芬塔 (VTR) 2008 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Nationwide Health Properties third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS)

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 third quarter 2008 earnings. Certain statements made in 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.A s this call will be available on our website for some time, it is also important to note that it includes time-sensitive information that may only be accurate as of November 5, 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 are included in its earnings release dated November 4, 2008. As a reminder, NHP's complete third quarter 2008 earnings release package was filed on November 4, 2008 in separate Form 8-K and are available on the investor relation section of our website at www.nhp-reit.com.

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

Thank you, Ron. Good morning and thank you for your interest in Nationwide Health Properties.

Thank you, Ron. Good morning and thank you for your interest in Nationwide Health Properties. Joining me for today's call is NHP's Senior Management Team. We had another solid quarter across the board and maintained our disciplined commitment to conservative balance sheet management. NHP's leverage remains favorable at 43% on an undepreciated book basis with corresponding fixed charge and dividend coverage ratios of 3.1 and 1.3 times respectively.Our debt maturity schedule is quite manageable with only $34 million due in 2008, about $125 million due in 2009 of which $55 million are putable notes and approximately $77 million due in 2010. NHP's first significant debt maturity of $350 does not occur until July 2011.

As reflected in the detailed debt covenant information, we added to our already comprehensive supplemental information package. All of our debt covenants are well within their specified compliance limits.During the third quarter of 2008, we issued $1.3 million common shares to our controlled equity offering program at an average price of about $35 per share, resulting in net proceeds of approximately $46 million. Our $700 million credit facility, underwritten by well capitalized banks such as JPMorgan, Bank of America, UBS and Wells Fargo remains 100% available to us. It matures in October 2010 and provides us with a one-year extension option. In addition, we have about $115 million of cash on hand.

As you may recall, our PMB acquisition is expected to close in the remainder of 2008 and 2009 totaling about $400 million are already approximately 60% financed with $170 million of secured debt at a blended rate of slightly less than 6% and about $75 million of operating units. Thus, our net cash requirement is only about $150 million.To provide us with another capital management tool, our Board of Directors approved the expenditure of up to $100 million to repurchase shares of the company's common stock. The stock repurchase authorization does not expire and any repurchase activity will be influenced by the intrinsic value of our assets as well as our liquidity and leverage positions.

We continue to be prudent with our capital and circumspect with our investments. During the third quarter, we invested $125 million which brings our year-to-date investment total to approximately $430 million. While we are seeing many investment opportunities, most do not achieve our current return expectations. Though we expect to complete our fair share of investments, we will only do so with the keen eye on maintaining our excellent liquidity and leverage positions. Challenging capital markets, like we are currently experiencing are an important reminder to judiciously allocate capital.

Today and for the foreseeable future, liquidity is a precious resource, which is not easily replenished without significant risk and increased costs. With all that happening on the economic and political fronts, we continue to monitor our portfolio with increased scrutiny, expanding analytical scope to reflect the current environment. We continue to believe that all three of our primary asset classes, senior housing, long-term care and medical offices have strong prospects for the long-term, although short-term bumps in the road will continue. NHP is growing, primarily the need-driven medical office portfolio, which is fast approaching $700 million and $3.5 million rentable square feet, continues to demonstrate solid performance with an average occupancy of 93%. Our skilled nursing and other long-term care facilities are need-driven and are generally performing well with EBITDA rent coverage at a robust 2.1 times.

Although need-influenced, senior housing does compete with many viable alternatives, including family care, which in tough economic times, tends to become an increasingly attractive option to many families. While our senior housing, same property portfolio showed a slight increase in occupancy and held its EBITDARM rent coverage relatively constant in the third quarter, we believe the impact of the economic down turn has yet to be fully experienced. Brookdale, our largest tenant maintained its EBITDARM coverage at 1.5 times over the past 12 months.

Our second largest tenant, Hearthstone has seen its year-over-year EBITDARM coverage decrease slightly from 1.23x to 1.20x. Hearthstone will current on its escalated based rent obligation yielding 8.5%, has not paid its supplemental rent. We recently engaged Cohen & Steers to facilitate our strategic evaluation of this investment and the full spectrum of alternatives available to us.

Finally, we are increasing our full year 2008 FFO guidance to between $2.21 and $2.24 per share and FAD guidance to between $2.13 and $2.16 per share. Our guidance range incorporates no results from acquisitions except those completed and previously announced and it does not incorporate the impact of future impairments or capital transactions.

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

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Michael Mueller of JPMorgan.

I just wanted to ask, you mentioned the Hearthstone deal; as far as the strategic alternatives, are you comfortable talking about what some of those possibilities are, what some of your options might be?

Only generally.

How about generally?

How generally? Or how about generally?

How about generally?

We're exploring all options. We continue to have a productive dialogue with Hearthstone itself. We very much would like them to be successful and they're doing some good things. We're hoping they stay in the path of doing good things, but we're also exploring other alternatives, which could include the possibility of a replacement tenant should that seem to be in our best interest.

Okay, fair enough. You guys have been a little more negative on investment conditions. Has there been anything in the third quarter to change that? Maybe as far as MOBs, have you seen distressed selling or where cap rates are going?

We haven't really seen distressed selling yet and we don't know if we will or not. Although we think it's certainly becoming more likely than it was only a short time ago. There hasn't been a lot of investment volume by really anyone in our space, with a few exceptions to that and I think we like others are taking a cautious eye to investments and for us, our most important objective is to make sure that we allocate our existing capital to its highest and best use.

That imposes on us more stringent standards than we have been accustomed to in the last couple of years, because the ability as you well know to replenish capital is not as efficient, easy or cost effective as it was, against only a short periods of time ago. So we're allocating capital with the mind toward a longer term perspective than we had only recently.

Okay, and then finally, I just can't help but ask, if you guys have thoughts on the new President elect and the stronger democratic hold in Washington, how that might affect you?

We officially are politically agnostic and so it's very exciting to be a part of a process. I'm sure most people felt a great sense of pride in our country last night as you see the transfer of power peacefully and honorably, respecting the wishing of the population. So it's a pretty tremendous thing. Now the political implications, we're going to have to wait and see. We're going to move quickly, I think from political rhetoric to political reality and of course what people talked about six months ago as being aspirations and even recently are likely going to be influenced by the economic realities that government, citizens and businesses all face.

Political answer, thank you though.

Our next question comes from the line of Jerry Doctrow. Your line is open.

I just had a couple of things and you touched on maybe both, but on Pacific Medical, I haven't had a chance to go back and dig through the filings to look at this, but you had some ability if certain costs rose to re-price some of those assets, so thinking ahead to the scheduled 2009 acquisitions, you made the point there's not much additional capital required on your part to fund them, but remind me whether the OP units the numbers fixed, it doesn't vary with share price and then it also seems to me that again based on debt costs or something you had some ability to re-price, was that only on the development?

You have a good memory Jerry and actually the specifics of it are somewhat complicated, but I think we can explain it succinctly enough that it will refresh your memory and to do that, I'm going to let the gentleman that actually negotiated that part of the transaction, the bulk of the transactions Abdo and Don, and we'll start with Abdo.

This is Abdo, if you can't tell from my accent. Basically for all the closings that happened, three months after the first closing, which occurred in April 2008, so three months after that, any closings starting in July, the cap rate is adjusted basis point for basis point up to 22 basis points, based on the JPMorgan, BBB 7 to 10 year REIT index. When we negotiated the transaction, the BBB 7 to 10 REIT index was 7.12. Currently it's about close to 11.So obviously it has increased more than 22 basis points. So we have the option, at this point, to adjust the cap rates by 22 basis points or to not close on the transaction.

And the practical alternative in between that, if I can add is that, we could have have discussions with PMB and price things that would reflect more accurately the current conditions. Whether or not we can come to an agreement would be a matter of the negotiations of the specific project and their objectives and our objectives, but of course we would have that option and they would have that option and that's exactly what you would expect would occur and if we're so far outside what was contemplated when we originally struck the detail the and whole world was operating in terms of real estate underwriting.

So obviously, I don't know that the next deal is sort of immediately pending, but given that you've got some sort of pending 2009 sales [ed note: PMB investment pipeline] that were 6-ish cap rates or even sub six cap rates, if I remember the terms originally. Lets say just to keep the math simple you're now at 6.2 cap rate on your 22 basis point upside, so is that a deal that still makes sense or are those deals that could not happen or have to get renegotiated? What's your kind of general sense at this point?

Jerry if you recall, when we announced the transaction, we announced also that it was fully funded, mainly the 2008, 2009 acquisitions and closings for the PMB transaction were prefinanced by the sale of the portfolio to Emeritus at a 6.1 cap rate. So the funds that we have available really were earmarked for that. We also had a great secured financing in place. For the cash that was required, the way the overall transaction is financed is through 50% of secured debt, about another 25% of operating partnership units and 25% cash and the transaction of the sale of the assisted living portfolio to Emeritus is funding the cash required.

Okay, so basically 2008 and 2009 will probably proceed as agreed. You adjusted your deal to the basis points and move ahead and then the future development stuff is more open; is that the right conclusion I'm drawing from your comments?

That's correct.

Okay, okay. All right, thanks. And then just maybe two other things if I could. One, just maybe Doug, you touched on sort of your general view on the senior housing space and I'm always interested in sort of your opinion on that and you talked about the fact that there are options and that you expect situations to get more difficult as time goes on. So just give us anymore sort of color, just on your observations, when you say get worse, are we're talking rates? are we're talking occupancy? just anymore color would be helpful.

Well, I'll preface it with two things, Jerry; one is I've been on record of feeling this way for some time now and there's been nothing that's occurred since I first went on record six or nine months ago believing this is going to be the case that would change that point of view. For now at least I'm going to be to be consistent, we'll see later if I was consistently wrong or consistently right, but there's no need or appropriate reason to change the feeling about that.So with that, I would say that I think that over the short-term and our own statistics reflected as I mentioned earlier that the slight increase in occupancy and EBITDARM coverage is holding at roughly the same level. First of all, we're coming up in the short-term on a seasonally more difficult time for senior housing, specifically assisted living as you're closer to the holidays, in the beginning of the year and cold winter months. It's a bit more of a challenging period just in any kind of economic condition.

Right.

I still suggest that people give consideration to the fact that the economy is struggling. We debated not that long ago, are we in a recession. I think more people each day are accepting we probably are and now the question's becoming how long, how deep and I think those answers will indicate really what's going to happen to the senior housing. As I've said, and I'll reiterate, a real enemy of senior housing is what we have going on right now. We have rising unemployment, which puts pressure on family and family members, and more time, unemployment creates less income and more time and that creates a situation where the family care option becomes more viable, more attractive, maybe the only thing that's possible; so we've got that one set of elements.

We've got the housing industry, which seems like it's not going to correct quickly, and if nothing else in certain cases it has to impact the amount of time it takes for those that need to sell their homes before they can. I think overtime, in the near term, we're going to see pressure on occupancy. I think we're going to see pressure on rates and eventually that's going to put pressure on margins. Companies will take actions to better manage their costs. There's good costs to better manage and there's bad costs to better manage like CapEx, like sales and marketing training, sales and marketing and general training and so let's hope that we've learned our lesson from the past and we focus on doing a better job with administrative costs, not cut the costs, because they have long term implications and fight our way through this and I think we will. I think for the most part, operators will find a way to get through it, but I don't see improvement in the foreseeable future.

Okay, that's helpful. And then just one last thing then on Hearthstone and I'll jump off. Is one of the options maybe that could be on the table, some more elaborate arrangement like where you would use RIDEA to either bring Hearthstone into a TRS, spin-off the management company or do something else; you've been consolidating a couple operators. I think you said one use of RIDEA would be to roll up portfolios if I remember correctly. So is Hearthstone potentially a jumping off a place for doing something like that?

I'm kind of a never-say-never person because as soon as you say that, it seems like something changes, that cause you to eat part of your words, but that's certainly not our preferred route, Jerry, and I'll tell you why. You're correct.We did say that we thought RIDEA afforded opportunities, to healthcare REITs and healthcare REITs would use them in different ways. Our preferred use of RIDEA at this point in time is for smaller portfolios that are under duress maybe to make some acquisitions in that regard, and in the proper circumstances roll them up together after we improve them and then maybe create a more sizeable portfolio, but do it under manageable, smaller piece spaces. It like how we've got in to medical office building. We started small, tested our thesis, make sure it worked and when we felt more comfortable with it, we jumped into it more forcefully and more profoundly.

With Hearthstone I don't see that as a terrific opportunity, relative to some other things we're giving consideration to right now, as where we want to start. It's a very large portfolio. Given what I said about what I think may happen to senior housing in the short-term, I just I'm not sure that we would feel comfortable doing that at this point in time, but we'll certainly consider it; we are considering it and we'll just have to see how each of the alternatives stack up against one another, but I'd say at this juncture it is not our preferred route.

Okay. One last one, if I can. If you do proceed to roll up little groups of properties under RIDEA, would you think you'd be more likely to use one of the large established companies as a third-party manager or would you go to smaller players?

It depends I guess, Jerry, but my initial thought would be in many cases you'd go with the smaller operators. They'd probably be more interested and motivated by a smaller portfolio. A larger operators probably going to try and lock you into a commitment, that they get a control over the assets over a longer term. My preference if you could get it this way is maybe have shorter commitments with the operator and sent them very well on the value that they help you create. I want to go from buy at wholesale or a low wholesale, get the assets to a retail value, package and then sell them and then be able to take them to all the large operators and including maybe the small operators that got us there, but once you get locked into the larger operator, they're probably going to negotiate for control of those assets over the longer term, which would inhibit your ability to capture the value and rolling up the rest to retail.

Thanks a lot.

Your next question comes from the line of Steve Schulz of KBW. Your line is open.

Good morning. Doug, on the supplemental rent, could you just update me on how much is now outstanding to be owed and how is that being booked?

It's about $900,000.

And has that been recognized as revenue or is that a receivable?

It's not. We've fully reserved for it.

Okay.

Steve, this is Abdo. Just to remind you, the first two years of supplemental rent were accrued, but they weren't recognized and that, the amount is about $1.5, 1.6 million. The payment of that was deferred until the beginning of the third lease year, which started in June and the amount was to be paid over 12 months and starting with the third year which June 2008, each quarter for this year, supplemental rent was due. So as of September 30, the combination of the two that is now due and payable is $900,000, but we have not booked any of it or recognized any of it.

Okay. And the puttable bonds, just refresh my memory, are those puttable at solely the option of the holder and is there any adjustment to the rate?

There aren't any options with the holder, no adjustment to the rate.

Okay and then is there anything in the fourth quarter, I guess implied by the full year guidance, either G&A or anything else that's sort of one-time in nature?

No. Not that, no.

Okay and then just one final question. As you look at the portfolio Abdo, how much unencumbered assets do you have that you could possibly use as a source for incremental secured debt?

As you know, we have also some covenants that limit us on how much we can use, but based on the covenants, we have a lot of unencumbered assets. We can increase our total debt by about $1 billion and remain in compliance with our covenants.

Okay, great, thanks.

You're welcome.

Your next question comes from the line of Tayo Okusanya with UBS. Your line is open.

Thank you, good morning, gentlemen. Just a quick question. In light of the cautious view you seem to have, in regards to the outlook for operators next year, are you increasingly concerned about some of your operators where your coverage ratio is kind of close to 1, 1.1, 1.2 and what are you doing to manage that potential tenant risk?

Well, of course as your coverage erodes and become closer to the 1.0 coverage, it becomes an increasing point of focus for us because for all the obvious reasons. There's not a lot we can do in terms of controlling that situation, because of course as long as our tenant is current on their lease obligations, it's their right to run their business as they see fit, but we have ongoing dialogue with them and the case from a frequency of that dialogue tends to increase.

We want to understand better the pressures that they're feeling, what they're seeing in their specific markets. We offered to them, if we can help with CapEx, in terms of financing that to take some pressure off of them that would roll into a rent obligation, but it preserves cash for them. Most of our tenants frankly have really quite good coverage and so we don't have to be particularly concerned by that. Most of the seasoned operators, which are the vast majority, if not all of our tenants in this sector have seen things like this before and while it's not terribly pleasant, they know how to navigate their way through different challenging periods.

There's a lot of things that are more favorable than some prior challenging periods, like additions to new supplies and that's not a specific problem that most of them are facing in most markets. So it's increased dialogue, the offer of council to the degree they seek it or are willing to listen to your experiences, providing them capital for capital expenditures. We can also look at their portfolio and see if there's a particular troubled asset that somehow we can explore options with respect to that strength in the overall master lease.

So there's things you can do, but frankly to a large degree, it's not within our control and that's the nature of a triple net lease and it's great to have the leases, but really our tenants charge and they suffer the risks and rewards of operations and it's their business and they run it and they generally do a good job, but as you have properly pointed out, when the coverage decreases, it puts us at a ready alert just to be aware of things.If we really see duress and stress, we'll start to think about along before we get to that point, what our options are in terms of replacement and should that be necessary.

Very helpful. Thanks, Doug

Your next question comes from the like of Michael Bilerman of Citigroup. Your line is open.

Good morning. This is David with Michael. What is your thinking about spending volumes versus capital preservation?

Our spending volumes versus capital preservation?

Yes, in terms of either investments in acquisitions or buying back your shares, et cetera?

Well, our first and foremost priority is to make sure we have proper liquidity and a properly structure balance sheet, because once you drift away from that in capital market environment like we're experiencing now and we're anticipating for planning purposes it's going to continue and we're trying to project it continuing longer than we hoped it will. Once you deviate from that, it's hard to restore the fine position that we're in.

That said, we don't think given the roughly $800 million of liquidity we have immediately available to us in our very manageable debt maturities and other obligations that it's proper for us to go to the sidelines and not continue to look for good investments, because quite frankly this is a greater opportunity to make high quality investments at some point in time for very good returns. So, we're keeping our mind for that, but for any dollar that leave this organization, the senior management team is going to put its collective heads together to figure out if that's really a dollar we're completely comfortable leaving the organization.

With respect to the share repurchase, frankly we think it's important to have available to us any and all tools that may be used, but frankly this is a tool we hope is not needed and we hope we don't use it, but there could be circumstances that would indicate that that's a good use of our capital and we would rather have the tool available to us and unused and unneeded than needed and not available.

Okay, thank you. And in terms of debt investments, do you have any appetite for that?

Investments in like debt or something like that?

Right.

We do and we've looked at some and we're likely to make some. We've made a few small investments along the way and we likely would consider doing more of that if we see the right fact pattern.

Okay, great, thank you.

You're welcome.

Your next question comes from the line of Rob Mains of Morgan Keegan. Your line is open.

Thanks, good morning. Doug, you expressed some caution about the acquisition environment and I know that these are all kind of interrelated, but is the hesitation you have, is it one of supply, quality or price, given where we are in the capital market cycle?

I'm going to let Don tackle that, but I would say just to give Don something to contradict if he chooses, I'd say it's a little bit of each, frankly. We think prices will adjust. We're seeing more supply than we had of late, but I'm not sure that we're comfortable as the pricing has already adjusted enough. What was the third one, Rob?

Quality.

Actually we've seen some fine quality assets. So in some respects, I think quality hasn't been the real issue, but Don you're on the front line, so why don't you help with that.

Rob, I'd look at it this way. I went back and sort of tallied things that we've been taking a look at this year and expressed strong interest in and many times bid on and that tally is up over $8 billion. You can see our year-to-date investments are roughly $400 million, which is about a 5%, hit rate. I would tell you that the supply is out there, but the quality and the pricing is not.

Okay and then to one question about the coverage and what not, in the supplemental there is a table, page 40 of tenant concentration, it shows your top 15 and in that table, there's EBITDARM coverage. Are those as of 6/30 or 9/30?

These are actually as of 8/30 because we received the financials 30 days later.

Okay, 8/30 have those trailing 12 numbers?

Yes.

Great, that's all I needed.

Your next question comes from the line of Jim Sullivan with Green Street Advisors. Your line is open.

On Brookdale's call this morning, one of the things they said in terms of how they are going to preserve capital, they're going to cut back on property level CapEx. I can understand why that's the right decision for Brookdale as an operator given their need for capital, but it seems like bad things for you as the owner of the real estate as it represents a pretty good chunk of your portfolio. What sort of control or process do you have over Brookdale or any other operator that's cutting back on CapEx to the point where it diminishes the value of the property or diminishes the competitive profile of the property?

Let me take a start at that and then Abdo and Brent can relish it. Our leases provide specifications as to CapEx requirement so we can certainly hold them to those obligations. Now at certain times you would hope that the tenant would put in more than would be required by the lease and particularly if they're in a very competitive market and particularly if there's been new supply added to the particular market; there's a lot of reasons why in a specific asset the actual requirements can be more than that, mandated by the lease.

The baseline is there's a lease obligation and we do hold our tenants to that commitment.As is, in the case with Brookdale, we have provided them earmarked CapEx monies and I'll let Abdo and Brent speak to that. There's things you can do from an inducement stand point to encourage them, to help them recognize the financial return if they move forward with CapEx, but in terms of strong-arming them, that's again I guess maybe one of the difficulties with the long term triple net lease. You're really bound by the terms of the lease and you have to leave it to the operator to some degree to manage their business intelligently.

In times like this when they're under duress, they will cut back. We're hopeful though that Brookdale will do the right things and make sure that they maintain a commitment to the assets that's intelligent. It's hard to know. I didn't have the chance to listen to their call. Sometimes it could be CapEx, which is proactive, where they're trying to get ahead of the game and they are doing things that frankly won't hurt the business or the quality of the assets, so hopefully that's what they're talking about.

You used the word "inducement". Maybe you can expand on that a bit?

Sometimes we're willing under the right circumstances to provide at lease rent rate that's more advantageous than what they're currently paying us in escalated base rent. So for example if somebody was paying us a 9% rent yield, we might offer them CapEx money at 100 or 150 basis points lower than that to encourage them to do that more quickly and how increased that returns to the point where they say,"yes that truly is such a good investment, I should do it", and they are not going out of pocket. Their rate of return on their investment is excellent and the incremental rent costs aren't high.

And is that something that's unique to your Brookdale portfolio or is that something you do with your smaller operators as well?

We would do that really with anybody. We've done that with a variety of different tenants and we encourage that, frankly with a performance level less satisfactory to us than we would like, but we would really try to encourage our tenants to look at their assets singularly and even in tough times. Brookdale and every other operator out there of any scale has assets in their portfolio that are very well occupied and may well have a waiting list for them and many of them have assets on lands that they could easily expand their size of the building and the flow through margin-wise is huge.

So in terms of a return on investment standpoint, with capital that we would be willing to provide and we would consider again on a financial inducement basis and in certain circumstances to encourage them to take advantage of that situation.Back in the days when everybody was focused on mega deals and things like that, it was hard to get anyone's attention on a single investment, but frankly on a sheer return on investment or return on equity business, there was not an investment that made more sense, if that wasn't just getting their attention. Today maybe we can get them to consider that more and at the same time freshen up the building.

Jim, this is Abdo. In the case of Brookdale we don't have CapEx impounds, but in a lot of other situations, a lot of other tenants, we do have CapEx impounds and as you know we do have physical envision assessment inspections that we do on a regular basis and once we get those results, we share them with the operator and inquire to them or ask them to make the necessary CapEx and the way we can control that is in the case they have CapEx impounds, we will not release the funds until whatever needs to be done is done. So we do have more tools with most of our tenants to be able to handle that, but in the case of Brookdale we do not have CapEx impounds.

One other thing we did too Jim is as the lease gets closer to its term, two or three years before we really start to manage it, even more carefully and increase our inspections and what not, because we want to make sure as the tenant is evaluating its options to whether renew the lease or not, we're going to make sure assets are returned to us in the condition that they should be.

Speaking with senior housing, it seems that for at least the public operators, the primary response to weakening market conditions and operating fundamentals has been to provide pricing concessions and promotional pricing. I'm curious given your experience as an operator if you were making the operating decisions at this point, especially given your outlook that you alluded to earlier in the call. Would price be the place where you'd be targeting, your response?

Well, it's a difficult thing to answer Jim and let me try and be helpful. I don't mean to be evasive, but let me give you some thoughts and Abdo I'm sure has some additional thoughts. First of all, it's very general and may seem a bit evasive; it really is market and asset-specific, because the right answer for one market and one asset could be completely different for another market and another asset, because the situations are different and in some cases discounting is the absolute right thing to do and in other cases that's the last thing you'd want to do.

In general my view is if you can avoid price reductions, I'd rather have, suffer some drop in occupancy and maintain rate many other factors being constant for a lot of reasons. One is occupancy and rate both make a contribution to your profit margin, but once you get to a certain level, it's really rate where you're coming from. Another factor that I don't like about rate or discounting is although Abdo and I did it when we were running an operating company in certain circumstances and you can deal with the very problem I'm going to address, but your other residents become aware of what you're doing and even though again you can address that, it does start to create a little bit of problems within the organization on the resident base and that can be problematic.

It's also a bad sales and marketing discipline, all else being equal. Once you introduce discounting due to sales and marketing force, frankly you're tempting them to become a little lazy, because it takes no effort to discount. It takes a lot of effort to hold prices the same as opposed to sale. So once you introduce that it's a bit of a temptation that's hard to break; so those are some of my thoughts. Abdo?

Don't have anything to add.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Phillip Martin of Cantor Fitzgerald. Your line is open.

Good morning.

Good morning.

First, are you seeing, Doug, Abdo or Don, any difference between independent living and assisted living in terms of occupancy or more hesitancy on new residents to come into those properties? Certainly independent living is a bit lower acuity. There might be less of a near term or imminent need versus assisted living, so have you seen any differences between the two care platforms?

Phillip, this is Abdo. Most of our buildings are a combination of independent and assisted and it's very hard to tell where the slow down in movement is happening, if it's at the independent level or at the assisted living. Some of operators we talk to may give us some indications, but we can't draw a general conclusion from that.

Okay. So no anecdotal evidence even from the operators at this point that you're talking to saying, so-and-so's not moving in because the care need is not necessarily there yet.

Again as Doug said in his opening remarks, in the current economic situation, people have more time and have less money, if they lost their jobs, so they have time to help mom or dad, their loved ones, taking care of them. The care that's provided in assisted living doesn't require any nursing knowledge or anything so some of the health they can provide themselves.So the higher you go in the acuity that becomes harder to do.

Certainly, okay.

So depending on each building and how high the acuity is this operator focused on and all of that. What you would see probably happening right now is a lot of the operators may increase the level of acuity in their building.

Okay. And in terms of opportunities within your existing tenant base on other assets within their portfolios that you don't have control over. Do you find some of your operators and I'm sure you might that have other assets in their portfolio, but outside of your portfolio that are having some difficulty that you see as a potential opportunity going forward in 2009, 2010 etc?

I think that those opportunities will present themselves particularly if the economic down term is lengthy and deep and it depends on if there's been some good work published recently about some of the operators and then they all have different challenges they face and those that have liquidity pressures on them are going to have to address them, and we stand at the ready to try and be a solution to some of the problems they may be experiencing somewhere down the road in ways that works for them, and certainly it works for us.

Okay. My last question. I know we talked a lot about the long-term care side of things, but in terms of medical office building opportunities and/or with working with strong Health Care systems, can you give us a sense of their perspective in this environment? Obviously much of these Health Care systems are dealing with need-driven businesses, despite the economic down turn, but they can't ignore it given there's fewer lenders out there, there's probably fewer choices in terms of financing and building out their platforms. What is their perspective? What is the opportunity there and just what types of things are happening there? Even in terms of their specialty care projects. I don't know if, even beyond MOBs on the specialty care side. I mean obviously this is why you diversified and this isn't the only reason but I would have to think there might be opportunities there with MOBs and/or specialty care given this environment.

And there are uh, Phillip, it's Don Bradley. We're seeing a lot more health -

I know it's the right price, certainly, but that might not be there now.

That's the million dollar question and is in negotiations, but in terms of are we seeing more activity from Health Care systems? Absolutely. I think you hear that across the board from all the different REITs and it is a fertile opportunity there.We are in a time when cap rates are moving. I don't think there's any doubt about that. How much and now far is the question mark. So you've got the age old problem of any seller looking at what a deal was just done at yesterday and why are you now wanting something more than that today? So when these opportunities translate into deals, we'll have to wait and see, but they're definitely presenting themselves.

Do you find that these health systems really are they more apt to move a bit more quickly than other property types, whether it's long-term care or even office or retail, because of the need-driven nature of their business and maybe demands from physicians and doctors, etc that there's a real opportunity cost not moving forward with the project just because of a cap rate issue or a price issue? Do you think there's the opportunity?

It's not a bad thesis Phillip. It makes a lot of logical sense. We'll just have to see whether it plays out that way. They also want to make sure that they're maximizing their return on their real estate and how those two balance within their organization. It'll be an interesting thing to see.

Okay, so anecdotally right now, they're still kind of holding tough or holding tight but that may change. Okay. To be continued, I guess.

Thank you very much.

Thank you.

Next question comes from the line of Chris Haley of Wachovia. Your line is open.

Great, thank you, good morning.

Good morning.

I wanted to go a little more detail related to the PMB financings, based upon your supplemental disclosure and your prior communications, looking at about $420 million total amount to fund the remaining projects from early 2009 through the 2014 project Willow Creek. If I exclude that project, I'm just under $400 million plus the remaining amount of commitments on expansions and renovations of another $145 million.

It would appear to me that, and correct me if I'm wrong, that the expansion and renovation capital that obviously you are committed to, yet based upon your previous comments that you could decide not to go forward with some of these future projects at PMB and I wanted to explore that a little bit. Could you give us a sense as to what thresholds would be met or what would have to occur for you to not move forward with, say for example, the 2010 projects or the latter half 2009 projects?

Well, it all depends and again as we mentioned earlier, the 2009 projects are already refinanced and so we'll have to see what the market conditions are at the time and we will have to make those decisions, but currently the way we're looking at it between the secured debt we assume, the OP units that will be taken by the sellers, the cash requirements for us. When you look at the 420 it's around $150 million, so we feel that we can, at this time be able to fund that. We'll see what happens in 2009 and 2010, what the market looks like and make those decisions if we want to still close on these or not, we will make those decisions at that time, but in terms of financing, the financing is in place for them to close.

Thank you. Related to that, the financing on these projects, the construction financing is there a term that would require them to be permanently financed?

Some of them -- there are a few under construction in 2009 that have some construction loans converting into term loans.

And you already have the option for conversion?

Yes.

So how much of the $420 million was construction?

There's $170 million of debt.

And the average term of that?

I don't know how much of this is construction right now; probably 120 is construction.

Okay, so when you think about permanently financing these projects and then based upon your initial yield that obviously can fluctuate based upon the rate that was discussed before, the JPMorgan rate, how much room do you think you have between the initial yield that you're proposing in your supplemental and your previous disclosures versus where you'll be in your all-in financing costs.

Again these debts, these cap rates, if things don't change in the bond index, will be increased by 22 basis points. That's the first step that we have to go through, so we'll look at that and make our decision at that point, if we want to close on it or not. The existing debt has a blended rate of about 6% and so we're roughly looking and again the cash we have available was from the sale of the Emeritus portfolio that we will be using to fund these acquisitions which was also at the cap rate of 6.1, so most of our cost is around that.

Again, once we get to that point, we've got our options available to us, as Abdo has described to you. If the environment looks similar to what it is today, you adjust as the agreement calls for and then you make a business decision, do you go or not go, but it's probably not as black and white as that, although it could be and it's probably discussions that you have with the counter party and remember this is a group that is going to be our development pipeline for many years to come so we're both going to want to come to a solution that works for both of us, you talk but it's hard because the world has changed a lot and if we're still there a year or so from now, it's going to mean that something significant has happened to still be there and we'll have to sit down and evaluate our alternatives as will PMB and we'll sort things out at that point in time.

To follow-up on that the yield you're providing are those back stop yields as of the date of acquisition or do you believe those are the yields that you would expect upon stabilization, which may be after your take down date?

At the closing date, this is the price. The price will be determined based on actual NOI at the date of closing using these cap rates.

Okay, last question. We were thinking of Brookdale's comments this morning regarding lower reserve and lower CapEx, thinking of lower reserving at the property level. I was more interested in what you were hearing from some of your other customers, your other operators, regarding their capital, their reserving requirements, their ability to set aside the amounts that have been agreed upon. I was wondering if you could give comments about what you might be hearing back from your other customers, other operators and related to that could you give us an example in the past, where you've gone through this, a more severe economic slow down and cash flow contraction at the operators. What was the actual reaction or what other steps did these operators regarding capital expenditures set aside take?

Let me touch on something that Abdo mentioned earlier and then [Brent], help us out here. Most of our tenants do impound their CapEx.

We disclosed this information on page 32 for our supplemental. About half of our tenants do provide and we have CapEx impounds, but I would like to clarify something that was mentioned about Brookdale and this information was made available to us. What Brookdale said, they will deferred any EBITDA enhancing CapEx. They did not talk about deferring maintenance CapEx to maintain the building in good working condition. There is a difference between the two.

Correct, correct.

So, obviously the tenants have the obligation to maintain the buildings and we believe they will and Brookdale is a very responsible operator, who knows that maintaining the buildings is in their best interest to remain competitive and they will continue to do that. Now if they have projects that they could enhance, maybe at this time they won't do that. Now other operators, we've continued to see the same level of requests for funding from our CapEx impound accounts that we hold for them, meaning they're doing the CapEx that they're required to do.

Thank you.

You're welcome.

There are no further questions.

Okay, thank you very much.

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