芬塔 (VTR) 2007 Q4 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Nationwide Health Properties fourth-quarter earnings release conference call. Thank you. I will now turn the call over to Mr. Ron Hubbard, Vice President of capital markets and investor relations. Mr. Hubbard, you may begin your conference.

Good morning, and thank you for joining our conference call to discuss Nationwide Health Properties fourth-quarter and full-year 2007 earnings, as well as information related to our multiyear transaction with Pacific Medical Buildings. Certain statements made on this conference call are forward-looking in nature. These statements are based on reasonable expectations and information currently available; however, actual results 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.

As this call will be available on our website for some time, it is important to note that it includes time-sensitive information that may only be accurate as of February 26, 2008. The Company believes that funds from operations and funds available for distribution are an important supplemental measure of operating performance. The Company's definition of FFO and FAD, the reasons for their importance, certain of their limitations and reconciliation to net income is included in our earnings release dated February 25, 2008. As a reminder, NHP's complete 2007 earnings release package, as well as information related to our multiyear transaction with Pacific Medical, were filed yesterday in separate Form 8-Ks and are available on the investor section of our website, at www.nhp-reit.com.

I would now like to turn the call over to Mr. Doug Pasquale, President and Chief Executive Officer of Nationwide Health Properties.

Good morning, and thank you for your interest in Nationwide Health Properties. Today, along with our fourth-quarter and full-year 2007 operating results and investment activity, we are pleased to be talking to you about a truly transformational event, as Nationwide Health Properties and Pacific Medical Buildings join forces in a multiyear transaction worth up to $2 billion. Joining me for today's call is NHP's senior management team. In addition, we're pleased to have Mark Toothacre, President of Pacific Medical Buildings, and members of the senior management. Mark and his colleagues, which he will introduce to you during the Q&A session, are happy to address any questions you might have about PMB and the medical office building sector.

Today's call features four parts. First, we will review our fourth-quarter and full-year 2007 results, which reflect another year of outstanding growth. Second, we will provide an overview of the PMB transaction in the medical office building sector. Third, we will discuss the financial aspects of the PMB transaction and provide our 2008 guidance. And finally, we'll address your questions. Since our earnings release and supplemental information are thorough, I will focus on what we believe are the key headlines.

Let's start with a brief review of 2007. Major accomplishments include: Completing $1.1 billion of accretive investments including strong fourth-quarter investment activity totaling $376 million. We issued approximately 7.8 million common shares through our controlled equity offering program in 2007 at an average rice of $31.52 per share, resulting in net proceeds of approximately $243 million. We also issued five-year, 6.25% unsecured debt and redeemed the outstanding [nine million, 7.7 million] Series A preferred stock. As part of our proactive portfolio management program, we sold a 35-year-old still-nursing portfolio located mostly in rural Texas, for $128 million, resulting in a gain of $60 million. On the financial performance front, we increase revenue by $84 million or 34% and normalized FFO by $40 million or 25%. This resulted in increases in 2007 normalized FFO per share and dividends per share of $0.15 and $0.10 per share respectively. As you know from our announcement in late January, this year,we further increased our annual dividend per share by an additional $0.12 to $1.76 per share.

Now I will shift to what is truly a transformational event for NHP, a multiyear transaction with Pacific Medical Buildings that we announced yesterday. This transaction firmly establishes NHP's commitment to the medical office building sector and provides with us a dynamic long-term growth platform. For some time we have outlined to you what we believe were important attributes for our medical office building platform. First, we sought a company with a sizable portfolio of class A buildings and high barrier to entry growth markets. Second, we desired substantial development opportunities with a time-tested, proven developer that has established relationships with large and growing hospital systems. And third, we required a company with seasoned property management capabilities to ensure that we maximize our return on investment. We are confident PMB satisfies or exceeds all of our stated platform objectives , so let's test that statement for just a moment.

If you've had a chance to review our class A portfolio, you'll see that these are really terrific assets and we've acquired them at market and they're accretive to us in 2008. Now I know you have some questions about what market is, but just as Manhattan real estate is different with Atlanta real estate and Denver real estate, so is medical office building real estate in California as compared to medical office building real estate in the southeast and midwest parts of the United States. With respect to development, we have a substantial opportunity to participate in development of some terrific assets in the future, and this is done at de minimis risk to NHP and not on our balance sheet.

With respect to property management, we are going to do a 50/50 with PMB and we have perfect alignment of interest. PMB is an excellent group to work with and it became apparent to us very quickly why they became the largest and most-highly regarded MOB developer and operator on the West Coast. In the fourth quarter of 2007, NHP, in association with PMB, acquired seven medical office buildings located in the state of Washington for $120 million. That transaction demonstrated the strong cultural fit between our organizations and highlighted our joint focus on growth-oriented health care systems. We are excited about the opportunities we share to drive growth and we anticipate a long and mutually beneficial partnership.

For those of you not familiar with PMB, they have been involved in the development and management of MOBs for more than 35 years. We produced a brochure and DVD to help you become better informed about PMB and our acquired portfolios. You have, or will soon receive this information. In the meantime, please visit our website where you can see the assets we are acquiring and interviews with PMB's executives. You can also learn about PMB at their website, www,pacificmedicalbuildings.com. PMB have completed over 65 medical buildings and were pioneers in the formulation of the developer-owned medical office building model, having developed over two million square feet of MOB space, all in the west. In addition, they are highly regarded as property managers and have a successful track record working with large institutional clients.

A number of compelling factors make MOBs an attractive component of the health care real estate market. Baby boomers, who are now beginning to enter their early 60s, already are seeking land continue to be seeking increased medical care for many decades to come. This generation, more so than any prior generation, is focused on living longer and healthier lives. Our increased MOB presence allows us to get ahead of the curve with respect to the healthcare needs of this important demographic group. Importantly, the services provided in MOBs are recession resistant due to its needs-driven nature. As a result, MOB represent a stable and predictable source of cash flow, enjoying higher tenant retention rates than just about any other commercial real estate class. The value of MOBs are enhanced when they are affiliated with leading hospital systems, and the PMB portfolio includes more than a dozen premiere investment-grade systems, such as Catholic Healthcare West, St. Joseph's, and Providence Health. The PMB transaction just one more demonstration of our ability and commitment to grow and diversify our Company.

To that point, following the completion of our acquisition of PMB's existing portfolio and assets currently under construction, our MOB portfolio will increase to 4.2 million square feet, with MOBs representing approximately 30% of our total investment based on our year-end 2007 portfolio composition. This series of acquisitions, which began in the fourth quarter of 2007 and concludes in 2010, will result in our ownership of 28 facilities with an average age of seven years, 14 of which are located in Southern California, seven in Washington, three in Nevada and one each in Northern California, Arizona, Oregon and Hawaii. This portfolio represents approximately 2.2 million square feet and an occupancy rate of about 94%. The blended NOI cap rate for the $915 million portfolio is 6.1% and equates to a price per square foot of about $420. The 2008 PMB acquisitions are expected to be financed through the assumption of $201 million of debt bearing an average interest rate of 5.9%, at least $100 million in partnership units, and the balance from proceeds derived from the recently-announced sales of Ameritus portfolio for $305 million. The sales price for the Ameritus portfolio represents a 6.1% cap rate on 2008 in-place rent. This time of capital market instability, it is important to know that the financing for the 2008 acquisitions are already in place.

Now most of you on this call know me, and know that for six years with Abdo we ran a large -- one of the largest assisted living companies in the United States. I think you know that I really like good assisted living assets and I don't like -- much like selling good assets. But when you can trade good assets for terrific assets at same cap rate that's terrific, and because of Ameritus and [Dan Beatie's] recent success and our objectives we were able to accomplish this. We traded marbles at a 6.1% cap rate and frankly, I can't see how shareholders aren't winners for the effort.

On the development front, NHP has the exclusive right to acquire up an additional one billion of MOBs over seven years at an expected meaningful discount to fair market value. We estimate the value of this discount to range from about $70 million to about $160 million. PMB currently has approximately has one million square feet in its development pipeline through existing hospital relationships. NHP will add property management to its MOB platform through joint ownership and for control of PMB Real Estate Services, PMB's well-regarded, full-service property management subsidiary. NHP is acquiring a 50% stake in this entity for $1 million plus possible incremental payments based on this entity's performance in 2009 and 2010.

The PMB transaction significantly improves NHP's risk profile by generating a substantial increase in NHP's overall portfolio size, creating asset class, tenant, geographic and pay source diversification within NHP's growing portfolio of healthcare assets, providing new class A high-occupancy assets, trading new strategic relationships with significant investment grade hospitals systems, and offering stable, recession-resistant cash flows. The PMB transactions are accretive to NHP and should add approximately $0.01 to $0.02 to FFO per share in 2008. Beginning this year we are providing guidance for both FFO and funds available for distribution. Our diluted FFO per share range is from $2.17 to $2.22 per share and our diluted FAD per share range is from $2.08 to $2.12. This range includes the anticipated effects of the PMB and Ameritus transactions in 2008, and while we expect to continue to make accretive acquisitions during 2008, both our FFO and FAD guidance ranges from before any additional acquisitions, impairments or capital transactions. However, this guidance assumes mortgage loan receivable prepayments and expected dispositions during 2008 as described in our supplemental information package.

We're now pleased to answer your questions. Operator, please open the

(OPERATOR INSTRUCTIONS) Your first question comes from Craig Melcher.

Can you go over the history on how this deal came about and the process that -- that went on?

Sure. We first were introduced to the principles of PMB about three years ago, I think it was. And it started out with a friendly get-together at lunch, and it took a while, frankly, to have our second get together, but we kept in contact. Then about a year ago things started to pick up a little bit in pace, as PMB explored its opportunities and we made known our platform objectives. We took the time to get to know each other, and really explore what opportunities we could have together and how we could enhance each other's positions. Then we had the opportunity to do a transaction in late 2007 up in the state of Washington, and that just solidified our feelings about them, and I believe their feelings about us, which led us to get to the point where we are today?

What really developed here over time is it became very apparent there were some folks PMB who were ready to move on in their life toward retirement and folks who were younger that were really running the show that were looking to have their day in the sun and doing their development and making their fortune. And it really fell -- fit in with our intergenerational transfer-type situation where we help monetize the folks who are looking to sit on the sidelines a little bit more and provide the capital for those looking for those looking to grow the business. So it became a perfect fit in that regard, especially when they were very interested in the concept of taking a lot of their profit in the form of OP units -- essentially NHP common stock -- really representing that they liked what the combination was providing for them, as well.

Was there ever an opportunity to buy the whole company, including the whole development business and the whole management company, or is that not on the table?

That really wasn't consistent with the PMBs principle objectives at this time, and so we didn't push the point, and frankly, we see some real advantages to structuring it this way. They're taking some meaningful development risks and they'll have the opportunity to reap the rewards from that and just a nice balance for now. How to evolves over the passage of time, who knows?

Actually Doug -- I don't know if you were in this conversation, but when we were first talking we were talking about acquiring everything.

We sure were.

And as we talked through it, we had the PMB folks say, are you sure as REIT you really want to be doing development on your balance sheet and we started thinking about it and and we go, maybe not. Okay, let's do a little something a little different on the development side. That's a good idea. On then on a property management they pointed out, we're just as much interested in how the property management done as you are, because that's our lifeblood for our development pipelines. So we really want to be in there with you on the property management, and that seemed to be a good story as well, so what -- why not team up on the property management. It evolved from looking at it as maybe a total acquisition to something that was really more of a partnership.

Okay. Do you have any say in the -- I guess with the half -- the future -- the developments are -- are under way or lined up, but the other half that you may have the option to buy over the next seven years, what type of say do you have -- or control do you have over those potential projects that you may be able to buy over the next couple years?

We're subject to a few exceptions, like if there's some restrictions imposed by the hospitals on who they can partner with to develop. It's pretty much anything that PMB is developing that is of a comparable quality to any of the post-2000 vintage buildings that we're acquiring as part of the first two transactions, or first three transactions. So anything of that kind of quality. Basically a 2000-plus MOBs, which is some of their larger on-campus MOBs. And then we also have the option if it's not of that caliber but it's something we're otherwise interested in to also pursue that as well. But the classic development project will be something like the stuff that is shown in our slides for post 2000.

If we don't like a transaction, we don't have to participate.

So if you don't participate, would you then be partially managing it, or would they sell that to a third party?

Well, if they went on and developed it with somebody else, if we chose not to participate in a specific project, they, of course, would want to develop it -- excuse me, to manage it and we have a 50% ownership in there and through that mechanism we would participate in that project, but only that mechanism.

The last question is just on the cap rate. You mentioned the 6.1%. What is the cap -- it looks like that's on the whole piece over the next couple of years. What's the cap rate specifically on the '08 piece and is there any difference between what the stabilized cap rate is versus what the current cap rate if the assets aren't fully leased up?

The '08 acquisitions are about 6.2%.

Okay, and that's the cap rate you'll receive in '08, there's no -- because that's already stabilized occupancy?

That's correct.

Okay. Thank you.

You're welcome.

You're welcome.

Thanks, Craig.

Your next question comes from Kristen Brown.

Good morning, guys.

Good morning, Kristen.

I wanted to ask in terms of the development, you're acquiring stabilized assets, is that correct?

That is correct.

So you're not bearing any the construction or lease-up risk, it's all on their side?

No, all the construction costs, PMB will be responsible for any overruns on the construction costs. On the lease-ups stabilization, obviously there is a take-out commitment and when the take-out -- when the construction loan matures, if the property hasn't stabilized, we are committed to taking it down, but the pricing would reflect the -- the occupancy level and the NOI available at that time.

Okay. And then just in terms of the additional $1 billion dollar pipeline, what do you see in terms of a timeframe for -- just in terms of annual volumes for acquiring development?

Let me introduce Mark Toothacre and he'll pick up.

Good morning, everybody. We've been doing in the neighborhood of $150 million to $200 million per year on a cost basis in development over the last several years and expect that level of activity to continue. That equates to somewhere between three and six or seven projects a year depending on project size.

Okay. And then my last question's just on the guidance. What G&A run rate does that assume?

The fourth-quarter G&A amount is a pretty good proxy for what the run rate is. It's somewhere right in that neighborhood.

Okay. Great, thank you.

Thank you.

Your next question comes from Dustin Pizzo.

Good morning.

Good morning. I guess just before digging into the MOB deal a bit more, can you talk a little bit about what's happening in the CCRC portfolio? It looks like occupancy fell a little bit there sequentially and the coverage is also down about 10% or so.

Yes, in terms of one of the CCRCs, one of facilities in Oklahoma's being repositioned and that comprises a large piece of the decline in the occupancy there. That's going to be taken care of over the next year or so.

Okay.

Considering the few CCRCs that own, if one hiccups you can see it ,so --

Sure. And then looking at the transaction, what do you think more anecdotally it's going to do to the internal growth profile for NHP?

Well, one of the things it's going to do for us is we have solid reason, based on what Mark just told, is their track record of developments on an annual basis. We have predictable growth from our MOB portfolio with them on the new development front, and so that's exciting and good. It also gives us, as we mentioned, real stability in cash flow, which is a good thing. And actually I think that as PMB and NHP have a chance to visit with some of the hospital systems and talk to them and give them the comfort of what we can do together as a team, I wouldn't be surprised, frankly, if we might not be able to increase and improve on the developments they've been able to do in recent years. So I think that gives us all kinds of opportunities. And certainly now I think we'll see even more medical office buildings as this certainly puts NHP on the medical office building map, and we've had good success in seeing most transactions, but I think we'll see even more opportunities across the country because of this transaction.

Okay. And then on the acquisition -- the five acquisitions in '09 and '10, are you locked into the pricing there already?

There is a mechanism to adjust the cap rate based on a BBB index bond pricing.

So with constant capital change then it's possible that depending on how much it changes that the cap rates that we've agreed to would modify based on the changes in the cost to capital.

Okay, and is that -- is that a one-to-one move or is it some sort of long formula that will take way too much time to get into here?

There is a formula, but basically there is a floor before it goes into effect, and after that it's based -- going (inaudible) up to a certain level at cap and after that we can back out the deal if we don't like it.

Okay. Then I guess on the -- on the development assets just a similar question. Is there -- how is the pricing determined upon stabilization when you look to potentially acquire those assets?

The mechanism at the time we're ready to break ground and we agree that this is a qualified project we want to pursue, that's when the fair market value cap rate is agreed to and that is when the development costs are agreed to. We assume the risk if that fair market value cap rate is different at the time we take out. They assume the risk if the development costs are different at the time the project is completed.

Or benefit.

Or benefit, whichever way it goes.

Okay, guys, thanks.

You're welcome.

The next question comes to Michael Mueller.

Good morning.

Let me go back to a prior questions and I'll to ask it a different way. The core growth of the portfolio, if you exclude the developments that you're looking at and the development benefits, can you talk about just the internal growth? I guess the track record for this portfolio, what your expectations are going forward, and then compare that to what your current portfolio produces to a year-to-year basis?

The -- as you can tell by the occupancy the portfolio is pretty well leased up today and of course we hope we can improve on that a bit. Medical office buildings typically don't show dramatic changes in lease rates when leases renew, and in our supplemental information we show a schedule of the turn over of leases, so that -- you can look at that to give you some guidance as to the opportunity from lease turns. But this is a relationship-driven business, and it's again why it is so important to team up with somebody like PMB, because we want to make sure that we're doing things in sync with both market competitive positions and what things are acceptable to the hospitals, because they have to deal with the physicians on a going-forward basis. So typically you're going to see increases when leases rose somewhere around the inflation rate, not nearly as dramatic or as volatile as you would see in regular office buildings. So because of that, you would say that it should be relatively consistent with the lease escalations that we have in our triple-net lease portfolio, which are around 2.5% to 3%.

Yes, this is Mark Toothacre. Our growth rates usually track with inflation. We have CPI adjustments in virtually all of our leases. When our leases roll we have typically a very high retention rate and the rental rates tend to just trend upwards along with -- there's one element of our revenue stream that has been procuring more prominently and that is parking revenue. We feel like we can grow that revenue stream a little bit faster than the general inflation rate, since paid parking at hospital and medical office building facilities is sort of a new animal out here in California, starting at low rates, so you're working off a low base and you can usually increase those by discreet increments that beat inflation.

Okay.

Southern Californians love their cars so --

For the $485 million of properties to be acquired in '08, can you -- I may have missed this, but can you talk about what the timing of that is and how it'll filter in throughout the year?

Yes, we hope to close about -- on $230 million on April, $135 million -- $160 million -- $135 million, sorry, in May, June and then about $120 million in November, December.

December, okay. And then last question, for the $475 million development pipe -- or the pipeline where you have about $475 million in there right now, when does -- when are the expected stabilization dates of that, is it '09, 2010? And then of that initial slug that's already in the pipeline, how much of that do you realistically see yourself buying or being interested in at this point?

I think the answer to your first question, if you're talking about the group of properties that are closing in 2009-2010?

No I was talking about the pipeline when you talk about the additional $1 billion.

The $1 billion pipeline, okay.

Yes.

Right now based on what we've seen we'd be interested in all of the ones that they have in their pipeline.

Okay. And what's the timing on that, because you've already identified some projects that are '09 and 2010?

That's why I wanted to clarify. The '09 and 2010 are buildings that are already being constructed as we speak and those are the times that we expected those to be stabilized. Those projects are not part of the $1 billion. The $1 billion is on top of that and let Mark speak to what he thinks the timeline for those might be.

The first projects -- the first project in our pipeline is breaking ground in March of this year and then we would have groundbreakings every four to six months after that, based on our historical deal flow.

Okay. Okay, thank you.

You're welcome.

Your next question from Jerry Doctrow.

A lot of this has been covered but to start follow up on that, Mark, so what's your typical development lease-up schedule? If you're starting one in March, when might that actually be purchased by NHP? What's that theoretical timeline?

That one is actually a single-tenant project, and it has a construction period that is roughly a year, so it can be purchased as soon as this time next year.

March '09, okay. And the other stuff would be -- obviously four to six months after that you're getting into mid, late '09 and maybe starting into '10?

The typical multiple tenant medical office buildings has schedules of sort of like this. A year of construction and then typically between 12 and maybe 24-month lease-up and it goes a little bit slower up to maybe 36 months. But I would say the average would be from time point that we started construction to delivery somewhere between 24 and 36 months. And Jerry -- Mark, if you don't mind just speaking a little bit about the concept and process you go to in terms of preleasing. Jerry, we won't charge this to your time.

We typically -- the demand profile for medical office buildings is pretty well known. Since we're doing mostly on-campus medical office buildings, we're able to identify the level of demand by surveying the hospital's medical staff and any other specific targets that they may have identified that are not on the medical staff, though in terms of -- if we do our homework properly on our feasibility studies it's hard to mis-size these buildings. So they usually open at a very high occupancy, somewhere between 75% maybe at the low end and upward toward 90% at the high end, and then fill up over a fairly short period of time because of the fact that we're usually pretty confident going in what the market is going to yield in terms of occupancy.

Okay. Okay. And just one or two more that I have. I think -- Don, I think you had sort of touched on this but just want to clarify, so the 8% cap rate on buying these is upon stabilization, but that cap rate really again is not fixed at 8%. It is really set by -- I don't know if it's by formula or whatever, and would you lock in for each building. Like this building opens in March -- or you're supposed to break ground on in March, you would lock in the cap rate on that particular property in March to take it out two years later, is that what I understood you say?

That's is correct, Jerry The process is really, the 8% is just an example that we gave that maybe wasn't as clear as it should have been, but the process is once we're ready to break ground PMB and us will agree to what the fair market value cap rate ought to be and what the construction costs will be. From that point forward we're both locked in on what we've signed up for and we either benefit or don't benefit from what the final take out price is.

Okay. And if you were doing it today, is 8% about where you think the fair market cap rate would be, is that why you used it in your example?

That would be what we think the development yield would be.

Okay.

And I think that's what, Mark, you would say around 8%?

Yes, and we're trying to push those up a little bit as we speak because we think the cap rates are moving a little bit. We target a threshold of at least s 200 basis point spread between our development yields and what we feel cap rates are, and it's that 200 points that we and NHP will divide up on going forward on these development deals.

And the cap rate, Jerry, just depends on what kind of building we're talking about. If we're talking about another building like we have going up in Orange or in Huntington, that's going to be a very low cap rate unless the market changes and if we're talking about a building in Nevada, it's going to be a different cap rate.

Okay. So, if -- if your cap rate maybe was 7% and if you're adding 200 basis points would be a 9% and NHP and PMB are splitting the difference, is that --?

That's exactly right, yes.

Okay.

We split the difference up to -- there's a formula there and we basically split the difference up to the first 150 basis points and then it's a little lower percentage of the next 150 basis points, but in effect, that's the concept.

Okay, okay. That's helpful. I just want to turn a little bit to the financing side of this if I could. On -- on the OP units, there's the initial $100 million or so that you're paying out and there's a collar on those. Is there a lock-up period for that stock or could we see it being sold tomorrow theoretically?

There is a one-year lock-up period, Jerry, so they can start converting the units into stock a year after it's issued.

And --

One point -- sorry to interrupt, but one point on that. There are two different kinds of situations where OP units will be issued. One's on these first group of properties that we're talking about, and then the second is in connection with the development takeouts. The PMB folks have agreed to take 5% of the value of the development in the form of OP units that are restricted for ten years, so those have a different element to them.

And I think for the most part, the significant PMB principles are looking at tax deferral as one of their primary objectives, so their intent I think in many cases is to hold the OP units well, well into the future.

Okay. And similarly, do you have restrictions on your ability to sell or resell these properties to avoid the tax -- the tax hit?

We do indeed.

Okay, and then if we can just start looking out a little further, Doug, Abdo, whoever, again I think you said that your -- that the actual cost of -- or the cap rate on buying the '09, '10 stuff will indeed vary with market I think tied to the BBB index and stuff, but financing's not in place for that. Do you just have a sense -- if you can talk about acquisition environment outside PMB for this year, and what I'm really trying to get at is the potential need for equity whether you keep using the, what I call continuous equity issuance or whether you would have a need for equity. If you can roll through what you've got left on your line and how much you could do before you'd have to come back to the equity market.

Actually, our history is, I think, starting to become apparent, Jerry. We've taken opportunities to issue shares through the continuous equity program for a variety of reasons. At times when we think that it's a good opportunity to deleverage possibly, which we did in anticipation of the PMB transaction, which allowed us because we knew that there was some secure debt that was very attractive that we wanted to assume and we could releverage back up to more historic standards, so we're going to be opportunistic of issuing through the controlled equity program. Again, we think it is a very efficient -- the most efficient way to issue equity and we've been successfully doing this now for at least a couple of years. The development pipeline, which Don can speak to -- or I should say the acquisition pipeline is really not as strong right now as we've seen it in the last couple of years. We anticipated that it might slow down a bit just -- the market constipation where buyers and sellers are really trying to sort out where asset prices are going and so there's just not quite as much movement.

I think we spoke on our last call about the fact that, in assisted living we expected there to be less inventory available for sale just because so much inventory had traded either to strategic buyers that wanted the assets for the longer term or financial buyers that frankly would have a difficult time flipping the assets at a profit based on what was going on in the capital markets and the prices they paid. So we're seeing a little less activity there, but frankly, it changes on a dime sometimes and you can go from not feeling particularly terrific about what you see for the next six months and one or two deals will change that and all of the sudden you're right up on top of things. So I guess flexibility and being nimble and opportunistic is really the key and it's why we have identified and put in place the joint venture, the controlled equity offering program, a number of different capital sources selling assets strategically, as we've done with Brookdale and we will do shortly with Ameritus to make sure we can match capital needs with investment opportunities.

And, Jerry, I think the -- you have another reason -- and we pointed this out, I think, ad nauseum -- but having MOBs now in our platform gives us a lot of diversification in what would otherwise be a very difficult investment climate. We still are seeing plenty of opportunities in the medical office building sector, whether will be triple-net lease-type opportunities with higher yields or be something along the lines of high quality like the PMB folks have. So it's nice to have that when the other markets start quieting down or there's some -- or the product that we're seeing is not stuff that's very attractive to us, and that's just a plus from this transaction from my perspective.

Okay, and last thing and then I'll jump off. Would you see any advantage of halving an AL or IL operating platform, a la through a taxable REIT sub like [Ventoss] has done. You've got something -- you've got some pretty close affiliations with some operators now through existing investments, but is that an advantage when clearly you guys know the business?

I'm sitting right across the table from Abdo and I think if anybody in our space can do it we can, and I think we will at the appropriate time. We're -- that's on our radar screen and at the appropriate time we will venture into that. We'd frankly like to see the legislation pass first and take that risk out of the element. I guess it can be structured around but we are not prepared to take that incremental risk. So we're preparing ourselves for that opportunity and I think when we get to it, we'll be terrific to it, because again we've done that business and it's not just Abdo and I, it's most of our senior investment officers. We know it from the inside out, so at some point in time I think you'll hear us talking about that, but it's not immanent.

And anything happening on the legislative front and then I will jump on that stuff or are we still waiting for tax bill or --?

That's primarily it. That's one of the things we're looking at and the right opportunities. There are some disadvantages to it and so we need to think carefully. We need to find a way to do it that creates value for our shareholders and also a way that we can produce value for our customers, too. We don't want our customers feeling like we're in direct competition with them. There are some things that we need to give thoughtful consideration to, but I'm confident that we'll find a way to do that.

Okay, thanks a lot.

You're very welcome.

Your next question comes from Rob Mains.

Good morning or afternoon out here on the East Coast. I want to make sure I understand the guidance properly. Given what you had in the guidance for straight-line rents, do I surmise that these leases are largely triple net?

Sorry, that -- which leases you're talking about?

For the -- the new ones that are coming on with PMB.

The -- they have some triple net, but also there' CPI increases that we have straight line with that, too.

Okay, but it's not the operating-type leases?

They are operating. Most of them are operating type where if they are on a triple net basis the tenant is billed for that. Our triple-net leases for assisted living and skilled nursing the tenant takes care of all costs, they pay them correctly. In the medical office building the triple-net lease in most cases is the landlord pays for the costs and then bills back the tenant.

Okay. Would -- let me ask it differently. Which line on the rev -- which revenue line will the rents fall on to?

That's -- we have a MOB revenue line --

Okay.

-- on our income statement and that's where the PMB revenue will show.

Okay. But that -- and that revenue will include a straight-line component?

That is correct.

Okay. You describe these assets as having high barriers to entry and I know that California's not a CON state, so what barriers are you speaking of?

We're really talking about the -- the cities that we are in and a lot of places like Burbank and Pasadena and Mission Viejo where there's just not that much land available. We're also on campus --

On Ameritus.

--and it's -- so once you're connected with a hospital system -- and really to PMB's great credit they've just done a fabulous job. 12 really terrific hospital systems -- and so these hospital systems are not going to be doing business or other developments with people on their campuses. I think it's not a monopoly, but it's in a pretty darn good position to be in.

Got you.

With regard to the cities, most of these cities have very difficult regulatory processes to go through in terms of getting new projects approved, so even if there could be competing sites or whatever, the process of getting a building approved and up and running is very difficult.

Okay. And then last question, speaking just to the California properties, are they all compliant with the seismic regulations?

Introduce Bob --

Bob Rosenthal, who's the founder of Pacific Medical Buildings and is here will answer that.

The codes -- the building codes in California and most of the west change every three years, their new codes are revised every three years, so it's virtually impossible to say that an existing building is totally compliant with the latest code. All of our buildings are built in compliance with the codes as the time that they were constructed, and because they're a relatively new portfolio, they tend to be a lot closer to the current codes than an older building would. But the the answer is there's no building that can be absolutely current.

And the great majority of our buildings were constructed after the Northridge earthquake that caused an upgrading of the seismic code.

And seismic requirements for a MOB are a little different than --

They're quite different than a hospital, so there really isn't a major issue among medical office buildings in general.

Okay, that's very helpful. Thanks a lot.

Bob is an architect by background and a real icon in architectural and medical office building circles and we're excited for you to meet him and Mark and the rest of the team.

Sounds good

Your next question comes from Karen Ford.

Hi, good morning. First just a point of clarification, did you say that in the '09 and 2010 closings that 5% of the purchase price will be OP units?

No, the 5% that I was referring to would be on the development pipeline.

The $1 billion.

That's the $1 billion.

Okay.

The OP units -- how much they take in OP units on those, I don't know the number.

We have at least a 40% of the eq -- of their equity, a minimum of 40%.

Okay. Does -- I assume that Prop 13 applies here and if so, what tax increases have you guys assumed on the transfer of the properties?

We have assumed -- we had estimates done and we have assumed full tax increase that's based on the Prop 13 and we have -- some of this will be passed through to the tenants, and others will be -- were taken into account in the NOI. And also PMB would like to have a portion of it pass through over a certain -- over a period of two to three years to make it easier on the tenants and they will be covering us for the difference.

Okay. What is the income that the management company generates currently from third parties?

There is very little.

Okay. And is that expected to remain that way going forward?

There's a little bit of third-party income associated with hospitals where we own buildings and often times they will ask us to run a building that for whatever reason they still own., nd those buildings are actually probably an opportunity for acquisition as we go forward with NHP.

I think -- go ahead.

There's another aspect of property management. It's very susceptible to scale that you need a certain amount of staff to run even one or two buildings, but as the amoun -- and as the number of buildings and the square footage increases, the efficiency gets greater and greater. So when the buildings that are under construction right now are completed, we're rejecting a profit, which will continue forward.

And Karen, from NHP's perspective, we view all that profit that comes in as pure gravy. Again, the main benefit we have seen from the property management side is maintaining those relationships and growing other relationships with the healthcare systems.

Okay. Finally, is there any mark-to-market adjustment on the debt that you guys are assuming, and what's the term on the debt you're assuming?

We've taken a look at the individual rates on the various buildings and the debt that we'll be assuming and those rates all fall pretty much right within what would be a fair market value range, so when we actually get to closing on various buildings that have specific rates, we'll take an even closer look at that. But at this point, we anticipate either a very small market-to-market or no mark-to-market as these buildings close.

And do you know what the average remaining is on that debt?

I don't think we have that in front of us, and it again varies based on the different buildings and the different closing times.

Okay. Thanks very much.

You're welcome.

Your next question comes from Tayo Okusanya.

Good morning, everyone. Just one quick clarification, Don. When you break ground on the building and you do -- do your negotiations to decide what the -- you expect in regards to the cap rates, at that point are you locked into buying that particular asset, or can you still walk away?

No, a that point, if we said we're proceeding, we are proceeding. Now they have to deliver a building that has certificate of occupancy -- what we do is give a take-out commitment to a bank and we don't advance fund anything, so once they've got the certificate of occupancy and the bank can exercise them a takeout, then we would be required to buy at the cap rate we agreed to.

Can you end up in is a situation where once the building is completed and you're ready to acquire it down the line that your cost of financing is higher than the -- than the cap rate that you agreed to?

I guess it's possible. We would hopefully -- if we saw that market presented to itself either advance fund or be hedging our finance requirements.

Okay. All right, that's helpful. Second question. In regards to the actual portfolio, trying to look for -- you guys have historically been very good at looking at the portfolios and figuring out opportunities for upside. It sounds like with this portfolio, yes, you have a nice development pipeline in front of you, but it sounds like most of the portfolio are triple-net leases that increase by CPI every single year. The management company that was the 50% that you have in that, they're not doing a lot of third-party management and they don't expect to in the near term. And the portfolio itself is fairly stabilized, at least the '08 acquisitions that you are making, at about 94% occupancy. So just based on that, where do you guys see potential upside that could drive your yields higher versus where you initially purchase the portfolio?

I think clearly the place where there's potential for the upside is on the development pipeline.

Okay.

If we're able to execute that correctly, it gives us the opportunity to get yields that we could not get in the open market.

Okay. So that's really where most of the -- okay, of the value is.

That is where we conservatively believe most of the value will be. And as Doug had pointed out earlier, this is just a little bit different business than office buildings, and that's good and bad. The bad is when times are rocking and rolling, it's very hard to throw through 6%, 7%, 8% rent increases because you damage the relationships that you've taken so long to nurture and you put yourself in a very difficult position going forward and getting additional business. Then again, when things are rough and people are going backwards in office buildings, you're still seeing cost-of-living increases on this site. So it's a stable return. It's not the dramatic, exciting return potential to it where it's going to leap at any particular point, but it's a pretty rock-solid return.

Okay. So is that the main reason, just the stability, that you prefer to run it using this lease structure versus some other guys that own medical office buildings through more typical operating leases you see on the office side?

Well, I think we are doing -- I think we are doing similar kind of leases, it's just whether or not -- who your tenant is, really, and this this case, ultimately the person we're looking to is the healthcare system, and the healthcare system is monitoring what we're doing. If they're going to do additional business with us and we're gou -- what they view gouging their tenants, that's going to affect our ability to grow.

Well, okay.

Mark has a point here.

I have one point to add si that there's been a recent spike in construction costs and our building's cost about double what they were to build just four or five years ago, and that has made -- the rental rate that's required for new projects has escalated quite a bit, so the buildings that are being bought by NHP have rental rates that are below what would be required for replacement buildings, so that may leave some room for pressing the rental rates as leases roll over (inaudible).

And also there -- it seems is a confusion about triple net. These are operating leases, they're not triple-net leases in the nature that you're thinking. So they are operating leases that when they -- when the leases turn, there is an increase, and as Mark said, there might be an opportunity there to increase rents more than just the CPI?

Okay.

And the parking revenue we mentioned real before. There's some real opportunities here, but as Don said, they just really aren't different than regular office building and I think Green Street did a piece which I thought was very useful where they showed that on a risk adjusted basis, you can make an argument that medical office buildings were systematically under priced relative to regular office buildings just because slow and steady increases often, like the tortoise and the hare, beat the wild and crazy up and down for regular office buildings when they have consolidations and economic downturns and those type of things.

And Tayo, we're really just keeping to our theme of we don't want to overpromise and under deliver. This is more the norm, and if opportunities present themselves for us to do better than the norm, we certainly will take advantage of that.

Okay, that's good. Just one more question and then I'll drop off. Just in light of the future commitment you may have regarding the development pipeline for this deal, and as well as buying the 2009-2010 assets, and as well as any debt maturing in '08 and '09, how do you think about your overall liquidity position and abilities to do acquisitions outside of the MOB realm?

Well, as you know, our credit facility balance at the end of December only had $41 million on it, so we had almost $700 million available, and with the sale of Ameritus would have covered all of 2008 acquisitions. And so, for '09 and 2010, we will continue to use our various capital sources. And in terms of the development pipeline, we do not have the obligation to acquire any of the buildings that PMB will be developing, so depending on what the markets are like at that time, we could decide to pass on certain -- on certain projects. So we will manage our capital and liquidity as we have done. We always -- when we have transactions we will try to find a creative way of financing them. We have our JV with a pension fund that's managed by -- advised by Morgan Stanley, also still have about $500 million available under that.

Great, very helpful, thank you.

Tayo, one other thing, though, the development pipeline will be financed not -- not by us as -- as we go, the development costs are incurred, [but it'll be funded on a take-out commitment].

Right. Great, thanks a lot.

Thank you.

Your next question comes from Philip Martin.

Good morning, everybody.

Good morning.

Just wanted to touch on a couple of things. I can take care of a lot of these off line, but are there -- does this relationship with PMB restrict you on any other deals with other medical office building developers, managers, et cetera?

Go ahead, Abdo.

No it does not, except we have -- in ten states we have an obligation to -- exclusive for management purposes for the property management. but other than that, it does not -- we still are allowed to do business with any other medical office building developer.

And in fact, we closed some in the fourth quarter.

Okay, exactly, and I would think this might even help, too, if you see other pipelines that are -- portfolios that are under managed and you want to bring them under this umbrella so to speak?

I think that is exactly right, Philip. I think affiliating with PMB and their known quality in this industry is only going to help in that regard.

Okay. Now in terms of PMB's preleasing requirement before development gets started, are they typically preleased by a fair amount before these developments get off the ground and if so how much? What are their requirements?

I kind of touched on it a little bit before. We do a feasibility study for every building before we start construction in which we survey the entire medical staff, which gives us a pretty good feel for the amount of demand and then we do get signed pre-leases, depending on our view of the depth of the market, anywhere between -- I think priced 50% at the very low end and sometimes upwards of 70% to 80% at the high end before we start construction.

Okay, so there's a fair amount of risk taken out of this before even development occurs?

We're looking for two things. One we want to see just underlying demand and also we want to see acceptance of rental rates, as well, so we then spend a -- it's been a hallmark of the way we've developed these things over the years.

Okay. Is there any interest or capability on PMB's part to do anything development wise in senior living or long-term care or property manage there, making this a complementary relationship for the two of you?

I think that that's a possibility and we've talked a little bit about that, but it's only been very conceptual at this point. But as we explore opportunities of development in that area and our relationship grows, I think that that's something that will evolve into at least more detailed conceptual discussions and I'm hopeful that it can blossom into some real activity, as well.

Okay. Because certainly your penchant to -- Doug, to always look five years down the road and see how these relationships and businesses can evolve, that -- that might be an opportunity.

To your point, you have some real nice possible synergies, Philip.

Yes. Lastly here, in terms of -- Don, this is probably a good question for you. The size of your investment pipeline, obviously now the last couple of years you've worked very, very hard to put some very good relationships in place here that have some good investment pipelines going forward. So we've got a nice pipeline with PMB, but in addition to this what is your aggregate potential investment pipeline the next two to three years now that you have several of these relationships, on the long-term care senior living side as well as the medical office building side?

Are you trying to catch me asleep, Philip? (LAUGHTER)

No, no, not at all.

You know we don't give acquisition guidance, so I can't really talk about that. What I can talk --

And I'm not looking for guidance really, but you've obviously have got some -- what I'm looking for here is --there's a pretty stable growth -- a pretty -- there's a good platform for potential future growth here, and I'm trying to gauge -- not really looking for guidance as much as I am that there's a lot of built-in growth with these existing relationships?

Well, we certainly feel that way and we set them up that way. And this is the -- the one with PMB is another example of exactly that. When we're trying to cultivate these relationships, not a one-off. It was supposed to be an ongoing situation where we're both benefiting going forward and we have several of those in place and we certainly expect to benefit from those.

Okay. And actually my last question here is on the new development properties with PMB here over the next couple of years, are -- are these all on different campuses than the ones you're acquiring or are they -- in three, four years are you going to have two to three medical office buildings within the same healthcare system or on the same hospital campus?

Many of these are repeat deals from existing clients sometimes at different campuses.

Okay.

And then we also are invited to respond to RFPs for -- we think virtually every hospital that's issuing an RFP for a new development project, we usually see it and we will compete for those and we tend to win our fair share of those in our market area.

But two buildings right now -- two buildings in the pipeline are on campuses where is we have other buildings.

Okay, so they -- okay.

That happens.

Okay. That's -- thank you for the answers and thank you for all -- that supplemental which -- you guys should publish that in hard copy now and put it on newsstands. (LAUGHTER) Okay, thank you very much.

Thank you.

Your next question comes from Rich Anderson.

Good morning to you, guys.

Hi, Rich.

Just a few questions here. First, quickly, the share count. Will you -- you'll publish your fully diluted share including the units that you're issuing with your acquisitions even before they convert, is that correct?

That's correct.

Okay, I just wanted to make sure of that. And just to ask a question outside of PMB for a moment. The purchase options and the debt prepayment, the leakage so to speak, is higher this year than it was last year. It's my impression that was starting to wind down, yet now it's going back up. What is happening there and what's the future hold for that leakage?

I will let Brent answer that in just a second, Rich, but one thing that -- I hope I'm right on this since I jumped in. (LAUGHTER) When we acquired the HR portfolio in 2007, some of those loans we knew were going to bleed off in early to mid-2008 --

Okay.

-- but they had good yields to them and so we thought we may as well pick up the cash for our shareholders then. But we knew that, and so that's at least part of it, Rich.

No, that's a good portion of it. The balance is -- a good portion of the balance is stuff we rolled over from last year, so we did some short-term extensions on some things, restructured some other loans, so part of what you see in 2008 is just a timing mechanism from 2007.

Okay.

I think the other thing, Rich, is what we really emphasized is the stuff that had pretty much gone away were the bargain purchase options where we weren't getting fair market value that we can reinvest, that stuff's pretty much gone.

Okay, understood. I want to get back to the straight-line rent topic and also the cap -- recurring CapEx element. With your new FAD guidance, your straight-line rent from 2007 was $0.03, or so it seems from your disclosure, and now is $0.11 and your CapEx was also $0.03 by my calculation and now is $0.06 based on your FAD guidance. My question is where are those -- those items coming from? Are they coming from this -- from this merger or this acquisition, the PMB acquisition, or is it coming from someplace else? And before you answer, if the leases are generally structured with CPI-based increments, I would think that you can't straight line that and yet you said that there is straight-line rent. So anyway, long question, hopefully a short answer.

Yes, the straight-line rent, some of it is coming from this portfolio, but not the majority. We have been -- we have a policy -- as you know, last year a lot of the REITs started to -- healthcare REITs started to straight line the rent on their -- on their triple-net leases, and we have a policy that we do that too, and we reserve a big chunk of it based on various -- various criterias that we use and some of our tenants have improved in coverage or other areas of network or others there where we are starting to recognize more of the straight line -- straight-line rent on those leases. So that's where it's coming.

Okay, that's -- that's from the triple-net category?

That's correct.

Okay.

As to the lease commissions and tenant improvement, obviously this transaction will add -- though not a lot, but as you know we've closed quite a bit of medical office buildings in 2007, and that's what you're seeing also the increase coming from in 2008.

Okay. So when you look at this transaction on not a NOI cap rate basis but a -- an economic cap rate basis, it would still be accretive to you?

In '08 I believe it's neutral.

Okay.

So that if you take -- we said it's a $0.01 to $0.02 accretive on a FFO basis, so you would be -- (inaudible) and leasing commissions are about $0.01 to $0.02 impact.

Okay. Okay. Question for Mark. Can you -- can you talk just really quickly about the inclusion of other potential bidders beside NHP or was this just an exclusive deal with you guys?

No, we did a fairly extensive process, and we, I think, fairly quickly decided that the -- that we wanted to be with a healthcare REIT because of the cultural fit. We like to -- we had good relationships with our clients and we needed a long-term player and then just the cultural fit with the NHP guys was very good, so they were the clear choice.

Did you talk to any other REITs?

Yes, we did.

Okay. And then last question, any issue with any of the hospital systems that you deal with in terms of the auction rate securities, fledging issue in the market these days?

I haven't heard of any with any of our hospital systems. I had a former CFO who's at a new hospital call me with a question about monetizing his MOBs because of that issue, but that's the only thing that I have heard of. (LAUGHTER0

Very good. All right, thank you.

Thank you.

Your next question comes from Jim Sullivan.

Thanks.

Hi, Jim.

Doug, thanks for the Green Street plug.

Really it's terrific. I hope to God you are right on all that stuff, Jim. (LAUGHTER)

You got a lot riding continue to now. Question. The topic's been touched on a number of times but I'm still confused as to who the tenants are in this portfolio. Is it typically the hospital systems and then subleased space to the docs, or are your relationships, and most importantly the leases directly with the doctors and the practices, et cetera?

The leases are -- our typical building has between 20% and 35% occupancy typically by the hospital or a hospital affiliate for outpatient services, such things as ASC, imaging centers, cancer centers, dialysis centers, that sort of thing, so that portion of the buildings have a credit element to them. And then in addition to that it's direct leases with doctors and group practices.

Given that I'm surprised your lease turnover isn't more robust over the next few years. How long are the leases that you typically sign of with the 75% you just referred to?

With regard to the outpatient spaces, we always get north of fen years, usually 15 or 20, and then on the multi-tenant physician spaces we try to hit an average of seven to eight years, but we mix them up. And the portfolio is fairly new, so the turnover in the near term is fairly low.

Okay. And then with respect to the -- to the seller strategy. It seems like cashing out -- albeit on a tax efficient basis for the OP units -- cashing out and working less was important motivation. What assurances does NHP have contractually or otherwise that the people who are needed to to do all of this development will actually stick around and do the development?

Well, from a -- I'll address a couple of elements of your question. From a cashing-out perspective, I think the principles are going to be taking somewhere in the neighborhood of 60% to 80% OP units, so we want to stay involved with our buildings and we think it's an important element -- the story to our client that this is a contribution of our properties to a -- to truly a partnership. From a working perspective, a bunch of senior managers have got quite a bit of work life in front of us and I don't think we are going to be slowing down any, although it'll be nice to have this transaction behind us so that we can start focusing on developing again. (LAUGHTER)

And most -- I think another component of your question was, what's going to keep them from jumping ship and going to another developer. And we have significant -- well, the large -- almost all of our senior management has substantial interest in the Company -- ownership interest in the Company, and we have substantial profit sharing plan for our other employees, so all of the senior employees are very much tied into the ownership?

Yes, I think the average tenure of our top management is over ten years now. Our -- our company-wide turnover is below 5% because we drive profit participation in the projects all the way down to most levels of the Company, and senior management has significant ownership positions into these buildings.

And even Dr. Jeffrey Rush, who's been the financial principal behind this is -- with the closing of the first tranch of -- major piece in 2008 we expect that he will be asked to ask our board and at some point in time, others may be asked as well. So we have a lot of connections here and tie-ins and we've really giving careful thought of how we have a complete alignment of interest.

Okay, and then my final question has to do with the ground leases. Ground leases come in all sorts of shapes and sizes. Are these many ground leases pretty traditional in terms much the round rent payment increases you might see in the future or are there any unusual features that might impact the economics for NHP?

Yes, a lot of these have zero ground rent on a go-forward basis because we pay what we call a ground lease origination payment at the inception of the lease in exchange for not having any rental stream associated with the ground lease. Aside from that, we try to be very careful that there's not going to be a disconnect between the rent levels and the underlying ground rent payments. We avoid market resets and that sort of thing. So we try to be very careful about making sure that the ground rent payments conform to the underlying revenue streams of the properties. From a restrictions point of view, typically our ground leases, since we're on the hospital campuses, require us to lease to medical staff members in good standing of the hospital. There is some restrictions relative to competing services, but anything that is typically done in an outpatient physician office setting can be done in our buildings, and then if we're in religiously-affiliated hospitals, there will be reproductive restrictions, basically no abortions.

Okay. Thank you.

Jim, we gave you a lot of information, but on page 12 of supplemental we tried to give you some other information about the ground leases you can have worked out, as well.

Yes, that's what I was looking at. I was just curious any resets or things of that nature that may impact your underlying growth going forward or the value of the assets.

Got it.

Thank you.

Thank you.

Your next question comes from Jerry Doctrow.

Just going on and I appreciate the time. Just a couple of real quick things. How much do you expect in you're '08 guidance to be generating from your half interest in the management company?

Nothing, zero.

Okay. Okay. And then just -- don't start requirements basically require you to start rents at market, so you've talked couple of times about not being able to push the rents, but aren't you really mandated to set the rents at market rents, given you've ground leases with the hospitals and stuff?

Well, that is a underlying trend behind the monetization of health systems, medical office building assets and they are the owner. They are required to set rents at market. We are not subject to those restrictions, and that's one of the reasons that more and more hospitals are looking for third-party ownership of medical office buildings because it takes them out of that potential conflict. We just have to look at what the market will bear, with keeping in mind that we don't want to offend our hospital clients.

Okay, thanks.

Jerry, don't misunderstand. We want to get to market rents but we just don't want to take advantage of the situation and gouge somebody for short-term benefit and really step on our own feet.

Right, and you've got long-term lease so the rollover limits you. Okay. Thanks.

Thanks.

Your next question comes from Chris Pike.

Hey, guys, how you doing?

Good.

I got several follow ups so maybe Don or Abdo together can call me after, but being that I have you on the phone, Doug, I just wanted to talk to you about your position with respect to -- to your strategy. I guess last time I met with you folks down in [Nick], I was under the assumption that you were really fast and steady on the triple-net lease play and you really didn't want to take on that type of operating risk regardless of the legislation being through. So is this -- is this an evolving and modestly changing posture regarding that business segment? And if so, what -- how did you become a little more comfortable with taking on that risk profile?

Well, it's hard to describe exactly, I guess, Chris, to what degree we may get into it. We do feel that that has a place for NHP in its portfolio of investment opportunities. And some of the questions have been really related to how do you supercharge your earnings a little bit, and -- and that would be an opportunity. With acceptance of incremental risk you -- you could increase your returns because effectively the coverage on our of triple leases would revert to us if we assume the operator positions. So our view is that there is value creation opportunities there. We would approach it if and when we decide that -- that that's something we want to do and I think -- like we did with medical office buildings, for example. When we decided that this was a space we wanted to become better acquainted with, we established a research and development budget, if you will, and entered into the joint venture with [Bro] Companies and this started out as a $50 million thing and look how that's blossomed.

I'm not suggesting that it will blossom like that on the operating side, but I can see situations where maybe we could go on on a select basis and find underperforming assets. If this economic downturn is -- is severe and/or long in duration, there will be assets and operators that get themselves in trouble. So if we could pick up assets that we think are under-managed or have some problem that we can fix -- and who better in our space to do that than a bunch of guys that have done that for a living and turned companies around -- we would on a select basis do that, hopefully buying them at wholesale or some kind of distress price and prove them and then maybe do a sale lease back with one of our customers. That is one possibility. Another possibility is we might pick up a handful of assets in different locations and work it up to a portfolio of, say, 15 assets or something, and again, maybe market those to a good customers of ours and say we've got a transaction here, a group of assets that we might -- you might find attractive.

That could solidify relationships with existing clients. It may be able to put us in a position to do business with clients that -- that really would prefer to own assets rather than to lease them, but the only way they can get to the assets on a lease basis. So we won't get into it big. It will be a slow, methodical process. I see us earmarking some R&D for this. We'll test to see if it can work, and if it works it'll grow into bigger, if it doesn't we'll abort them..

Okay, great. Catch up with you guys in a little bit then.

Thanks.

Your last question comes from Steve Swett.

Steve, thank you for hanging in there with us. (LAUGHTER)

Sorry to belabor the call

You should get some kind of award.

This'll teach Mark to go with a public company, I guess. (LAUGHTER) Just a couple of questions since I did hang in until the end. The -- the timing of the various tranches of the closings. Is there any difference in the cap rates with -- with each grouping of assets that close or is it all pretty consistent with the 6.1%?

No, there is a difference. The cap rates of the ones closing in 2010 is lower at 5.8%.

Okay. And then, Doug, just sort of a big-picture question. Where is the medical office building platform or diversification concentration now versus where you want it? And to the extent that you've got significant ability to add to it over the next couple of years, does that take it to a point that makes it larger than you'd like it?

There's a lot of elements to that and it's a terrific question. When we set out on this path, people started to ask us where would you like to see the Company five years from now and this was two or three years ago. And at that time we said we thought we'd like to be somewhere in the neighborhood of 50% senior housing in the assisted living and independent living primarily asset class. We thought we would try to work our way down to about 20% skilled nursing and do that -- we still like that space, but do it on a select basis. Get newer assets where the quality mix was really good and we saw some opportunity. There's some new generation skilled nursing that, as I think you know we've been involve with and we think they're terrific and we've got some really nice relationships with some tenant operators that view that space similar to us, which puts us at around 30% left for medical office buildings, assuming that we didn't add yet another leg to the stool at some point in time, and frankly we don't see that happening in the near future at all. So we're not too bad from where we said we wanted to be in five years. It's just that we did it in two-and-a-half years, so that's that.

Now having said that and in tying some thoughts together from earlier, and as Don mentioned, we're seeing more opportunities in medical office buildings today that are attracted to us than we are in some of the other spaces. So as has been our nature in the past, we're strategically optimistic and so if the best investments that we can make over the next couple of years is the medical office building on a risk-adjusted basis, if that ran up significantly even from 30%, say to 40%, 45%, even 50% of our portfolio, that wouldn't be frightening to me personally because the opportunities will come again to make investments in assisted living and senior housing and then that's what we will focus our intention -- attention. We do want to get ahead of the assisted living curve. We see some real opportunities there, but probably on the development front more so than acquisition, so we're trying to figure out how maybe to get involved in that. So kind of a 50/20/30 doesn't sound bad to us as an overall thing, but as that adjusts from year to year frankly we don't care. Our job is to produce value for shareholders and you do that by making the right investments at the right time and not being terribly concerned if you're a little higher or lower to what your model portfolio is since that's just a guess anyway.

Okay, thanks.

You're very welcome.

At this time, there are no further questions.

Thank you very much.

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