you about that maybe offline. And then just last few things I have real quick -- you talked about G&A, just stock-based comp, there was I think an item in the guidance which seemed to suggest stock-based comp was going up. I think you touched on it. But if you can just clarify what is going on there, and what is the right run rate for the stock-based comp going forward?

Okay. The stock and the equity -- the stock options, I'm sorry, and the restricted stock combined should be about $8 million a year of noncash expense, which obviously we think -- the reason we disclose that is A., we want to be transparent, and B., we think it is positive. In total, $0.08 of G&A and then another $0.04 of deferred financing fees are essentially noncash deducts to our FFO and our FAD. So really, we think that is important for investors and analysts to understand, and we also think that the change in our compensation structure to more equity-based compensation for executive management will continue to focus us on creating value. So I hope that answers your question.

Yes, I have no problem with it. I think we typically [head back] for FAD, so I just wanted to clarify. And then my last thing and I'll let someone else talk -- I was wondering, Rick, if you could just maybe touch on the balance sheet -- you have balance sheet items of debt and preferred after the Sunrise REIT deal I think you gave at the end of quarter. So do you have those updated numbers?

Generally, the acquisition in -- we'll call it big round numbers is we assumed about $860-some-odd-million worth of debt. That debt rate is probably somewhere around 6.2%, 6.3% effective rate, including the amortization of deferred debt costs. So we issued $700 million of preferred stock that has a dividend cost at LIBOR plus 125. And then we issued $530 million worth of interim loan debt at LIBOR plus 125.

Karin Ford, KeyBanc Capital.

Just a follow-up on that last question. Could you give us an update on what the cap rate ultimately shook out at once you increased the consideration?

An excellent question. We believe that the cap rate is approximately 5.7 on our share of 2007 NOI.

Great. Second question is can you tell us what your expected NOI growth is going to be from the Sunrise assets, say, '06 over '07 on a same-store basis?

Great question. We are looking at approximately 7%-ish growth in the portfolio, and that is sort of from stabilized as well as starting to get the benefit of some assets that continue to be leasing up.

Rich Anderson, BMO Capital Markets.

On the Sunrise acquisition, how close or how much above would you estimate that you are buying that above replacement cost?

Important question. If you look at the [five seven] cap that we just talked with Karin about, you would say that the assets that we acquired, which are almost all the sort of cream of the crop, which is the Sunrise Mansion-style assets, were acquired at a price that many, including some of the Sunrise REIT shareholders, believe is a very attractive one. That said, we believe that the cost that Sunrise incurs to develop the assets may be 250 to 300 per unit and that our costs are, all in, higher than that, let's call it 350 to 370.

15% to 20%.

When I look at now this operating structure, lease structure that you have, using the TRS, I'm not sure why that would be less risky than a triple net, but we can leave that aside for now. But understanding why it's structured that way and the benefits of it, do you have any plan to take a look at the rest of your assisted living portfolio and say maybe we can do something similar to this to the extent it's successful and maybe even bring in Sunrise to be the management company?

Let's address a couple of the things in your question. First of all, the reason that we believe that this kind of structure is substantially less risky is that it creates a sub-portion of our portfolio that has complete diversity and granularity within it, because we are getting our revenues directly from the individual residents of the assets as compared to a chunkier sort of corporate credit, which you would find in the triple net lease business.

And what we really want to convey about that is, at the margin, obviously, you could have increased unpredictability sort of within a narrow band of results, but big picture, that is a much stabler, more reliable kind of revenue base, because it comes from 6000 seniors as opposed to a single corporate credit. And that is, I think, very, very significant.

In terms of looking at the rest of the portfolio, our focus right now, and we are excessively focused on successfully integrating this Sunrise REIT portfolio, bringing it into our operations, making sure it is optimally paid for, and then, of course, we can look at things like you're suggesting, which is could we look at other aspects of our portfolio to change the existing triple-net structure. We certainly could do that only with, or would likely only do that with the existing tenants, unless they wanted to divest those assets.

Just to put to a finer point on that, obviously we've got contracts in place with those existing tenants in which they are gaining the benefit of the excess cash flow over those lease payments and all the benefits that Debbie just described that we are receiving in our Sunrise portfolio. So certainly it would have to be a combined effort for us to be able to do that. And as Debbie points out, right now that's not an area that we are working on as a focus opportunity.

Turning to medical office quickly, you mentioned the joint ventures that you arranged with an MOB developer. You have separate joint ventures with a single partner, or are they multiple partners?

These are multiple partners.

As it stands right now, really it is sort of a flip-flop in a sense that you are more playing the role of what would be typically the role of the private equity firm in a conventional REIT joint venture. So when does that switch and when do you gain the operating expertise where you can be the operating player in the joint ventures? Is that something that you see within the next year or so?

We have done a couple of things here. First of all, on the existing joint ventures, what we have tried to do is one of a couple of different strategies, that being using our capital to support the acquisition of existing assets to lead to future development opportunities that we can participate in, in which we can roll those into the larger joint ventures, which will allow us to gain access to those attractive new development assets at below retail cost. So that is one aspect of the play.

The other aspect, and this is important, is we have really tried to identify what we think are attractive local and regional players with good development management and leasing capabilities for these joint venture vehicles with the objective of getting close to them over time, and hopefully finding one or two of these operators that can become a good platform investment for us that we can then use to grow into the medical office space. So this is sort of a first step in a larger transaction -- or larger investment strategy in the medical office building area.

Perfectly understood. And then lastly, Debbie, you mentioned the attractive Canadian senior housing or senior living marketplace. Do you find the fundamental picture and the environment in Canada more attractive than U.S. or less attractive?

I would say that it is different. Certainly, the properties in Canada are performing excellently. And the reason why is because there are fewer high-acuity private-pay options in Canada. Sunrise is really the only high-acuity private-pay provider in Canada. And so over the last three or four years, as they have really developed a brand in Canada, we have seen accelerating acceptance and therefore higher growth in rent and occupancies at the Canadian properties. There are a number of markets in Canada where there are just no options like Sunrise, and we think that is tremendous unplowed territory.

Does the Canadian national healthcare structure benefit the residents in Canada at assisted living facilities?

Well, the skilled nursing facilities are reimbursed under the --

But they don't pay for assisted living?

But they don't pay for assisted living, that is correct.

Rob Mains, Morgan Keegan.

Just want to follow up quickly on the guidance comment. $0.20 of hedge benefit in the quarter, which means you've got $0.11 of startups, lease-up, etc., as well as some component of integration costs. Is it possible to split those out between those two categories?

This is Rick. I think it is probably a little too early to try to get into too much detail on that.

And then I just have a conceptual problem, or not a problem, question. Taxable REIT -- maybe it was a problem, too -- taxable REIT subsidiaries -- isn't this too big to be a TRS under the law, or is there something I don't know about?

It is not.

Isn't there like a 5% to 10% limitation?

No, it is 20% hopefully going to 25%. And it is measured in a very interesting way that makes it actually even bigger than it appears.

So the fact that this is 40% of your revenues, I shouldn't worry?

No, it doesn't have any -- it's not like that. We can give you a primer on it. Brian Wood, our [caps] person, would be happy to do that if you would like to do it offline.

That would be very helpful. Okay. And everything else was answered.

[Mark Effersabe], PIMCO.

Just checking in -- and I heard your comment on the capital structure and all the options you're evaluating. You mentioned the debt markets are hot right now.

Nobody should know better than you.

Yes, and just wondering here, though, on that comment there what your sense is now that you have had more time to think about it in terms of getting maybe to investment grade one day, what your thinking is in terms of what you need to do to get there and how that might influence your decision here on maybe how high you would take leverage. I know it is going to be temporary, but --

We're happy to answer that. We already have an investment-grade rating from Fitch, which was a big accomplishment for us. We are BB+/Positive with S&P, and S&P commented favorably on the Sunrise REIT acquisition. Basically, I think we are positioned for an upgrade with them, and one of the things that they talked about is trying to make sure that our fixed charge coverage is around the 2.5 times level.

But we have been working very hard with all the rating agencies over long periods of time to continue to show them the progress we have made, mostly toward diversification, but also maintaining strong credit stats. And I personally believe that we are there, but they are the ones with the decision, so we have to continue to make the case, and hopefully, in particular with S&P, we will get there this year.

It seems like you guys have made a ton of progress here, obviously, on tenant concentration and government pay mix and so on. This is fabulous for the rating agencies, given what I have read in terms of what they have said is important to them. But I guess the lingering question is just how high you take leverage on a temporary basis to do the financing here, the final permanent financing. And do you know when you might be able to tell us your plan there?

As soon as we have more to report, obviously, we will let everyone know. And you are right -- this is really fabulous for our credit profile. I spent a lot of time today talking about how it substantially reduces risk in our Company. And we want to make sure it is great for our debtholders, who we think are important stakeholders, and also importantly for our shareholders. So we will definitely balance those objectives and try to make money for everyone, as we have always done.

(OPERATOR INSTRUCTIONS). Jerry Doctrow.

Just one -- on the joint ventures, I just wanted to clarify -- I assume they are going to be consolidated since you have such a larger ownership, and I'm assuming the fees are not coming to you, but would be going the other way to the partner. Could we just get a little more color on the accounting for those?

Could you clarify which joint ventures? We have talked about a couple of different ones. We have ones with Sunrise, we have ones with medical office and we have potential ones with institutional third parties, so which --

I am really talking about the three MOB joint ventures, the new ones there.

The three joint ventures will be consolidated on our books. And then they will get, obviously, management fees for the (multiple speakers).

And then there is minority interest line that's been pretty customary for real estate companies reporting.

This is Ray. There is only one of the joint ventures that has sort of outbound management fees in it in terms of any asset management fee.

Rob Mains.

Actually, that little bit that Ray said right there, that answered the question. So I'm good.

Brian Jones, Neuberger Berman.

Just wanted to ask a question about the potential development volumes that you guys could do with Sunrise, both in Canada and potentially the U.S. Do you have a feeling for what the dollar volume could look like there and how those development deals would be structured, whether you would own them in joint venture with Sunrise or own them wholly owned on a go-forward basis?

This is Ray Lewis. Sunrise has stated that they have significant development plans for the U.S., Canada and Europe. And as Debbie stated earlier in the call, we have exclusive rights of first offer for Canada and properties that are in markets around our Ventas/Sunrise-owned and -managed properties in the U.S. We are expecting and Sunrise is suggesting that we are going to see a significant and steady flow of opportunities arising out of those rights, and we are already working on a handful of deals. So I think the opportunity could be pretty sizable, although it is difficult to handicap at this point how large.

On the structure front, at least the transactions that we're working on now are all joint venture structures. And so that is how we're heading out of the gate here on those transactions.

And I am currently showing we have no further questions in the queue at this time. I would like to turn the presentation over back to yourself, Ms. Cafaro, for any closing remarks.

We really appreciate everyone joining today's call. As you can tell, we are extremely energized and engaged in our business, and it is a really dynamic period of time at Ventas. And we want it to be very -- not only dynamic, but very productive and profitable for all of our stakeholders. And we will continue to be committed to that objective.

Thanks for your interest in Ventas, and we have a couple conferences coming up, and we are all very much looking forward to seeing you there. Thanks again. Talk to you soon.

Ladies and gentlemen, thanks for your participation in today's conference call. This does conclude your presentation, and you may now disconnect.