Welltower Inc (WELL) 2004 Q2 法說會逐字稿

Welcome to the Health Care REIT second-quarter 2004 earnings conference call.

At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.

It is now my pleasure to introduce your host, Georganne Palffy with the Financial Relations Board.

Ma'am, you may begin.

Good morning and thank you, everyone, for joining us today for Health Care REIT's Second-quarter conference call.

You should have received a copy of the press release; but in the event you have not, you may access it via the Company's website at www.HCREIT.com.

I would like to remind everyone that we are holding a live webcast of today's call which may be accessed through the Company's website.

At this time management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Health Care REIT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's filings with the SEC.

And now I would like to turn the call over to George Chapman, Chairman and CEO of Health Care REIT, for his opening remarks.

Please go ahead, sir.

Thank you, Georganne.

I'd like to begin by reviewing our investment activity for the quarter, update our investment guidance for the year, discuss changes we are making in our basic lease structure as it relates to annual rent escalators, and the accounting impact and corresponding revisions to FFO guidance.

On the investment side, we had another quarter of solid investment activity with 74.2 million of gross new investments and 40 million net investments bringing our 6 month total to 161.5 million of gross investments and 128 million of net investments.

As you know, despite successfully closing over $1 billion of investments during the last 2 years, we began this year with more modest guidance of 200 million net investments and we attributed that to increased competition.

However, through hard work by our origination team, we have generated a more robust investment pipeline than previously anticipated and are now increasing our net investment guidance to 400 to 500 million for 2004.

On the lease structure we have made some significant changes going forward and I'd like to now discuss those changes.

Historically we have had 20 to 25 basis points fixed annual escalators in our lease rate.

The fixed escalators were easy to administer, gave us predictable rental income and enabled the operator to capture growth in EBITDAR.

As per GAAP, the average lease rate was booked as earnings -- were booked as earnings resulting in a straight line receivable for the difference between earnings and cash rent.

In short, the straight line receivable builds during the first half of the lease and then is monetized over the last half of the lease.

As our portfolio has grown the straight line receivable has also grown, and this has occurred at a time when investors and analyst suggest, to us at least, that FAD has become a more important metric than FFO.

Accordingly we determine to gradually minimize straight line rent by adopting a formulaic approach to rent escalators that is expected to provide the same economics to us while not requiring us to book straight line rents.

Our master leases will incorporate annual escalators based on the lesser of a CPI factor or a fixed basis point increaser.

We believe this will allow us to focus discussions on the key strengths of our company, largely eliminate arcane accounting discussions relating to GAAP and its straight line requirements and add an element of organic growth over time.

Going forward, substantially all of our new leases will be structured with this approach.

During -- of our second quarter real estate purchases of 74 million, about 58 million of such investments contain no straight line requirement.

We also decided to minimize the recognition of straight line rent in the existing portfolio.

We have discontinued recognizing straight line rent on approximately a quarter, 25 percent, of our current portfolio.

This resulted in straight line rent in the second quarter 2.5 million or so below our expectations.

But I should point out that all changes to straight lining to the existing portfolio are clearly factored into our new guidance.

As a result, our straight line rent forecast, not including any future onetime payments and pay offs outside those already received during the first half of 2004, are 18 to 20 million, down from previous expectations of 24 to 28 million.

And for 2005 we expect straight line rent of approximately $14 to $16 million.

With respect to leases on which straight line rent is being discontinued, we will use future cash rent escalators to retire applicable straight line receivables and thereafter such cash escalators will generate additional internal growth.

We believe that this change is positive.

We gradually minimize straight line rent and shrink the GAAP between FFO and FAD.

I should add that regardless of the lease structure in effect, our strong facility coverages in our portfolio, which are now at 1.64 to 1 across the entire portfolio, support our expectations that all or substantially all of our operators will make their lease payments as required over the entire life of the lease.

Now let me turn to guidance briefly.

Because of the timing of our new investments and particularly our new lease structure and reduction in straight line rentals as discussed above, we are revising our FFO guidance for 2004 to $2.87 to $2.92.

We should point out that our fourth-quarter run rates for FFO and FAD are 76 cents and 68 cents respectively.

As is now required, let me quickly give you the components of these number so that they can be reconciled to net income.

Net income 39 cents, depreciation 37 cents, straight line rent 8 cents.

Additionally we are providing preliminary net investment guidance for 2004 of $250 million and FFO guidance of $2.98 to $3.06.

And while the Board has not yet adopted a dividend policy for 2005, we believe that FFO and FAD payout ratios should be quite strong even with the foregoing changes to our lease structure.

I should add that substantially all of the difference between previous annual guidance tied directly to our proactive approach to straight line rent.

In fact, our financial results are quite strong and would have been at the high end of our guidance absent these changes to recognition of straight line rent.

Moreover, any changes to straight lining have absolutely no effect on cash flow or our ability to pay dividends and, in fact, our cash flow and FAD are running ahead of expectations.

And with that, I'll now turn the presentation over to Ray Braun for his overview of financial information and data as well as portfolio.

But first, I would ask him to comment on the NIC project that he is co-chairing with Kathy Sweeney of AEW.

We would hope that valuations in the Health Care REIT sector could improve once better data and information is readily available.

Ray?

Thanks, George.

Last week the National Investment Center published its first 39 reports on the NAB project which shows occupancy and rate data for nursing homes, assisted living, independent living and continuing care retirement communities in the top 30 MSA's, and that covers about half of the U.S. population.

The NAB reports will be published quarterly and will provide greater transparency to the capital markets on local market conditions.

As George alluded to, we believe that over time this quarterly market data will bring better access to and lower cost of capital to the sector due to a better understanding of the long-term care industry fundamentals.

Now I'd like to review our second-quarter results and then review our guidance for '04 and '05.

We recognized net income available to common stockholders of 37 cents and FFO of 69 cents per diluted share for the quarter.

Dividends paid in the second quarter were 60 cents per share and our FFO payout ratio was 87 percent.

The Board approved our 133rd consecutive dividend to be paid on August 20th; please see our earnings release for the reconciliation of net income and FFO.

Moving on to the operating results; we had gross revenues including discontinued operations of 60.1 million for the quarter; revenues were 90 percent from real property and 55 percent from the assisted living sector.

As George mentioned, our revenues were reduced by our change in straight line rent recognition for the quarter.

On the expense side, our quarterly depreciation, including discontinued operations, increased to 17.7 million from 11.9 million in the prior year as a result of the increase in real property owned.

We added 300,000 to the loan loss reserve and our allowance now stands at 8.4 million.

Additionally, our quarterly interest expense, including discontinued operations, increased to 17.4 million from 13.2 million in the prior year as a result of the $250 million senior unsecured notes issued in November 2003 and the secured debt assumed in conjunction with our new investments last year.

Moving to the balance sheet, we ended the quarter with net real estate investments of approximately 2.1 billion.

At June 30, 2004 the Company had investments in 346 healthcare facilities in 33 states with 49 operators.

As previously reported, our gross investment activity for the quarter totaled 74.2 million and we had asset sales of 33.8 million which generated net investments of 40.4 million.

We acquired 9 nursing homes and 1 assisted living facility for 57.2 million and provided 3.4 million of mortgage financing for a new specialty care hospital during the quarter.

The new lease investments have terms of 15 years and average yields of approximately 9.4 percent.

The remaining 13.6 million relates primarily to the funding of construction and renovations on the existing portfolio.

Our credit profile remains stable, leverage is low at 36 percent debt to total market cap at the end of the quarter.

Our interest coverage year-to-date is all of 3.2 times.

Please see the earnings release for reconciliation of net income and EBITDA.

Our debt maturity schedule is in good shape.

We only have 1.2 million of debt maturing in the balance of the year.

We had no change in our credit ratings during the quarter and we will continue to manage the Company to maintain investment grade status.

Our DRIP activity is doing well; we issued 320,000 shares in the second quarter generating $9.8 million.

At this point I'd like to shift the discussion to the portfolio.

Please note that the coverage statistics will reflect the last 12 months activity through the first quarter of '04 whereas balances, facilities, and bed counts reflect amounts as of June 30th.

As George mentioned, our overall payment coverage is strong at approximately 1.64 times, an increase of 6 basis points from the prior quarter.

Our portfolio has 98 percent stable assets, 88 percent of our properties are owned and 81 percent of our owned assets are in master leases.

At the quarter end our assisted living portfolio was comprised of 218 facilities with 14,139 units and an investment balance of 1.2 billion.

The stabilized portfolio had 212 facilities with 13,331 units, an investment balance of 1.1 billion and payment coverage of 1.4 times, an increase of 5 basis points from the prior quarter.

Our fill up and construction properties remained within our stated goal of having 10 to 15 percent of the portfolio in construction and fill up.

We currently have 4 assisted living facilities remaining in fill up representing approximately 2 percent of our revenue.

We had 8 properties stabilize during the quarter and we acquired 1 facility in Philla (ph).

Finally, we have two assisted living facilities in construction.

Moving on to the skilled nursing portfolio, we had 120 facilities with 16,616 beds and an investment balance of 748.5 million.

Average occupancies have risen from a low of 81 percent in the third quarter of 2000 to 85 percent in the first quarter of '04.

Our payment coverage remains strong at 1.97 times, an increase of 13 basis points from the prior quarter.

We recognized revenues of 22.4 billion in the second quarter from the skilled nursing portfolio which represent 37 percent of total revenues.

I'd like to give an update on Medicaid reimbursement.

We're predicting that our average Medicaid rate in the portfolio will increase 3 to 4 percent in fiscal year 2005.

The average rate increase is comparable to last year and should not have a significant impact on skilled nursing coverages.

The only states in our portfolio that we project flat to the increased rates are Florida and Ohio.

We currently have 21 facilities with 2,397 beds and an investment balance of 124.9 million in Florida and 5 facilities with 911 beds and an investment balance of 61 million in Ohio.

We do not believe that the reduced Medicaid rates will materially affect payment coverages or increase payment risk on those portfolios.

I'd like now to discuss our expectations for 2004 and 2005.

Primarily due to our revised straight line expectations, we are adjusting our 2004 guidance and now expect to report net income available to common stockholders in the range of $1.49 to $1.54 per diluted share and FFO in the range of $2.87 to $2.92 per diluted share.

We expect to record straight line rent of approximately 18 to 20 million for the full year 2004 executing any additional payments outside the normal monthly rental payments.

We are also increasing our projected net new investments for the year to a range of 400 to 500 million.

New investments are anticipated to include annual escalators expected to be equal to or greater than historical norms without the requirement of straight-lining the rental stream.

We are also initiating guidance for 2005 and expect to report net income available to common stockholders in the range of $1.47 to $1.55 per diluted share and FFO of $2.98 to $3.06 per diluted share.

The guidance assumes net new investments of 250 million with leases that will not require straight-lining of rents.

Additionally, we plan to manage the Company to maintain investment grade status with a capital structure consistent with our current capital structure.

Please see the earnings release for a reconciliation of the outlooks for net income and FFO.

That completes my report, and I'll turn it back to you, George.

Thanks, Ray.

Let me take a moment to summarize some of the salient points from our presentation.

One, our investment pipeline has filled up nicely allowing us to complete approximately 310 million of gross new investments through today.

Two, our net investment guidance, as we've indicated, has been increased to a range of 400 to 500 million.

The portfolio, as Ray indicated, is progressing very nicely with our ALF and SNF assisted living facilities and skilled nursing facilities coverage is growing 5 to 13 percent respectively so that across our portfolio coverages now stand at 1.64 to 1.

We also believe that our proactive approach to eliminating over time straight line rent should remove a distracting factor from HCN's profile.

And finally, even with our rather dramatic reduction to straight lining, our payout ratios for 2004 and 2005 should be very strong.

We clearly believe that HCN is very well-positioned both for the short and long-term.

And with that, let me open the floor for questions.

(OPERATOR INSTRUCTIONS) Chris Pike, UBS.

Good morning, gentlemen.

For a couple seconds I thought we had the same issue from last quarter.

George, I just wanted to revisit your comments from earlier in the call.

I think I missed a couple of them.

You said that one of the decisions to straight line was in able to help the operators improve their EBITDAR earlier in the lease.

No, Chris, I think what I -- frankly from a cash standpoint from an operators standpoint it doesn't matter because they are paying cash equal to usually 25 basis point increases per year.

Why we like to keep a flat increase there is that it provides some incentive for the operator to be very attentive to providing good quality care in a cost-effective manner because the operator can take the monies in excess of those amounts.

That's what I'm understanding.

I just --.

It wasn't a straight lining issue; it was more of a flat increase.

In terms of the leases in general, are there any other structural changes to the leases that you guys are thinking of making?

Maybe moving from a 15 year lease structure down to a 10?

Or any other salient structural changes with the lease besides moving to a cash basis?

No, not really.

We really prefer 15 year leases so that we have a much more permanent revenue stream.

There have been people we've done business with who want to buy out early.

And if we have to in order to get a great operator from time to time we have been able to give them an early buyout, an early option paying us more to some degree equal to some of our opportunity that we lose for years 11 through 15.

But that's very rare, Chris.

Great, just a couple more questions.

In terms of -- I don't know if it's you or Ray -- the timing of the acquisitions and dispositions in the quarter?

If you heard my last comments you'd note that we closed quite a number already in --.

Yes, I'm talking about Q2, the second quarter, when they occurred in Q2.

The dispositions were right at the beginning of the quarter and the acquisitions were at the end.

Okay, fine.

And I guess just maybe a 60,000 foot question for George.

Any bias in the sense of the property types you guys are seeing in the pipeline?

Are you seeing more or less or one or the other type of facility type in terms of deals that are getting passed along your desk?

We have closed a number of nursing homes already this year, and yet we're anticipating that that could be balanced almost dollar for dollar by a large assisted living portfolio.

So I think the answer -- Chuck, do you think it's primitive and again this year?

And as we've told you before, even if we had a weighting, Chris, toward -- in like 75 percent skilled nursing to 25 percent assisted living, we're so opportunistic in terms of what we will ultimately invest in and we're so dependent upon our operators as almost part of our marketing team that many, many times our initial weightings do not prove to be accurate.

Okay.

And how about cap rates?

Any noticeable change by facility type as you move through the year to improve -- or to move up your goal or is it because of this assisted living facility portfolio that that is now on the horizon?

Chris, the cap rates have compressed.

Since probably last October we've been watching, particularly in the assisted living sector, the competition heating up and we've been seeing cap rates compressing probably by over 100 basis points in that sector.

The nursing home sector more recently has also seen some compression in cap rates and our guidance is assuming that we'll be seeing lower cap rates and lower yields.

So what kind of cash caps are you looking at for the ALF's and SNF's at this point?

I would say in the Alf (ph) market you're in the 10 to 11 range and in the SNF market 11 to 12.

And last question.

So the ALF portfolio, was that baked in to your original guidance at the beginning of the year or is this something that has just come across your desk?

No, somewhat like last year, the pipeline is pretty lumpy this year.

We did not think we would see some of the opportunities we're seeing now and that's why the guidance has gone up on that investment.

Because we have a number of large transactions and hopefully we'll get one or two of them home.

Thank you very much, gentlemen.

I appreciate your time.

Joseph Smith, ING Clarion.

Just trying to understand -- I'm here with Ken Weinberg by the way.

Just trying to understand how from a cash and FAD basis, as that's certainly how we look at the world, it's sounding like that's how you guys have and will continue to look at the world anyway.

Given your increase on the investment side, while you don't give guidance on FAD, how much -- could you help in terms of how much your FAD estimate is going up for '04 since that's the critical number anyway?

Joe, I couldn't agree more with you.

The SEC in its infinite wisdom and put a damper on disclosing FAD, or at least FAD per share for a number of reasons, not many of them that are very good.

They're concerned about FAD being equated to cash flow but, of course, that was always a concern with FFO as well.

And they're concerned that FAD isn't as easy to define as FFO has been because of the (indiscernible) white paper, etc.

So we're stuck trying to give you FFO which is okay to give.

And then to give you the ranges of depreciation so that you can see that even though FFO has gone down, as you look at our depreciation and as you look at the straight lining that has decreased, you should be able to work your way back to a FAD number which is probably stronger than most of the estimates we've seen.

And you should also, by looking at the straight line number for next year that we are projecting together with our FFO projections, also work to your FAD number for next year which shows when we've done the math, even though we're not allowed to say it, a significant increase from the ranges in 2004 to 2005.

In short, what I was trying to say in my last paragraph before closing and opening for questions is economically and from what you call a FAD standpoint and from a cash flow standpoint we are doing it very well in our judgment and we have chosen to take care of this sort of straight line distraction.

But please forgive us for not being able to give you the FAD per share.

It's prohibited now by the SEC.

Okay.

On a recurring basis just thinking about your business over the next couple years, is it a conservative estimate -- if I say that I would expect FAD growth on an unleveraged basis to being greater than a 3 to 4 percent CPI just because of investments and your internal growth, and then on a leverage basis whatever you do on top of that with your acquisitions.

So if I'm saying 3 to 5 percent FAD growth, am I in the range of reason?

Yes.

Okay.

Great, thanks.

Jerry Doctrow, Legg Mason.

A couple things that I just wanted to kind of go over.

First of all just on the straight line.

Again, I kind of applaud you for just moving off of it given how much of a distraction it's been.

And I certainly understand that on new deals.

What I'm puzzled about a bit is how you can look at the existing portfolio and decide that a certain chunk of it is just no longer being straight lined.

Have you renegotiated leases or what was the accounting determination that allowed you to change that quarter of the portfolio off straight line?

Jerry, we had to be very strong with even our auditors on this and we had a variety of ways we could do it.

We renegotiated the terms in some cases, we tried to say -- to look at is there any uncertainty of payment so that we could be more conservative.

So a whole array of ways to do it and we had to really push it to try to become more conservative.

But that's all we could do.

So we're at about, as I said, about a quarter of our existing portfolio which is a pretty big number and we couldn't, frankly, push it any further and we're not going to be doing anything more at least anything of any size.

So we're left with this and that's all we can do.

The remainder of it -- the remaining three quarters of the portfolio or so, Jerry, we'll just play it out on the straight line and gradually, as we said earlier, monetize the straight line receivable in its natural - during the last half of the term of those leases.

So we tried to push it as hard as we could, but there's a limit, as you point out, and that's it.

So any sense of how much you renegotiated, how much your auditors, maybe under your encouragement, decided it was not comfortable or questionable (multiple speakers)?

We're not going to get into that because we don't want to get into particular operators and I'd just assume keep that to ourselves.

Okay.

On the go forward stuff and, again, you gave us pretty good numbers on obviously what the straight line is going to be.

I wanted to see if we could get a little bit more color on sort of the timing and yield on acquisitions because candidly I was having a little trouble getting to the FFO guidance and I suspect it's a timing issue.

You talked about the second-quarter -- third quarter -- you got stuff done, was that done earlier in the quarter, so very close to the beginning or was it done more recently?

The Second quarter, as Ray said earlier, we had about 27 million of the 33 -- or what was it? -- payoff almost right at the beginning of the second quarter and many of our acquisitions were late in the quarter.

Ray, do you want to give more color?

The other thing that happened, Jerry, is we did close a sizable transaction very early in the third quarter.

That's another 150.

Roughly 150 million and a yield in the 915-ish range.

Okay.

And then the rest of it obviously is decisions about your expectations of timing and the rest.

Is a lot of the rest -- is the fourth quarter (indiscernible) or do you think some of that's going to come potentially still in the third quarter?

Yes, there will be some still in the third, but we still think there will be a sizable number in the fourth.

Okay.

One of the things that you said earlier that confused me, and maybe you were talking about cap rate and yield.

But you were talking about cap rates on ALF's at 10 to 11, SNF's 11 to 12.

But you're talking about your cash yield is only about 94 or 915 on these.

What's the right yield number should I be thinking about?

I would say low to mid 9-ish on a cash shield on the leases.

And then when you factor in the coverage requirement, you multiply the yield by the coverage you get your cap rate.

Okay.

And just one or two other things if I could.

There's going to be some -- historically we just assume zero internal growth for you because it's all straight line so there's nothing.

With you now switching about a quarter of the portfolio over to a cash basis and then to investments on a cash basis, I'm just trying to think of what, overall for the portfolio, what sort of an internal growth rate?

Are we at half a percent or 1 percent or --?

First of all, Jerry, let me give you some color on it.

When we talk about the quarter of the current portfolio that we've converted away from straight line to an organic growth, what we have to do is we have to spend the necessary time taking our cash increasers, not booking them but to use those to pay down the receivable, okay?

To get rid of that before we have organic growth.

So we're probably out, and if you look at 25 basis -- if you really look at -- when you have time back in your shop to look at how we recognize straight line, you recognize straight line in greater amounts in the first year and then a little less the second, third and fourth.

But then as you begin to monetize the straight line receivable for the quarter of our existing portfolio, you only monetize it with 25 basis points the first year let's say, and then that accumulates to another 50 the second.

So it takes 4 to 6 years in most cases to get rid of that receivable.

So you're not going to see much organic growth from those until about 5, 6, 7 years out.

On the new projects you have to wait until after 12 months.

So pretty much we're left for the first 12 months or so with some variations of timing with the external growth that's our driver.

Okay.

And then just one or two other things.

Given that you've got higher levels of investments, what do you anticipate you need for equity when you're giving us your guidance?

What's your assumption about equity markets?

I'll start and then I'll let Ray handle the hard part.

We're about 150 of our line right now today.

And we have availability of 340 million -- therefore 190 million left.

And we're looking at some transactions and one that is fairly large.

So we're beginning to look toward the capital markets.

To add just a little bit more detail, Jerry, we can fund the low end of our guidance on our line this year.

So it's really going to depend on how many of the deals we get home.

If we hit toward the high end we're going to need to do capital activity.

As we've indicated in the past, we would think that our next capital move would probably be in the preferred area because we think that market is still relatively attractive for us.

And then from there, as we've indicated earlier, we're going to keep our balance sheet and our leverage in a position to maintain our ratings.

You'll see probably a relatively equal mix of debt and equity coming out after that.

Okay.

But is there any equity that you've done on like on the DRIP or whatever this quarter or is that running at any level that's meaningful?

Yes, roughly 300,000 to 400,000 per quarter.

Okay.

And then just last thing and I'll stop.

I was wondering, Ray, since you've now gotten the data and I presume you've seen the data from the NIC stuff, if you can just give us any sense of where the national trends are on occupancy and rates or any of that color?

The info just came out last Thursday and Friday, Jerry.

And we're still in the process of pulling together all of our analysis and analyzing the metrics.

I would think that on the next quarter call I'll be able to give quite a bit of color on that.

But it's excellent data and we're really excited about getting through it and trying to identify trends.

It will be even better next quarter when we can see 2 quarters and start looking at trend lines.

Okay, thanks.

Scott O'Shea, Deutsche Bank.

I was wondering if I could get the dollar amount of receivables on your balance sheet, both the long-term deferred receivable and any short-term receivable just from the 30 day payments?

Yes, hold on a minute.

Okay.

Our straight line balance at the end of the quarter was roughly 56 million.

And -- one second.

And we had no operators delinquent more than 90 days.

So the short-term was de minimus then?

Yes.

The 150 million deal you just closed, was that the large Alf portfolio you referred to?

No.

Okay.

That's still out there.

Okay.

That's it, thank you.

Paul Puryear, Raymond James.

We're pretty well covered, I guess just one thing that wasn't asked or we're trying to clear up.

Is it fair to say that the FAD, the absolute number for 2004 is now higher than it was in your -- the guidance is now higher than the prior guidance?

Yes.

Sir, does that answer your question?

Sorry, Paul.

Yes, it is higher.

Oh, it is higher?

Yes.

Okay.

All right, fair enough.

Thanks.

Philip Martin, Stifel Nicolaus.

You know the proper pronunciation of that name so I won't (multiple speakers).

Well, first of all, good morning.

I thought I was forgot about there for a minute, but -- most of the questions have been answered, but just a couple housekeeping items.

Now the second-quarter acquisition, you said the majority of those -- what number were closed very late in the second quarter?

Just from a timing standpoint?

Around 60 million of it was closed in the last couple days of the quarter.

Okay, last couple days.

Now, in terms of the percentage of leases -- I know you said in the -- roughly 53-58 percent of leases in the second quarter were done under the new accounting basis, or cash basis.

On a go forward basis --.

All of them were, Philip.

All of them.

So on a go forward basis the percentage is going to be what?

Close to 100 percent?

Because I know you said some are --?

We might have a couple where we have the old vestiges there because of previous commitments, but substantially all the leases that we're going to be doing we're trying to get away from straight line.

Okay.

Let me just go through the -- okay, well I think that -- oh, the 2005 estimated FAD number there, the aggregate number.

Do you have an estimate for that yet?

We're at 18 to 20 this year.

(multiple speakers) I think you can figure it out from there, Philip.

Well, the straight line -- did you give an '05 straight line number?

(multiple speakers) estimated.

14 to 16 million was our estimate for the straight line.

Okay.

I just missed that.

Okay.

Well, that should do it.

Thank you very much.

Robert Mains, Advest.

One more straight line question.

The 2.4 million that --.

Which could explain, by the way, if I were moving away from straight line.

Yes, excellent case in point.

The 2.4 million in cash that you got outside the normal monthly rental payments, is that from the dispositions?

Primarily the dispositions, that's correct.

Okay, so if I want to do kind of a run rate comparison to Q1 I'd add that back as well as the 2.5 that goes away I guess permanently because of the restructurings?

Correct.

Okay.

And then on the SNF portfolio, coverage went up and you also had a 40 basis point increase -- you went from 32 to 36 percent quality mix during the quarter.

How much of that is improvement in the assets that you have retained and how much is it new assets that you've added?

Are you asking what was the same store coverage increase?

Or quality mix.

I guess they kind of go hand-in-hand.

We're trying to get that information.

We're trying to get our same-store increase number which I think is the closest proxy we can give you.

Okay.

While you're working on that -- the assets that you're seeing out there, for among the SNF's, are they running at a higher quality mix or higher coverage either than what you've seen in the past?

I'm sorry, Rob, could you repeat that?

The opportunities you have to invest in SNF's currently, are you seeing assets generally with the same lower or higher quality mixes and coverage ratios?

We're still trying to get the same-store for you, Rob, hand on just a second.

Our same store coverage increase -- quarter-on-quarter was 23 basis points in the SNF portfolio.

So if you went -- so overall increase going up 13, that would imply that the new assets are coming in at about typical coverages before, so the increase that you're getting is just on the existing?

Primarily, but timing effects that and other things in terms of the calculation.

That answers the second part of my question as well.

Thanks a lot.

Greg Andrews, Green Street Advisers.

I'm a little confused on the cash payments outside of the normal monthly rental payments.

When you say that comes from primarily the disposition, I don't understand how that gets recognized in revenue.

Essentially -- we'll elaborate, but essentially when an option is exercised before the end of the term the operator is required to repay not only -- pay not only the option price but to pay the amount of the outstanding straight line receivable.

So there is a reduction with dispositions.

Okay, great.

That's very helpful.

What is -- with respect I guess you're saying here that you recognize straight line rent in the second quarter that was reduced by 2.5 million.

I guess that's reduced versus your prior expectation.

Correct.

And with respect to the one quarter of the leases in the portfolio that were switched over from straight line rent to non straight line rent, what was the accounting treatment used in doing that?

Was it a write-off of the straight line rent receivable?

No.

What happens is that we stop recognizing any straight line and we reduce the existing straight line receivable by future cash increases.

Remember that despite this so-called -- this recognition discussion we seem to be having today, that all of our leases essentially, new and old, will probably end up having 20 to 25 basis point cash increasers annually.

So now to get rid of that receivable on those leases for which we discontinue the straight lining, we will apply cash increasers going forward against the receivable for those particular leases until that old straight line receivable is gone.

It's the most conservative way we can do it.

Right.

So the straight line rent receivable you said today stands at 56 million.

What was it prior to this change?

Well, it's still the same.

What will happen, Greg, is that the straight line receivable will continue because we have three quarters of our existing portfolio that are still recognizing straight line rents.

The straight line receivable will continue to go up but at a slower rate for the next 3 or 4 years and it will also -- and the rate will decrease because, one, we're starting to decrease the straight line receivable with respect to properties for which we are no longer recognizing straight line rent.

And you will be getting some properties that are subject to straight line rentals that got to the crossover point, 7.5 years, and they will then begin to monetize down their particular straight line receivable.

So you're going to see the receivable grow at a slower rate for another say 4 years or so -- again, don't hold me to -- it's 4-4.5 -- and then it will begin to go down rather quickly.

So we are just going to have to, over a number of years, take -- reduce the straight line receivable.

And we're happy to work that through with you probably in a separate call so that you totally understand it.

Okay, so there was -- was there a write-off of the straight line rent receivable during the quarter?

No, it's not recognizing.

It actually increased, Greg.

At the end of the first quarter it was 53.5 million and we added our straight line this quarter of 2.5 to get to the 56.

Okay, fair enough.

You haven't commented much on the property bought during the third quarter.

Can you provide any commentary on what it is that you bought?

We began to buy a portfolio of over 180 million of skilled nursing facilities with a new operator.

We began that process late in the second quarter and completed it early in the third quarter.

And then, Ray, do you want to go through some detail on the facilities?

Yes.

They're skilled nursing facilities.

There are 16 of them.

As I indicated earlier, the initial cash yield was 9.15 percent and the funded amount was 148.4 million.

Most of the properties are located in the Southeast -- Florida, Mississippi, Alabama.

Do these have coverages that are comparable to what's in your existing portfolio?

Yes.

And occupancy is also similar?

Yes.

Okay.

That's it for me.

Thank you.

Philip Martin, Stifel Nicolaus.

She got it right, I'm impressed.

A couple questions on second-quarter acquisitions.

No straight line questions, I promise.

What operators did you do these transactions with in the second quarter?

We don't give the names of specific operators.

What I can tell you, though, is that we picked up a couple new operators which we're very pleased about.

How many new operators, can you say that?

Two.

Two new operators, okay.

And operationally, cap rates are obviously compressing here and you're underwriting to a certain coverage, that sort of thing.

But operationally -- let's look at operating margin.

Where have the operating margins on skilled nursing and the assisted living, independent living areas gone over the last year?

Have they remained flat, have you seen them go up?

Improving slightly in both sectors.

What's the average you're seeing on assisted living?

Operating margin wise?

Roughly in the high 20s, low 30s.

And skilled nursing?

13 to 17-ish.

Okay.

And on your specialty care properties, I know it is just a small amount, but can you give a little detail on that -- on those acquisitions, I think it was two properties.

No, we had 1 specialty care hospital that we acquired in the Greater Washington D.C. area.

And the care acuity level provided by that property is primarily what?

ALTEC (ph) and SNF.

Perfect.

Thank you very much.

Robert Belger (ph), Prudential Equity Group.

A couple of questions.

Obviously I have one on the straight line rent as well.

We'd be disappointed if you didn't.

We were waiting for it, Robert.

Hopefully we won't be talking about this in a couple of quarters.

That's the whole idea.

The leases that you reduced the straight line rent on, did you reduce any future rental increases?

No, all the economics stay the same, exactly the same.

That's I guess what we really want to point out in the call.

All the economics are the same, regardless of whether we're going it the new way or the straight line.

And we totally expect to receive all of our rent.

That's the basic message.

Okay.

Maybe you went over this and I missed it.

Did you discuss investment yields on investments closed in the second quarter on a cash and also GAAP basis and also on dispositions?

Hold on a second, Robert, I'll pull that up for you.

Can you repeat the question?

Yes, just the investment yields on the transactions closed in the second quarter on both a cash and a GAAP basis and also on the dispositions as well.

The cash and the straight line yields are the same and they're in the 9.3-ish range on the second-quarter investments.

And the dispositions -- what was our average?

Hold on, Robert, I've got to pull another schedule.

On the dispositions the income yield was roughly 11.2 percent.

Okay.

Then just another question on your expected capital market activities.

Would you be considering a convertible preferred issue?

We preferred to do a cumulative preferred -- perpetual preferred deal.

A straight preferred?

Straight preferred is what we want to do.

Okay, great.

That's all my questions today.

Thanks.

Any more questions, operator?

Hello?

Sam Muron (ph), (indiscernible) Value Fund.

Actually most of my questions have been answered, just want a clarification on, again, the straight lining.

What percentage of the portfolio as of today then in terms of the leases are straight lined?

And for the ones that are not, what kind of year-on-year growth is embedded in them?

About three quarters of the existing portfolio at the end of the second quarter are continuing with straight line.

With the non it's usually 20 to 25 basis points of economic growth.

But as I indicated in response to an earlier question, until we monetize the existing straight line receivables with respect to those properties we will not recognize any organic growth.

Got you.

Okay.

Thanks.

Scott O'Shea, Deutsche Bank.

A follow-up year on the assisted living coverage.

You mentioned you've gone up in coverage at the property level.

I'm looking 110 about 6 months ago to 118 now.

What's driving that?

Is that primarily rate driven at this point?

Yes, the occupancies in the stable portfolio have been relatively flat, Scott, for several quarters.

But as I've mentioned in some prior calls, what we're seeing is that the operators have pretty good pricing power and that the supply pipeline is way down.

So it's mostly rate driven on the revenue side.

Could you break that out into some kind of percentage revenue increase that they're putting through and offsetting expense escalation that they're seeing?

Roughly we're seeing 5 to 10 percent increases in rates depending upon the markets and the operators and the care levels and expenses are increasing at a rate 3 to 4 percent roughly.

Okay.

Anything -- as you look to '05 budgets now in these facilities, this 118 is a trailing 12 number, is that correct as of March 31st?

Yes.

Okay.

So we should -- on current rental rates we should expect this to continue to increase a little bit going forward?

That would be a reasonable expectation and assumed in that is that we don't see a lot of new supply coming online.

Okay.

Any guidance or comments on what you're seeing in new supply out there?

Right now it's increasing at roughly 1 percent of the existing stock and we're carefully monitoring the market.

I think the NAB study I referred to earlier, once we get through that data, is going to provide a lot of color on what's happening in the marketplace.

But it's really premature to comment on that.

And of course, next year we will comment in detail on our outlook for the year.

We'll give some more color on it next quarter and then a lot more detail at the beginning of the year.

Okay.

Could you also provide some background on just the improvement in the SNF coverage?

Is there more coming there since this is a rolling 12 number?

Any change in outlook for Medicare reimbursement?

Our expectation today -- right now under the rules in effect for Medicare there's a built-in inflation adjustment that will occur in October.

And in order for that not to occur there would have to be an act of legislation.

And we're expecting to get an inflationary increase in Medicare.

And as I mentioned earlier, right now the Medicaid budgets look like we're in 3 to 4 percent range.

Okay, great.

The last question has to do with the construction facilities.

Are those for existing operators that will be rolled into a master lease?

That's correct.

Okay, great.

That's it for me.

Thanks.

At this time I would like to turn the floor back over to management for any final remarks.

We appreciate all of you participating in our call and that will be it.

Thank you.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.