芬塔 (VTR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Nationwide Health Properties earnings conference call. My name is Francine, and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Ron Hubbard, Vice President of Capital Markets and Investor Relations. Please proceed, sir.

Good morning. Thank you for joining our conference call and webcast presentation to discuss Nationwide Health Properties first quarter 2009 earnings. Certain statements made on this webcast 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 webcast 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 May 8, 2009.

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 other limitations and reconciliations to net income, are included in our earnings release dated May 7, 2009. As a reminder, NHP's complete first quarter 2009 earnings release package was filed on May 7 in separate Form 8-Ks and is available on the Investor Relations section of our website rat www.nhp-reit.com. I would like to turn the call over to Mr. Doug Pasquale, Chairman and CEO of Nationwide Health Properties.

Thank you, Ron. Good morning, and thank you for your interest in Nationwide Health Properties. For today's webcast presentation, I am joined by NHP's senior management team. After reviewing a few quarterly highlights and our financial results, we will provide updates on NHP's liquidity position, investments, portfolio management activities and our 2009 guidance. Given the current state of the capital markets and investment environment, the first quarter of 2009 was as expected -- lots of hard work and not much glamour.

Our balance sheet and liquidity remained strong, as evidenced by credit rating upgrades from Moody's and Fitch. On the strength of our 1.3 times dividend coverage, our Board of Directors maintained our cash dividend. With our limited need for capital, we elected not to issue any equity during the first quarter 2009 through our controlled equity offerings program, but did repurchase $30 million of our senior Notes for $25 million on April 1, realizing a 5 million gain. Despite the tenacity of the current recession, our financial results remain strong. Compared to last year's first quarter, revenue was up 14%. MOB segment income grew 5% and is approaching 20% of total revenue. FFO increased 9%. FFO per share is up a penny and FAD per share is up $0.03. When the economy is strong and capital is flowing freely, growth and the income statement are center stage topics. In the current economic environment, the balance sheet is front and center.

Long before low leverage became fashionable, NHP understood the importance of a conservative balance sheet to provide maximum flexibility in any economic environment. Over the last five years, we worked hard to reduce our undeppreciated book leverage to 40%. Concurrently, our fixed charge coverage improved significantly from 2.5 times to 3.4 times. The bottom line is, NHP's balance sheet is among the best in the REIT industry, and we remain committed to keeping it strong. Our debt maturity schedule is quite manageable, with only $164 million due between now and July 2011 when our first significant debt maturity of $340 million occurs. Given our limited debt obligations, $80 million cash on hand and the full capacity of our $700 million credit facility, and our improved credit rating, we are well-positioned to take advantage of opportunities as they arise.

Over the past few years, our attention has been directed toward driving growth through quality investments. Given the current state of the market, we are focused on making strategic investments that improve the quality of our existing assets and serve to strengthen our tenants. To that end, we committed over $50 million during the first quarter, the majority of which will be funded over the next couple of years. Turning now to general market fundamentals, as we predicted, the combination of a sustained weak housing market and rising unemployment has put downward pressure on senior housing occupancies and occupancy margins, trends that we expect to continue until these factors abate. We believe that savvy operators have already implemented prudent cost reductions, many made possible by the weak employment market, in an effort to offset the effects of these trends.

Along with cutting costs, operators have raised rental and service rates to protect margins. But over time, residents and their families, already belabored by the longest recession in memory, will increasingly resist these increases. Therefore, without increases or at least stabilization in occupancy levels, it will be difficult for operators to prevent some degree of margin erosion over time. That said, we remain very bullish on the future of this sector, given the attractive demographics and expected limited additions to new supply, at least for the next few years. So far, our same property senior housing tenants, accounting for 97% of our total senior housing portfolio, appear to be weathering the storm relatively well. With slight increases in monthly rental rates, they overcame an 80 basis point quarter over quarter decline in occupancy, resulting in their operating margins and our 1.3 times rent coverage remaining relatively flat.

Skilled nursing facilities are less impacted by a weak economy, given the services provided are primarily driven by a significant need; although the current economic turmoil has put pressure on government reimbursements programs, particularly Medicaid. President Obama's recently passed stimulus package provides state Medicaid programs with about $90 million of new capital and allays for now many concerns about state reimbursement programs. On the Medicare front, CMS recently proposed what essentially amounts to a 1.2% rate reduction, if enacted, for the next fiscal year. In a stress test of our skilled portfolio, assuming the effects of the proposal to be uniform and that no mitigating action was taken by our tenants ,this proposal would reduce our current 2.1 times EBITDAR coverage by only 15 basis points. For the quarter, our same property skilled nursing portfolio, accounting for 93% of the total, has maintained relatively stable operating metrics with over two times EBITDAR coverage.

The medical office sector remains generally healthy; but rising unemployment and cuts in corporate benefits will likely have modestly unfavorable implications. Vacancy for this sector is expected to increase 100 basis points by the end of 2009 to about 12%. Despite the overall strength of medical office buildings, the current economy and capital market conditions have prompted developers to slow or postpone new construction. Completions in 2009 are forecasted to drop from 16 million to 13 million square feet. By December 2010, completions are expected to fall to 4 million square feet, a 75% decline from 2008 levels. Our MOB portfolio continues to perform well, with occupancy at about 90% and year over year NOI growth of just over 3%.

Regarding Hearthstone, I have some good news to report. Notwithstanding a challenging operating environment, the Hearthstone team has continued to stabilize operations and improve margins by managing expenses. To date, Hearthstone is current on their escalated base rent obligations, and portfolio rent coverage continues to modestly improve. Moreover, after extensive third party and internal due diligence, it appears the assets and operations continue to be well maintained. The business model remains sound, and we believe the Hearthstone team has a clear focus on the goals at hand and is committed to succeed. With that, we have determined that of all the available alternatives, seeking to restructure our lease with Hearthstone is in NHP's best interest. While definitive documents have not been finalized, I'm pleased to report we have agreement an agreement in principle on key restructuring terms that we believe will largely preserve the economic benefit we originally bargained, for while providing Hearthstone a substantial opportunity to create real value for themselves. Notably, it is contemplated that

While base rate will be unchanged, base rent escalators will be converted from being CPI-based to 3% fixed going forward.

Supplemental rent will be deferred for 24 months to give Hearthstone additional time and liquidity to work through their current difficult operating environment. Certain restrictive financial and operating covenants will also be temporarily relaxed to give Hearthstone an opportunity to continue to improve operations.

Restrictions on distribution will be further tightened until such time as Hearthstone achieves and sustains an acceptable rent coverage level.

At NHP's option, ownership of the operating entity would be automatically transferred to NHP in the event of certain major events of default, thereby enhancing NHP's rights and flexibility in the event of an adverse scenario in the future. Hearthstone and NHP will work collaboratively to identify, evaluate and affect the orderly transfer of underperforming facilities that would be in the interest of both parties.

NHP will also be afforded enhanced oversight rights, and we will meet monthly with Hearthstone to review operations and financial results.

We will, of course, provide more clarity upon completion of the restructuring, which we hope to accomplish within the next 30 to 60 days.

Finally, due to the favorable impact of our $30 million debt repurchase on April 1, - we are increasing both our FFO and FAD guidance ranges $0.02 on the low end and $0.01 on the high end. Our guidance range incorporate no results from acquisitions except those completed or previously announced, nor does it incorporate the impact of any future impairments or capital transactions.

We are now pleased to answer your questions. Francine, if you would please open the lines.

(Operator Instructions). Our first question comes from the line of Jerry Doctrow of Stifel Nicolaus. Please proceed.

Thanks. Good morning. Just a couple things. On Hearthstone, just -- and I understand we will get more details later -- but just sort of on the accounting side of that, is there anything in the way of charges or impact that we should anticipate? Just trying to think through the -- kind of the accounting side.

Nothing really, Jerry.

Okay. And then on the Pacific Medical, I know there was a line in there that you terminated, I guess, interest to buy the five properties, whatever it was. Just the relationship sort of continues? I mean, if prices change, where do we sort of stand going forward with kind of that strategic relationship?

We continue with a very positive ongoing dialogue with them, meeting with them just earlier this week, and we are exploring a number of different alternatives and will continue to so.

Okay. So future purchases, I guess, could still come back if you guys could agree on a price? Is that one way to think about it?

That possibility certainly exists. It's not -- as would you expect -- only pricing. We are very focused on liquidity and other things; but under the proper set of circumstances, which could well manifest, we would very much like to own the assets. There's nothing changed about the asset. They are still terrific buildings and terrific locations with terrific operators. So everything that attracted us to them originally still exists. It's just we have got to find the sweet spot where everything comes together nicely.

Okay. And maybe last thing for me, just on the capital side, obviously buying back debt at discount is -- can be attractive in this market. Any sense for how much more of that's out there or how much more we should -- we might think about?

Well, we are very grateful to Moody's and Fitch and Standard & Poor's with their outlook upgrade. We had hoped for this upgrade some time ago, and now that we got it we again are eternally grateful for it; but the timing has not been perfect in terms of our debt buy back program, as you might imagine. That said, we remain vigilant in looking for opportunities to find, again, the sweet spot; and they periodically arise, when they do we would be happy to buy in debt on the right terms.

But between the upgrades and just the mood in the market generally, less opportunity than might have existed even a couple months ago?

Yes. There's a little less opportunity right now; but the thing that's interesting -- and it's obvious when you think about it -- the individual or unique matters relative to just the counterparty in terms what have their objectives may be -- and sometimes they have a goal that would provide them a reason to sell -- so you have to remain vigilant even though, as you say and which I agree, things are a little less favorable than they were just a couple of months ago.

Okay. I'll drop off. Thanks.

Our next question comes from the line of Rich Anderson of BMO Capital. Please proceed.

Thanks. The -- just to get to Hearthstone one more time, is there -- will there be any influence on your guidance once that issue is officially addressed?

Really there shouldn't be, because in terms of the rent we are just going forward as we had. We had been fully accruing for the supplemental rent and reserving for it all along. So there's no change there. We are just really moving forward with Hearthstone in a way they deserve because of their performance and commitment to the assets, you know they are these assets and the concept that Tim Hekker came up with, they just need a little time to work through this. The supplemental rent, the timing of it relative to what transpired in (inaudible), was just tough on them. And so the answer to your question is no, there's no change to our guidance. We just now need to get this formalized, which we expect to occur over the next 60 days. And they just need to continue to do -- doing the fine job that they have to continue to operate in a difficult environment.

When would the escalation take effect?

It's on the anniversary of the lease, so I think it's May 1 -- May 31?

June 1st.

June 1st.

June 1st. Okay. So that -- would that have been in your -- like, that escalation wouldn't have been in your numbers, right?

Rich, this is Abdo. The impact is not significant because we already had a 1% that was fixed --

Okay.

-- in the lease, so that 2% over a six-month period isn't going to be any significant to change the guidance.

Fair enough, and just so I understand the restrictions on distributions, you mean within their organization, is that right?

Yes, when we originally crafted the agreement, we didn't fully contemplate a complete set of restrictions on distributions. And what we want to do -- and really what's in the best interest of Hearthstone, so this is not a problematic from their point of view -- we want to keep capital in the Company. We just wanted, since we were going through the process of a lease amendment, to just formalize what really was conceptually in place to begin with.

Okay. Turning to PMB, were these assets that you have listed here -- and I'm just -- I apologize, I don't remember specifically the details of how it worked -- but I know there was a first tranche where you were subject to a 6% cap rate or 6.1% or something like that, and then the rest -- the further down the line they were subject to negotiations. Where did these fall in that category -- in those categories?

This is Abdo again, Rich. The overall transaction was at the cap rate of 6.1, so all the properties average about 6.1. So most of these were in the 5.8, if you want individually, to 6.2, 6.3, averaging the 6.1.

I see. So -- and they weren't willing -- or you haven't been able find a number that would make you comfortable and them comfortable?

As Doug said earlier, the price wasn't the only concern for us, obviously our liquidity and how much cash would be acquired to make -- so there were several reasons why to not act on these properties right away.

Are they still developing?

They are finishing up a couple of buildings -- actually, they opened them, but I don't think they have started any new building right now.

And then for those, those are subject to your own -- to off market negotiations, aren't they?

The development, they are subject - if they have a project that they are contemplating the development of the project, they will bring it to us first, yes.

Okay, that's what I was remembering. And then just to close the loop on this, if the average is 6.1%, where do you see the market for medical office right now in terms of cap rates for good quality stuff like this?

Hey, Rich, it's Don Bradley. We really don't have anything first hand; but what we are seeing published and what others are talking about is you are seeing the average cap rate now over eight -- and that's average now nationwide. And you might see something in the California or other high-end markets that might be a little lower than that.

Okay. Is there any situation you can envision at this point, given all the things that we are all dealing with, about doing a -- more of a full-blown equity offering? What would be the circumstances that that would happen?

We never say never to anything, but we don't see any reason for that in our situation in the immediate future.

Okay. And then lastly, I know you aren't alone with the investment into Brookdale. Can you just sort of give your take on the rationale behind that?

Actually, we thought it was a relatively easy decision to make. Our philosophy has been -- and it's certainly easier to recognize it in difficult times like this -- but it's always true, your best customers are the ones you have. And Brookdale is a solid company with really fine management that just has come up against some difficult circumstances, just like everybody else, and they just needed a little extra to get over the hump. They are our largest tenant. We see that they are going to be successful, and we wanted to participate in helping them get to where they want to be and deserve to be.

Okay, thank you.

You're welcome.

Our next question comes from the line of Michael Bilerman of Citi. Please proceed.

Good morning, guys, it's David Shamis here with Michael. Are you guys seeing anything out there in the market in terms of buying opportunities, any more distressed sellers entering the market?

This is Don Bradley. Not really. There's a few things here and there, but nothing that really gets you all that excited yet.

Okay. And what are your thoughts on buying back more preferred?

Buying back what?

Preferred.

More preferred stock.

This is Abdo. We haven't had much of an opportunity to buy back our preferred. At last quarter, some of the holders converted into common, but we haven't had much opportunity to buy back any of it.

Okay. And as far as you're aware, is PMB currently in the process of trying to find another buyer for those assets?

They are certainly aware that there are other buyers out there, and they will do what's in their best interest. But we have a very strong partnership with them, and our economic interests are, by design, very well aligned on all fronts. And so I think that it would be extraordinarily difficult for another buyer to come in and superimpose themselves in a buying opportunity unless we just really didn't want the asset. And the possibility exists that somebody will value the asset significantly more than we do. But if they do, I think that will beg the question as to why, given that we've been working on this for two years; and so I would question the motives and the valuations that another party would put on it that would materially be different than our valuation. So the possibility exists, but I think if and when the assets are transferred I think that NHP is in as good a position as we would expect or like to be to have the opportunity to buy them.

Okay. And finally, on the Pacific Medical assets that you did acquire, how have those performed versus your original expectations?

This is Brent Chappell, David. They've performed as expected to date. Relative to last year's performance, they are still on track. I think we are seeing some good things with respect to interested parties in the existing vacancies; but on the whole, they are performing as we expected throughout the year.

Okay, thank you guys.

You're welcome.

Our next question comes from the line of Dave Aubuchon from R.W. Baird.

Thank you. Had a question on the senior housing space. When you look across your portfolio and talk to your operator, where do you think the senior housing occupancies will bottom out?

That's difficult to say. And I don't think anyone really knows, and I think it's highly dependent on what the economy does. If the economy remains lethargic or gets worse, and if unemployment continues to increase, my -- our strong expectation is that occupancy will continue to decline a bit. We don't see it -- absent a severe fall off in the economy from where it is -- we don't expect it to be draconian by any stretch of the imagination; but I don't think 100 basis point or 200 basis point or maybe even a little bit more than that is out of the question. I think the more likely scenario is that it's less than that. But if you are looking for a range, I would say could you go maybe another 200, 250 basis points -- assuming that there is modest continuing increases to the unemployment rate and it stays there for awhile.

What we expect is that it will be increasingly difficult to continue to impose substantial rate increases on tenants over time -- again, depending on what the economy does and what the employment rate is. So at some point in time in our view, a lot of the operators are going to start to see pressure on their operating margins. They've done a terrific job to this point of maintaining margins in the face of declining occupancy, and they've done it primarily through cost cuts and rate increases. Cost cuts, at least in a prudent fashion, are finite; and rate increases, while not finite, the demand curve is only inelastic to a point, and at some point you start to get resistance. So again, if the economy remains challenging or deteriorates, we think you are going to see pressure on occupancies to a slight degree; pressure on rates, with less ability to cut costs.

Is it your sense that they have squeezed out most of the costs -- the easy costs to cut right now?

My guess is that the vast majority of all of those have been already been taken.

All right. Moving over to the skilled nursing side, when you conducted your stress tests on the Medicare payment reduction, were there any particular markets or operators that stand out better or worse, or did you not drill down that far?

This is Brent Chappell. We didn't drill down that far. We took it kind of across the board and just presumed the 1.2% was uniform and really wasn't mitigated by a percentage of Medicare participation, just to get kind of the full effect of what would transpire if the 1.2% reduction were enacted.

Okay. And if I recall, there is a comment period that the industry would have an opportunity to provide their comments regarding that cut. Is it your assumption that the cut will not be as much as a 1.2%?

It's hard to predict. I think based upon what transpired, if I remember correctly last year, the rates that were proposed were ultimately enacted. So there is -- certainly that still remains to be played out.

Okay. Thank you.

Our next question comes from the line of Michael Mueller of JPMorgan. Please proceed.

Hi, quick question. A lot of the questions have been answered, but if we are looking at sequential occupancy for, I guess, the assisted living senior housing and the skilled nursing portfolios, I know there's an element of seasonality that typically happens going into the first quarter. I was wondering if you look at those declines, is it possible to cut it up between something that may be a little more just seasonally driven versus what would you consider to be more housing market driven or economically driven?

That's a very difficult task to really identify it to that fine of a point; but you're right that the first quarter does tend to be a less robust quarter than other quarters. So you could reasonably draw the conclusion that part of the decline is attributable to that factor. How much of it relative to the others is, in my view, difficult to determine. We will know, though, as we get into the second and third quarter.

Okay. And I guess a follow-up to a prior question where you were talking about occupancy. You could see it decline another 100 - 150 basis points. How much of a decline has to happen before you really start to worry about coverage and just worry about operator health? I mean, how far away do you think you are from that? Whether or not it happens is a different question, but still?

Again, that's hard to speak to generally. For the most part, I think that most operators will be able deal with whatever occupancy decline may be ahead of us; and that is a maybe, and again it's tied I think primarily to what's happening with the economy and the unemployment rate. But most of them, I think, could sustain whatever is in a reasonable range left in the terms of occupancy decline. It's just, I think, going to be more difficult to do that without experiencing some erosion in the margins. I mean, good operators are doing exactly what they've done. They've recognized the fact that the market is softer than it has been. They've recognized that they have ability to cut some cost; particularly, labor is a primary expense in operating an assisted living facility, and the labor market is very weak.

And so they've adjusted for that. They've taken advantage of other opportunities, and it's all worked so far. But at some point in time, you get to the point where you can't cut costs much more; and I think that they are getting close to that. And it does at some point in time start to get to be a little more difficult to raise rates. The good operators will continues to push them; and for the most part they will be successful, but in certain markets they won't be. And they will have difficult decisions to make whether to require or ask for a little less in the way of rent increases just to save residents from going back to live with their relatives or doing something else -- and that does happen. And those decisions, I fear, may lay ahead for some of our operators in some of their markets.

Okay, and maybe one last question. In terms of underwriting standards, and just looking at property level coverages, I mean, assisted living, independent living coverages tend to be much lower, say, than the skilled nursing coverages --- at least in the portfolio here. Do you think when you start to see capital be put back to work at some point down the road, that the coverage levels the people will underwrite to for assisted living, independent living, will look different than they were over the past couple of years, say when capital was going out the door?

It's an interesting question. We certainly like to write to a 1.2 EBITDAR after CapEx coverage. We probably have gotten a little aggressive on that in the last couple of years. Going forward, I think we will be very stringent about a 1.2 -- at least a 1.2 coverage on an EBITDAR basis after CapEx. But in a way, we are seeing a once in a lifetime-type economic experience, and the coverages -- although not as robust as we'd like -- are still holding. So, so far they seem to be working the way they were intended; and as long as we eventually pull out of this, we should be fine. So our initial thinking will be probably to continue our initial underwriting at 1.2

Okay. Okay. Thank you. Good bye.

You're welcome.

Our next question comes from the line of Brendan Maioriana of Wachovia. Please proceed.

Yes, good afternoon. This is Young Ku here with Brendan. My question is in regards to product types, are you guys seeing any other product types, or which product types do you guys see as most attractive today?

Actually, we like all of our product types. Skilled nursing, we continue to believe, is a very solid investment. The problem with skilled nursing in today's market is it's hard to find the newer state-of-the-art quality facilities because it's very difficult for those to be built, and that's the stuff we are more attracted to me. On senior housing, we remain very bullish, as Doug said in his opening remarks. We view this period as a bridging period that we will get through, and we think -- like a lot of our contemporaries think -- that senior housing has very bright prospects ahead of it, especially with the very low development that exists. So that's a very attractive market to us. And medical office buildings, we got the in it for a reason. Our reason has been correct. We've been nicely diversified into what appears to be the most recession-resistant property type in our sector, and we see no reason for that not to continue.

So I think all three are going to be very attractive. If you are asking about distressed opportunities, that's going to probably be -- that's harder to tell because the distressed opportunities we would be more interested in would be financial distress as opposed to operational distress. I don't think you will see us get a big way into investing into turnaround situations that are highly risky, and it would be more something where someone is in need of capital and we help them out with that. But that's going to depends on the individual circumstances more than the property type.

So the fact that you guys terminated a bunch of these potential acquisitions doesn't mean that you are shying away from MOBs, right?

Oh, not at all. We are very bullish on MOBs. As both Doug and Abdo said, the reason we terminated our obligations, as we were permitted to do under our contract, were twofold. One, the price today is for those assets is not a (inaudible). Two, we are very mindful of our liquidity and we want to work through this time period with our customers, but do so very prudently; and we are going to mind our shop on liquidity until we are comfortable that the capital is there to move forward. So it has nothing to do with the assets. As Doug said, we would love to own those assets, and hopefully in the not too distant future we will own those assets.

Got it, thank you. And in terms of your liquidity, have you been having any discussions with your lenders about your credit facility maturity?

This is Abdo. The credit facility, we've -- have had the bank meeting and we have discussed with the lead bankers, and we don't see any issues of getting the credit facility in 2011 at this point. And what we see currently happening in the market, like you saw with some of the people who renewed their facility, is that banks are going to commit less money than they currently commit. So -- will we be able renew at $700 million? Maybe not, but if you look at our liquidity, we don't necessarily need that much. We don't anticipate any problems in being able have a credit facility in place in December of 2011.

Got you. And my final question is regarding senior housing. In terms of operating margin, in your experience, how far do you think -- how much your compression do you think there could be in operating margin?

In senior housing margins? I don't think there's going to be a whole lot, to be frank about it. I don't know exactly. I really don't think that occupancies are going to go down a whole lot from where they are now, and I think it will be more difficult to get rate increases at the same levels that they have; but hopefully that will prove to be incorrect. And as I said, I think it's going to be increasingly difficult to identify prudent incremental cost reductions. So you could see the combination of maybe slightly lower occupancies and the combination of less in the way of rent increases and, let's say, no further cost reductions. That could equate to marginally less operating margins, but not significant. You would really have to have rates go completely flat or decrease, which is highly unlikely in my view. In occupancies, we really hit the wall here on the economic front. You really see meaningful decline, see the margins fall. But it is a high operating leverage business, so you could paint a scenario where it's worse than that. It's just, in our view, not likely.

Got it. Thank you.

You're welcome.

Our next question comes from the line of Jim Sullivan of Green Street Advisors. Please proceed.

Thank you. Wanted to follow up on the Brookdale question that was asked earlier. I'm just trying to reconcile your decision to participate in a line of credit with the alternative that would have seem to have been much more up your alley, and that's to do a sale lease-back with a company that owns a lot of real estate. Was there an opportunity to provide capital to Brookdale through sale lease-back as opposed to jumping into the line of credit?

Jim, there wasn't an immediate opportunity to do that. We hope that there will be opportunities in the future to do that. This was -- Brookdale was working and it was, I think, well known that they were working on shoring up their liquidity and their facility. And they just ran up in to some difficulty, as many companies are prone to, just because thing are less easily accomplished than they have been historically, and they had a hole to fill; and the hole was -- in terms of completing the credit facility -- the hole was relatively small, an incremental $9 million investment on an already large investment in a way that we think was financially prudent. We think we were well collateralized. We think that the participants in the facility that had a much bigger piece in it than we did structured a very intelligent facility. So we saw it as a way to help a good customer, and at the same time help ourselves. And we think by so doing, that good customers will want to reciprocate and try to conduct business in a way that will forward those that were there for them when they needed it to try and direct business that way. So the long end is exact what you've said, we just had to get to it -- or we tried to embolden our position -- by doing the right thing and help them out.

Sticking with senior housing, your reported occupancy on a same store basis is 83%. That's a number that seems to be materially lower than, for example, what Sunrise reported on its call this morning, 88%, and what your public REIT peers have reported. Can you help me understand the pretty substantial gap between the occupancy rate that you're reporting in your portfolio and what others have reported? Is it geographic? Is it quality? Is it strategic?

I am going to let Abdo answer that question. I'm going to add one other factor to what you said -- I think it's also partly computational.

That's exactly what I was going to say is, is that it's very hard to compare occupancies from various portfolios and how different companies compute their occupancy -- residents versus units, when they have semi-private units -- and it's a very, very difficult to be able to compare all these -- how much this inconsistency creates in terms of differences it's hard to say, but maybe a couple hundred basis points. But that's the main factor there that could create that.

Can you be more specific? When you look at how you report and how others report, what are the specific things that you do that would cause your reported occupancy to be structurally different or, i.e., lower than what others are reporting?

Well, I can tell you from looking at some, that some people the way they calculate their occupancy, they have the ability to be at over 100% occupied; and that's because if they have two residents sharing a unit that will count as two, but the units are the same. So there are a variety of ways that I have seen that people compute their occupancy that does not necessarily reflect the same way that somebody else calculates it. We use resident days -- and like if you take the Hearthstone case, they have the double occupancy, obviously. It's more like counting beds rather than units in that scenario. So if you have a unit that has only one resident -- in this case it will be one over two. In some cases people count that as being one over one; and when they have two in that unit, they count it two over one.

Okay. I'd like to learn more about that, we can do it offline. The MOBs, when I think about the capital roadmap for PMB, it would seem that your commitment to buy several of their assets at a fixed cap would have been an important part of their game plan going forward as to how they funded their activities. You've walked, I think rightfully so, from that obligation. How is PMB financing what it has under construction now, and are you being asked -- or do you contemplate providing any sort of capital to them that would be just different in structure compared to buying their assets outright?

They have construction loans. They have a couple of projects that were under construction that now are open and they are in lease up, and they have some preleasing and they are continuing to lease. They have construction loans in place on these couple of projects. As you know, we have one of the three that we are committed to buy. It's a triple net lease building Pomona, California. And they have a construction loan on it that we have provided a take out commitment for. So they don't -- they were not counting on the sale of these buildings to finance their construction. And for future development, we have the pipeline development agreement with them that if they have any projects that they want to develop that they would bring to us and we would provide a take out commitment, and they could get the construction loan with that commitment and move forward with those projects.

Now as Doug has mentioned on our previous call, that we are ready to help PMB navigate through these difficult times where development activities probably would be slow and they have development overhead and other things by providing maybe some short term help through loans or other thing; and as you know also from our agreement, we have a line of credit for their development activities when they are working on a development project that they can draw on.

Jim it's Don Bradley, too. I just want to point out one thing -- you may have already realized this -- but we always refer to them as PMB buildings, but it's not like PMB has 100% ownership of these buildings and is getting 100% proceeds of the sale. These are largely owned by individual investors and -- with PMB not receiving that large of a portion of any sale.

Okay. And then finally, you had expressed on the last call -- or I guess had cautioned that a lot of your leases have CPI based escalators; and given where CPI has been, that those escalator would cause the NOI growth in those leases to be modest. There didn't seem to be any evidence of that in the first quarter. Is it going to take time for those CPI based escalators at low rates or zero rates to work their way through NOI growth?

You're exactly right, Jim. I think what we've seen and what's reported in the operations of the existing tenant base, it's going to take a period of time throughout the year to really play out.

And as we mentioned, with Hearthstone and other tenants when we meet with them, one of the things that we are talking to them about as we try to help them out in an appropriate way is to convert the CPI based to fixed rate, at least to a large degree.

Thank you.

You're welcome.

And the next question comes from the line of Karin Ford of KeyBanc Capital Markets. Please proceed.

Hi, good morning. Had a guidance question. The new guidance does include the $5 million gain on debt that from the April repurchase -- that's right, right?

It is included in net income, but the numbers we are giving are the recurring guidance, so we have taken it out of the net income to provide a recurring FFO and recurring FAD guidance.

Okay, so it's not included in the 2.22 to 2.26?

No, it's not.

Okay. That's helpful. Thanks.

You're welcome.

Our next question comes from the line of Steve Swett of KBW. Please proceed.

Thanks. Most of my questions have been answered but, Abdo, one thing. The medical office portfolio, if I look at the expenses, it looks like the margins were up higher in the first quarter than they've been in the past several quarters. Was there something one time in there or was that kind of a new run rate on the MOB operations?

Yes, it's -- As you know, the PMB buildings tends to have higher margins because of where they are located on the West Coast and higher rental rates; and as we closed a couple of buildings in the fourth quarter, that has helped the margin in the first quarter of '09.

Okay, so that's -- the margin in the first quarter is closer to what it's going to be going forward, net of any acquisitions?

That's correct.

Okay. Thanks.

You're welcome.

(Operator Instructions). Our next question come from the line of Rich Anderson of BMO Capital. Please proceed.

Sorry, I don't mean to extend things but it's Friday, whatever. Hearthstone, back to that, just a quick question, do you expect to -- since it's going to be a fixed rate escalator, will you then have straight-line rent attached to that portfolio?

We will, but we have a very strict reserve policy on our deferred rent, and we probably would reserve most of the straight-line.

Okay. Sounds good. Thank you.

You're welcome.

And our next question come from the line of Michael O'Dell of MetLife. Please proceed.

Yes, thank you, and congratulations on the overdue upgrade. You've mentioned that there's on option to -- regarding Hearthstone -- In the case of an adverse situation where NHP could take ownership of the operating partnership, have you thought through any implication that would have on your REIT status?

We have, and this is a scenario that is unlikely to present itself. However, that said, it's good to contemplate any possible scenario, and so we've considered that and we think that we're covered.

Okay. And then just one more quick one. Regarding the Brookdale lending agreement, do you have any other significant outstanding contingent funding commitments in terms of loans out to operators - besides now the Brookdale? I mean, it's de minimus, but is that something that we should be looking towards?

We just have as we -- as you can see on our supplemental -- some capital expansions, capital equities in terms of expansion or renovations that we have committed to various -- it's on page 27 -- for various tenants -- Atria, Brookdale -- several of them are in this category.

Right. Okay. So -- but there's no -- there's no other unsecured facilities that you are a part of besides the Brookdale?

No.

Okay.

It's a unique animal for a particular situation.

And by the way, that facility is partially secured by real estate.

Right. Okay. Right. Thank you.

You're welcome.

Our next question come from the line of Amit Annand of Axial Capital. Please proceed.

Hi. First of all, I just wanted to thank you for providing so much information in your supplemental. I think it's really helpful for investors. My question is whether you could provide some color on your operators that have rent coverage to their EBITDAR or to their EBITDAR less CapEx of less than one. I was just wondering how they are financing their rent they're not covering, and how they are financing or paying for their G&A.

Oh my goodness, did we put that in the supplemental? Thank you for your comment. We do try to make our supplemental as comprehensive as possible, and Abdo and Brent and the rest of the team are always looking for ways to improve it, and they do that. Brent? Or Abdo?

They currently continue to pay the rent. Some of them have their own ways of cutting maybe their overhead or funding some of the shortfall, thinking this is just a bridge until the better times come. But we don't have a lot that are close. SSA is one that probably you're looking at will be operating at a negative; but most of the others are either breakeven or have a little bit left. And some operators instead of 5% management fee may be happy with four or three, and would be happy to survive that way.

Great, that's helpful. Thank you.

You're welcome.

And there are no further questions in the queue.

Thank you very much, Francine. Thank you, everyone. Have a good day.

Thank you for your participation in today's conference. This conclude the presentation. You may now disconnect. Have a good day.