Welltower Inc (WELL) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Health Care REIT, Inc. fourth-quarter 2004 earnings conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference is being recorded.

I would now like to turn the conference over to Georgeanne Pelfy of the Financial Relations Board.

Please, go ahead.

Good morning, and thanks to everyone for joining us today for Health Care REIT's fourth-quarter conference call.

You have received a copy of the press release.

But in the event you have not, you may access it via the Company's web site 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 web site as well.

At this time, management would like me to inform you that certain statements made during this conference call, which aren't nonhistorical, 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, Georgeanne.

Let me give you an overview first.

And then we will begin drilling down on all of the numbers -- financial information as well as portfolio.

During the last 3 years, we made excellent progress in strengthening Health Care REIT's foundation and positioning the Company for future growth.

In 2004, we made gross new investments of 585 million, net 522 million.

Our gross investments for the last 3 years total over 1.6 billion, 1.37 billion net.

We more than doubled assets and revenues as a result, with our portfolio's average life moving out to 12 years.

During this 3-year period, we also increased our employee base by nearly 50 percent, including a nice new vice president of finance who is being groomed for the CFO role, a new west-coast marketing person, and a general council.

We have added depth to all areas in accounting, portfolio management and monitoring, research and the closing process.

We believe we have excellent depth and breadth of management in the Company.

Looking back on 2004, we are obviously disappointed in our FFO shortfall, which is largely caused by higher than anticipated G&A cost.

Moreover, we are reducing our 2005 earnings guidance due to several factors.

One relates to the higher professional fees, as well as the transitioning of 11 properties to three new operators in the fourth quarter of 2004.

In that regard, I would add that while we have impacted earnings somewhat by transitioning these assets, we have always believed that assets transitions are an unfortunate but necessary part of the investment process.

The new operators are proven operators, already in our portfolio, who should bring stability to these assets and provide good quality care to the residents.

Generally, we have been successful in transitioning assets when necessary by moving the assets at an early stage.

In the case of the 11 properties; perhaps, we waited a bit longer than usual, hoping for a turnaround.

And yet our experience generally has been that if we can match the right operator to the correct model for the particular market and facility, this typically results most of the operating issues.

The other factor related to the change guidance is the probable disposition of two high-yielding assets.

These assets weren't in our previous investment guidance.

And while earnings would be affected by such payoffs, a significant part of the proposed payoffs relate to a sub-debt repayment.

And this repayment, if completed as expected, would follow repayments of sub debt totaling nearly $20 million in the second half of 2004.

While we do expect to utilize the sub-debt vehicle selectively in the future, we like to see sub debt for individual companies repaid in a reasonable time period, allowing us to recycle sub debt for other companies that are interested in growing their portfolios.

The other payoff, expected payoff, relates to a proposed purchase of a facility that would afford a sizable gain upon sale.

On balances transaction, if successfully consummated, would provide a very good return to us and eliminate a one-off facility from our portfolio.

I want to give you some of our thoughts on 2005.

Once again going into this year, we are cautious about investment opportunities.

Our revised net investment guidance totals 200 million, assuming the two new proposed payoffs occur.

As we look back, we believe 2002 through 2004 was a period of unprecedented investment opportunity.

The 20 new operators added in this period were uniformly strong.

We benefited from a number of larger investment transactions.

It's always difficult to predict our ability to fund and then close these types of large transactions.

Moreover, the competition for larger transaction investment opportunities in the higher AL space, assisted living space, has continued to ratchet up with cap rates for specific transactions reaching unprecedented levels.

And while this may or may not be the beginning of the convergence of cap rates for the multifamily and the assisted living sectors, we are currently uncomfortable paying such high amounts for these assets reflecting these low cap rates.

On the other hand, if no opportunistic larger transactions become available, we should have a solid year in which we continue to actively monitor the portfolio and eliminate under-performing operators and assets.

Another way in which we have attempted to reduce uncertainty from our financials was the decision early last year to change our form of lace to eliminate straight-line rent from future income and FFO.

Based upon a review of our projected FFO and FAD or our existing portfolio, we believe FFO and FAD should converge steadily and meet in late 2008 or early 2009.

And you should note in our disclosure, our earnings release, our increased emphasis on FAD to give you more information relative to that concept -- wanting now to try and summarize the bottom line.

We are never happy with write-offs, but they occur.

We don't like to transition properties -- that occurs.

We have some loans on nonaccrual that Rams (ph) Scott will deal with.

And we're not at all happy with the additional unexpected G&A expenses.

But even given those factors, we anticipate recurring FAD growth of between 10 and 14 percent for 2005 and we're very pleased with that.

And accordingly, our Board adopted a resolution to increase our dividends, as we reported in our earnings release.

So with that, I'd like to now have Scott Estes, our Vice President of Finance, present our year-end financial results.

And then, Scott will turn the floor over to Ray Braun, who will deal with a number of financial and portfolio matters.

And then, we will open for questions.

Scott?

Thanks, George.

Before I begin, I would like to note that our earnings release is posted on our website, under the heading "Press Releases."

The earnings release contains reconciliations of FAD, FFO and EBITDA to net income.

I'll first review fourth-quarter and year-end results and then discuss the balance sheet.

For the quarter, we recognized net income available to common stockholders of 30 cents, FFO of 71 cents, and FAD of 68 cents per diluted share.

Dividends paid in the fourth quarter were 60 cents per share, and our FFO and FAD payout ratios were 85 percent and 88 percent respectively.

For the year, we recognized net income available to common stockholders of $1.39, adjusted FFO of $2.82, and adjusted FAD of $2.56 per diluted share.

Dividends paid for the year totaled $2.385 per share, and our adjusted FFO and FAD payout ratios were 85 percent and 93 percent respectively.

As previously announced, the Board approved our 135th consecutive dividend to be paid February 22, 2005.

In addition, as announced in the earnings release, the Board has approved a new quarterly dividend rate of 62 cents per share per quarter, commencing with the May 2005 dividend, representing an annualized increase of 3.3 percent over the previous level.

Our dividend policy is reviewed annually during the Board of Directors' January planning session.

The declaration and payment of quarterly dividends remains subject to the review and approval of our Board.

I am now moving to operating results.

Our gross revenues, including discontinued operations, were 68.9 million for the quarter.

These revenues were 92 percent from real property and 53 percent from the assisted living sector.

For the year, we recognized 253.8 million, with 91 percent from real property and 55 percent from the assisted living sector.

On the expense side, our quarterly depreciation, including discontinued operations, increased to 20.3 million from 16.1 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 wrote off 3.8 million of loans.

Our allowance now stands at 5.3 million.

Additionally, our quarterly interest expense, including discontinued operations, increased to 18.7 million from 17.1 million in the prior year as a result of the 250 million of senior unsecured notes issued in November 2003 and a 50 million of senior unsecured notes issued in September 2004 -- offset in part by savings generated from our swap agreement in the current year.

Our G&A also increased to 6.2 million in the quarter, and Ray will cover that in a few minutes with some additional comments.

Now moving to the balance sheet, we did end the quarter with net real estate investments of approximately 2.4 billion.

At December 31, 2004, the Company had investments in 394 health care facilities in 35 states with 50 operators.

As previously reported, our gross investment activity for the quarter totaled 125.9 million, and we had payoffs totaling 27.7 million, generating 98.2 million of net new investments.

We acquired 18 nursing homes and one assisted living facility for 118.2 million during the quarter.

The new lease investments have turned to 15 years in average initial yields of approximately 9.5 percent and have CPI-based increases, which would yield approximately 11.3 percent over the term of the leases.

Our credit profile remains stable.

Our leverage remains low at 34-percent debt-to-total-market cap at the end of the quarter.

Our interest coverage for the full year is solid at 3.24 times.

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

Our debt maturity schedule is also in good shape at this point.

We only have 6.3 million of mortgage payments due in 2005, excluding the 30 million revolver, which is on an annual renewal basis.

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

Last thing on the capital raising front, our enhanced career plan continues to do well.

We issued 358,000 shares in the fourth quarter, generating 12.6 million.

And for the full year, we issued 1.5 million shares via our DRIP, generating 51.6 million.

We would continue to expect issuing approximately 300,000 to 400,000 shares per quarter through the DRIP going forward.

And at this point, I will turn it over to Ray to further discuss your financial results.

Thanks, Scott.

First, I would like to talk a little bit about our G&A and give you a little bit of color on that.

It increased to 6.2 million versus 3.6 million in the prior quarter.

Of this 2.6 million sequential increase, approximately 2 million or 4 cents per share was not anticipated in our previous guidance for 2004.

Approximately half of this 2 million is comprised of professional service fees with additional taxes, compensation expenses and transition costs associated with removal of an underperforming operator comprising the remainder.

Going forward, we anticipate G&A to be roughly in the 17.5 to 18.5 million for the full year 2005.

Regarding impairments from write-offs, we did transition a portfolio of 11 properties from an underperforming operator to three new operators during the quarter.

All three operators have properties within our portfolio, and we are optimistic of the performance of these facilities will improve post transition.

As a result of this process, we took a $3.8 million write-off, related to outstanding loans with the prior operator.

As we said before, we will continue to actively capitalize on opportunities to improve the overall quality of the portfolio by weeding out our problem facilities or operators and take whatever write-offs or impairments are necessary.

Next, I would like to talk a little bit about loans on nonaccrual.

This number represents loan balances on our books for which we're not recognizing any interest.

We began calendar 2004 with a loan nonaccural balance of 30.5 million.

Our nonaccrual balance then declined to approximately 17 million at the end of the second quarter.

At the end of the third quarter, we increased our nonaccural balance to 38.5 million due to the addition of loan balances totaling 21.5 million with five different operators, most of whom are regional assisted living providers.

Again, in the fourth quarter, our nonaccrual balance declined to 35.9 million through the previously described replacement of one underperforming operator, which had an outstanding loan on nonaccrual.

The weighted average yield of the contractual interest payment is approximately 12.5 percent.

Going forward, we will continue to provide quarterly commentary to keep everyone apprised of any changes to the balances of these loans.

At this point, I would like to shift to portfolio matters.

Please note that the coverage stats reflect last 12 months of activity through third quarter '04 -- and balances, facilities and bed counts reflected amounts as of December 31.

Our overall payment coverage is at approximately 1.78 times, an increase of 7-basis points from the prior quarter.

Our portfolio has 98-percent stable assets. 90 percent of our properties are owned.

And 85 percent of our owned assets are in master leases.

At the quarter-end, our assisted living portfolio had 234 facilities, 15,776 units, and an investment balance of approximately 1.3 billion.

To stabilize portfolio, we had 230 facilities with 15,115 units and an investment balance of roughly the same in payment coverage of 1.45 times, an increase of 1-basis point in the prior quarter.

We only have two assisted living facilities -- and Philip representing less than 1 percent of our revenues.

Our skilled nursing portfolio had 152 facilities with 20,975 beds and an investment balance of 965 million.

Our payment coverage is strong at 2.11 times, an increase of 5-basis points from the prior quarter.

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

As announced, we are reducing our 2005 guidance and now expect to report net income available to common stockholders in the range of $1.39 to $1.47 per diluted share and FFO of 2.90 to 2.98 per diluted share.

The guidance assumes net new investments of 200 million with leases that will not require straight-line rent.

The Company expects to record straight-line rent of approximately 14 million for the full year 2005 before any payments outside of normal rental payments.

There are three primary factors that have contributed to our 8 cents reduction in the forecast.

First, we now anticipate dispositions of two high-yielding investments during early 2005 that were not in the previous guidance.

These investments total approximately $50 million and generate a blended yield of approximately 12.5 percent.

Accordingly, we have adjusted our net new investment guidance to 200 million, down from the previously estimated 250.

Based on the assumption that the proceeds would be initially used to pay down a portion of the line of credit balance and then later reinvested at 9 to 9.5 percent, this would represent an approximate 1.6 million or 3 cents per share reduction in our forecast.

Second, as a result of ongoing professional service fees, our currently anticipated 2005 G&A is 17.5 to 18.5 million, approximately 1 million or 2 cents per share higher than previously anticipated.

Third, through a successful transition process to replace an underperforming operator during the fourth quarter, we provided one of the replacement officers with a rent accrual during the first 6 months of 2005.

This item resulted in an incremental reduction to our 2005 forecast of approximately 1.65 million or 3 cents per share.

Please note -- we have provided a reconciliation of FAD within our press release and forecast 2005 FAD in the range of 2.65 to 2.73 per share, based on estimated straight-line rent of 14 million in 2005.

This 2.65 to 2.73 per share FAD guidance for 2005 represents a 10 to 14 percent growth over 2004 recurring FAD of 2.40 per share, which again excludes the impact of any potential one-time cash payments the Company may receive in 2005 and the actual 8.1 million in one-time cash payments we received in 2004.

Our guidance does not account for any impairments or unanticipated additions to the loan loss reserve.

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

Please see the earnings release for reconciliation of the outlook.

That completes my report, and I will turn it back to George.

Thank you, Ray.

We will just open for questions.

(OPERATOR INSTRUCTIONS).

Robert Belzer, Prudential Equity Group.

A few questions -- first, are you going to identify the operator, where you restructured the investments?

No, we're not.

Can I get a little indication of why you would withhold who it was?

First of all, we have always taken a position that with regional local operators, we have been very careful about keeping their names confidential.

And this is a tough situation for the operator as well.

The operator underperformed, and we're not going to do anything to further harm him.

Do have any additional investments with this operator?

No, we took all the investments away from the operator.

We are very disappointed with that operator and for that operator to some degree as well.

We went pretty far down the road with him, thinking that the Company would turn the corner.

And it just could not get there.

And could you indicate the total investment balance and whether the investments are completely transitioned at this point with new executed leases?

We will get you the number, and they are all transitioned.

Yes, it is roughly 65 million, Robert.

And they have all been transitioned.

Okay.

And then last year when you reduced your straight-line rent balance, was there any in that number related to this operator?

The question was -- was there any straight-line balance related to this operator?

No, there was not.

And that was when you took this reduction -- that would be last year?

Okay.

How about the increase in the nonaccrual balance in the third quarter -- was that related to this operator?

No, it went down.

It actually went down.

I was speaking to the increase in the 20 million.

(Indiscernible)

Michael Dinwer (ph), UBS.

The first question I have is -- why are you selling the two properties?

Is it purely to generate some liquidity or is there another reason?

We have plenty of liquidity.

There are two really unexpected developments.

One relates to sub debt and frankly, as I said in my initial comments, we utilize sub debt sparingly, selectively.

And we would like to see it repaid.

It's a vehicle to help companies grow and become a more important part of our portfolio.

But when we have an opportunity to have the sub debt repaid and available for recycling, we think that is a very positive development.

We have had a lot of sub debt repaid in the last 6 months, 9 months, and that is just fine with us.

That is how it is supposed to be used.

On the other one -- we are not going to say too much about that yet.

Only that it is a one-off asset.

If the matter closes, we will recognize a significant gain on that asset.

And on balance, we decided not to hold off the ability of the operator to essentially sell the assets and also make a quite a bit of money for the people involved.

So, both are a little different.

In many respects, I guess it hurts some of our earnings going forward, but we think it is the right thing to do.

Okay.

My second question is kind of a follow-up to that.

It looks like your bank lines are fairly well drawn at this point -- any plans or thoughts on timing for restoring that capacity?

What are we -- ?

151 at the end of year.

We have $180, $190 million available.

And with the payouts coming in, we are in very good shape from a liquidity standpoint.

Plus an approximate 50 million or so from the DRIP.

So, we have plenty of liquidity with lots of dry powder.

We are in very, very good shape.

And our access to capital, especially on that market, is very strong, as witnessed by our 6 percent deal last year or late the previous year.

(OPERATOR INSTRUCTIONS).

Robert Mains, Advest.

A couple questions -- first of all, in the last couple quarters your -- the reported number for straight-line rent has been netted against prepayments.

Do you have any prepayments in the current quarter?

If you flip on the earnings release to Exhibit 13, that outlines the reconciliation.

Okay.

I can do that.

And then the second question -- digging a little bit into the G&A issue.

The unanticipated increase in service fees -- can you kind of describe what's going on there, and why it is persisting?

Sir, what sort of fees those are specifically?

Yes, when we look at our budgeted numbers for the year, we typically look at something in the range of 60- to 70-basis points of G&A.

And this year, when we look at our accounting and legal fees in the fourth quarter, we ended up coming in higher than we anticipated.

A lot of that, Rob, is Sarbanes-Oxley.

And we incurred additional costs and expenses certainly relating to the transitioning of properties.

And finally, as I indicated in my opening remarks, we geared up to prepare ourselves to be a $3 billion, $4 billion company.

We've added great personnel.

But all of that hit this year.

We are not at all pleased about not having updated our guidance to reflect it.

So believe me, we are not happy about this.

In many respects, you can look at it almost as though you would think that with size; maybe we could heat up some economies of scale and knock the 60 to 70 down a bit.

But to some degree, it is the transitioning of assets in Sarbanes-Oxley; it is additional costs that are just keeping us up in that range.

And I guess we don't foresee that improving markedly, given the environment we are all operating under -- unfortunately.

Okay.

So if I were to look into '05, I guess what you're saying is -- part of it is Sarbanes-Oxley runoff.

But also part of it -- is you've just kind of built a bigger organization.

Is that a fair assessment?

I think that is fair.

Last question I have -- sounds like you are still getting F40 (ph) comments about assisted living pricing -- sounds like you are still getting okay pricing in the nursing home sector.

Has this Beverly transaction changed anything over the last couple of weeks, or is it too early to tell?

Well, they seem to not be exactly getting along at the moment.

True enough.

So we will have to see how that goes.

Certainly, that could indicate some heating up of the process or some recognition that perhaps the nursing home stocks, at least in the public arena, are undervalued at least to some people as you look at underlying assets.

But I guess, I think our group doesn't see that changing that markedly.

There is an overhang relating to potential changes to the rugs refinements, so called rugs refinements action.

Frankly, I think many investors look at skilled nursing as somewhat more complicated, complex, arcane if you will, than investing in high-end assisted living facilities that people think they know a lot about.

We do not look at it -- we do not look for it to overheat.

But certainly, the Beverly transaction will be watched very carefully.

Richard Finnick (ph), RD Finnick (ph) & Co.

I would like you to extend, if you would, upon the growth of the nonaccruals, coupled with the reduction in the loan loss reserve -- and just some language, which would afford me some comfort into the adequacy of the loan loss reserve in that regard.

Well we -- and Paul, you might want to comment on this too.

But we go through the adequacy of our loan loss allowance usually at the end of the year.

We are required to look at it every quarter and go through that with our audit committee and with our outside auditors to make sure it is adequate.

You might note that I believe we are still the only company in the healthcare REIT's sector that does take a provision quarterly through our income statement.

It affects income; it affects FFO.

And we build it up to be conservative.

And if either the audit committee or the management team or the auditors thought it wasn't adequate, we would increase the reserve or allowance accordingly.

The other point I would make to you is that the nonaccrual, that number has gone up and down.

It has been comprised of different companies at different times.

Many times, the nonaccrual loans relate to folks that are still in development or Philip, so that it is natural to be very conservative.

And we always expect -- just like we will take some charges against our loan loss that we will have some companies whose loans we have to put on nonaccrual.

We just think it's part of the investing game.

We feel that we are conservative in terms of how we try to reserve, protect ourselves from possible issues.

Is that okay --sufficient?

That's good, thank you.

Scott O'Shea, Deutsche Bank.

Just wanted to make sure I understand kind of what's going on with the loans -- you had 69 million of loans roughly with this operator?

And then, you wrote off almost four in transition 65's end of three new operators?

Is that basically --

We had an investment balance of roughly 65 million, Scott, comprised of leases and loans.

And in connection with transitioning into the new operator, we ended up writing off roughly 3.6 million. 3.8, I am sorry.

So these were not completely cross-defaulted then within the pool -- or cross-collateralized?

They were all parts of a master lease.

They were.

But as part of our deal with the new operator, we ended up not recovering that component of it.

Okay.

Have the properties been rolled into master leases with the new operators then?

We had a single property in one case.

So that hasn't been yet.

But it is an operator that has been in our existing portfolio who -- actually it is an executive officer from one of our operators, who we are backing to grow his company.

So it will become part of a master lease.

Otherwise, the other two are master leases.

Okay.

For the properties that are on nonaccrual now, what type of properties are those?

Are those mostly SMIF's?

Yes.

No -- mostly assisted living.

Mostly AL -- with the rest of your portfolio in the industry doing okay, what is it about these properties that -- why they are struggling?

A couple of them have properties still in Philip.

And we wanted to be conservative and make sure they got full.

And then generally, when we look at our collectibility analysis at the end of the quarter, we want to make sure we get repaid our investment balance plus our loan balance and apply first dollars to that.

So that is what we've done.

Okay.

On the sub-debt investments, when do you expect to get that back?

Is that a first-quarter event?

We think it will happen in the first quarter.

Okay.

And you mentioned another purchase option exercise -- is that the case?

Yes, we --

And that's for 20 -- can you give us some dollar amounts and timing on that one?

Likely -- second quarter.

Yes, that all happens roughly second quarter.

It will be over half the amount we expect.

Over half the amount -- I am sorry.

We expect $50 million of prepayments in dispositions.

And it will be over half of that.

Quick question here on the rental book -- are you current on all the January rents?

Going through our delinquency roster, Scott, we have no one who is delinquent more than 90 days, which is our delinquency policy.

The sub-debt investments -- are those corporate loans?

Or are those second mortgages?

Typically those are loans at the corporate entity level.

And when would these have otherwise -- what's the actual maturity date that you have in your books?

For the loan we expect to pay off?

Yes.

I think that was about roughly 4 to 5 more years remaining.

Have you seen any increase in inquires on purchase options at this point?

It looks like you're getting one from this one operator -- anything else in the book that you might have been contacted on?

There are certainly people who have inquired generally about their ability to take us out because of the low-interest rate environment.

And generally, we are not terribly interested in that unless it fits into our plans for repositioning our portfolio or to reflect different points of emphasis.

And in fact, once the particular transaction closes second quarter, we will be able to discuss that matter and why we decided to take a gain and why we were willing to do that.

But it is generally -- this is not what you would expect to see happen.

We like to have our leases out there 10 to 15 years and to recognize the full revenue stream during that period.

Again, because of confidentiality and because of some concerns that either or both might not close, we do not want to go into more detail.

But generally, we have a 12-year average life.

And we think that probably is one of the strengths of this Company.

That by going out and doing all of the transactions that we did 2002 through 2004, doubling the size and extending our average life out to 12 years -- we want that revenue stream generally.

So this is a bit different.

And again, we will talk about it further when we're able to do so.

Okay.

As you look through your portfolio in terms of what could come back to you under purchase options, what kind of options are embedded in the portfolio that somebody could exercise say, right now?

Hold on, one second.

In most cases, if you look at the lease maturity schedule in the exhibits, that is accurate.

We have some properties out there with early purchase options with additional fees that are roughly equivalent to the economic loss.

We are not going through the remainder of the say 15-year term.

Those are usually -- some people have some 8- to 10-year early option periods that are structured that way.

Ray, I do not know if you give him a rough --

Okay, so typically it is the end of the lease term they've got the option purchase?

It's generally whatever the lease term is -- 10 to 15 years and they have it at the last 6 months of that time period.

We do have several that are shorter but with a make-up fee that is roughly equal to the remaining economic benefit to us.

But those are few.

One last question and I will give up the floor.

The pipeline -- what is the acquisition pipeline look right now?

Scott, we're looking at a number of transactions right now.

As you know, it is an imprecise business.

And I think it is mostly looking at expansions of facilities with existing operators, adding new properties with existing operators, and we have a few new operators that we're looking at developing a relationship with.

And our net guidance is something we think is very doable, but it is not factoring in any large transactions.

Philip Martin, Stifel Nicolaus.

A couple of things -- I'm going to jump around here a little bit.

Regarding the $65 million portfolio of the 11 properties, how long have these properties been in the portfolio?

I think we acquired them in the late '90s, Philip.

Okay, so late '90s -- they were assisted living?

There were some assisted and some skilled.

Okay, 50/50 roughly -- or what was the breakdown there?

Roughly, six of the 11 were nursing homes.

And that was a larger investment balance.

Okay.

So the nonaccrual balance -- mostly assisted living -- do you put all of the new development in Philip?

Or is it more of a case-by-case, scenario-by-scenario situation there?

It is a property-by-property analysis.

Okay.

And then, again on the $50 million here coming up -- 20 million is roughly the sub debt, and then the 25 to 30 million is just one-off asset.

Is that the rough breakdown?

That is roughly accurate.

The sub debt is that -- this is averaging 12.5 percent.

The sub debt loan was where -- 17 to 18 percent?

No, it was lower than that.

The average -- did you say what type of asset that was?

It was a corporate loan.

I'm sorry on the 25 to 30 million, the one-off assets -- is that a -- ?

No, we didn't.

We are revising our guidance to reflect what we think is going to happen.

But it is not a done deal.

But it is not a done deal.

That's more of a second-quarter timing.

We will give you a lot more color once it happens.

Beyond this 50 million, the plan or -- what is budgeted for the rest -- I know you have given guidance of 200 million net investments; you've taken that down by the 50.

It is from 250 to 200.

It's now 200.

In terms of purchase options and prepayments beyond this, what are you budgeting?

I guess my question is -- gross investments of acts, your net number is 200 now -- just trying to look for aggregates, prepayments, purchase options -- ?

Sure.

We think that net number is a good number.

We could see some more dispositions.

We are not anticipating a large number.

And we think we'll have investments that will meet that guidance number.

And your gross investment number for the year -- you're planning is what?

Your net is 200.

We are really trying to keep to the net concept because it is such an art and not a science.

But we could have another 50 million of dispositions.

And therefore, the number would be 250.

But as Ray says, we are very comfortable that we can get to the 200 million net.

Okay.

The last question here -- I just missed this and if you could repeat it -- the 1.6 million rent deferral -- 6 months' worth, I missed the comment there -- if you could repeat what you mentioned there?

What I said, Philip, was that one of the operators we transitioned assets to -- we gave him a rent deferral for 6 months.

Okay.

So that's through the first half?

Perfect.

Jerry Doctrow, Legg Mason.

I had some problems trying to queue in.

I think -- obviously a lot of moving pieces through these earnings.

I think that sort of concerns me the most -- is just trying to understand kind of where your guidance was last quarter versus this quarter.

Because as we went back looking over some the comments, I clearly did not get the sense that there was as much stuff in -- as many problem loans as indeed are sort of playing out.

Like with this 11 that you transitioned, my recollection last quarter was we were talking about maybe three or four properties that were having problems.

I was wondering -- if you can give a little bit of feel -- one, were those assisted living properties?

How do they kind of come about, or am I just misunderstanding what was happening last quarter?

And also maybe -- again, just trying to get comfortable with the outlook here that there are not some other surprises.

Gary, I think that the three or four you're referring to -- we have talked about three or four operators that we consider on the fence if you well.

And one of the operators, we had 11 properties with them.

And we finally decided in the third quarter -- excuse me, in the fourth quarter that it was time to move it to a new operator.

We were tired of the old operator not meeting performance expectations, so we decided to move it.

And it could be -- if you look at 11 properties too, the overall effect was generally negative.

There was erratic performance.

Maybe of the 11, three or four of the properties were particularly poorly operated, we thought.

And we moved them as a batch to minimize the harm to the Company.

We have the right to do that.

So not all of those properties were necessarily bad properties, but we that we could get them to a better operator that would provide better quality care and run them much more efficiently.

And we are very pleased with the success of our operators.

I must say that I am a little surprised that you're surprised.

We don't think that taking a $3.5 to $4 million charge against our loan loss allowance, it was up around $8 or $9 million -- to take care of a problem and to move on is at all on untoured.

I have seen a number of people in the healthcare REIT sector take impairments and loan loss charges over $10, $11, $12 million.

And I don't even think that is bad if in fact each of the REIT's is repositioning assets with better operators.

So again, I am surprised.

And I would add to that, George, we have 50 operators in our portfolio.

To make 50 perfect investment decisions is impossible.

So we are at any point in time going to have a few operators that we're concerned about.

And what is important is that we deal with it.

You guys have always been active managers for your portfolios, which again, I think is something that you just need to do.

And obviously, no one in the investment business expects you to be perfect on everyone.

I think again the only issue that I have is really sort of the order of magnitude and try to be clear on that -- sort of go forward because again -- clearly the impression I got was the three or four -- say if we've got another three or four that are still remaining in the portfolio -- what magnitude of properties and stuff do you think are sort of at risk or at issue as we go into '05?

It always seems like there are four or five, and they change around, Jerry, okay?

You know, it's just impossible for us to tell you that an operator won't lose its focus.

This particular operator -- when it began did a little bit better.

It was not able to bring its operating infrastructure and focus to the level necessary to run assisted living and/or nursing homes.

This is a very tough business.

And people frankly who are pretty good initially don't always stay there.

They are just very dependent upon their ability to recruit ED's, keep them there in the facilities or administrators, in the case of nursing homes.

And we really can see shifts that are fairly profound.

But I think it will be fairly interesting to report back to you at some point what these three new operators do.

Because we really find that, in my judgment, most of the problems and facilities are not necessarily the dollar amount per say or what you pay for them, it's more that an operator does not maintain its focus.

And that's when we move them.

And we will not hesitate to do it again.

I've always told you that during the course of the year, if I have to move properties and take that charge of $2 to $4 million or whatever it might be, or an impairment to move properties -- I'm going to do that -- I am not going to wait and worry about what kind of care is being given to the residents in our facilities.

That is something we really strongly are concerned about.

And if you look at how we deal with non-accruals, we are very conservative on that, okay?

So if we ever move a property, it could well be that a property is on non-accrual or we are not charging full rent or full interest anyway running through the numbers.

So probably the effect is not that great in most cases.

As I said in my opening remarks, on this particular operator, I think probably we waited a year too long.

And that's not what we typically do.

We are pretty clear with operators and move a little faster.

So shame on us for maybe waiting a little too long.

But you will see more.

They will have very minimal effect, we think.

But that's just part of the long-term care investing game.

Yes, I guess that is the only thing that is surprising -- is again, particularly with the rent deferrals and stuff, there is a little bit more impact here than I would have expected.

But on the --

We are not totally sure that that operator needed that whole rent deferral too.

That was a subject of much debate.

But those things happen.

And there is nothing else in terms of straight lining or anything else in terms of the transition leases that make them out of the ordinary?

They are just -- the other leases that you have transitioned here are just basically all --

Cash -- booking cash.

And I guess my other issue is just on the straight line.

Anything else going on there that we might anticipate?

Or is that straight-line rent issue really sort of behind us in terms of any further changes in the accounting and stuff there?

You know that any time we have mused a little bit about whether or not we should look at existing operators who have straight lining and whether we should even consider going back to them and convert them to organic growth -- eliminate the straight line receivable.

And Jerry, as we looked at it more, we thought, we are about let's say approximately 40 percent right now probably organic growth.

And maybe another 20 percent that might have some straight lining but also has some variable based upon either incremental gross revenues or some other factor.

So we sort of think we are pretty good.

And then when we looked at when FAD and FFO would converge, when they would meet -- and got a number 2008, 2009 with a steady decrease thereafter.

We said, given the three largest operators that remained on straight line and their coverage which is over 1.5, we just decided why roil (ph) the markets -- we are very comfortable, okay?

But it is a good question, and we certainly thought about it internally as a managing group and decided this was behind us.

I am all in favor of not roiling (ph) the market.

And then just my last thing -- just in terms of just clarifying your guidance because you used this concept of, I guess, it was ongoing or recurring FAD.

I wonder if you could just clarify a little bit on what's in, what's out.

Also maybe your 265 to 270 guidance for '05, if I've got that right -- we might in terms of reported FAD see some additional cash above and beyond from your normal course of business?

Can you just give me a little color on kind of those numbers, the '04 and '05 numbers -- and how they might change on a kind of reported basis?

Let me give you some color on it, and then Ray will follow-up.

We would also invite any comments from any of you as to what would help in terms of giving you information.

Obviously, this is an issue where we are trying to report FAD as NAREIT requires, which also reflects cash payments that would reduce -- that would have an impact on reported FAD, but then we try to get to a concept that other analysts have mentioned, which is more of a reoccurring number without the cash payments.

What would the apples-to-apples comparison be?

What we are planning to do is to report it as per NAREIT, so you can see apples-to-apples that way.

And then look at it sort of on a reoccurring non-cash payment basis -- reduction so that you can look at it that way.

Some people look at it differently.

And we are hoping that by giving both sets of numbers, you will get clarity with it.

Ray, do you want to --

Technically, Jerry, the two things that adjusts that number is prepaid rent and when we do a disposition and get repaid a straight-line balance at the time of disposition.

So our intent is to give you the number we know it is going to be without any of those events.

And when those events occur, we will provide those numbers, so you can reconcile.

And those are typically net adds.

They are net adds, that is right.

And there is just one little footnote that talks about sort of the 240, where one excludes impairments in 1 dozen.

If you just -- I think in your 240 for '04, there is a footnote if I am reading that right.

And just want to clarify --

No, that is correct.

And so, it was obviously a non-cash impairment, would that be out of FAD in both cases?

It should be.

Gains and losses are -- and impairments are just in a way anticipatory loss.

But there have been some folks over in Washington that seem to make a distinction between impairments and losses.

And so, we are trying to comply with the specific comments of the SEC, the specific position of NAREIT and yet -- to give the various analysts probably three numbers that deal with impairment, with the SEC position -- the impairment issue as really a loss, we think, and then finally without any cash payments.

So that is the best we can do.

If anybody has any suggestions, Ray, Scott, Paul and Mike would enjoy hearing from you.

Yes, I think, Jerry, we try to give you all the components.

And it is your decision on how you want to analyze them as part of investment guidance.

Greg Andrews, Green Street Advisors.

Just a follow-up on the same topic -- so, I'm really clear.

Your FFO guidance for '05 does not include any non-recurring rental cash payments, is that correct?

Correct.

And your FAD guidance for '05 does not include any non-recurring --

Correct.

Great.

Because obviously you had 8 million last year, so --

And we will have more this year.

But we don't want to give you guidance because we don't know what they are going to be.

Can we talk for a minute about the new investments in the quarter?

Were the SNIF's you bought all part of one portfolio -- with one operator?

Hold on, I'm getting the sheet out, Greg.

No, there were a couple of operators that we bought a couple portfolios with.

Okay.

What were their coverage ratios on those deals?

The coverage before management fees roughly averaged about 1.5 to 1.6.

And on this rent deferral period that you provided on some of these properties you're transitioning -- is that something that the operator kind of needs in order to sort of bridge a time period where they kind of come up to speed and improve the operations?

And I guess my concern is -- will -- if the deferral burns off after 6 months, is there a potential problem even for a new operator there?

We don't think that they needed it for the 6 months necessarily.

No, we do not think they needed it thereafter.

We didn't think they necessarily needed it now.

These assets have performed pretty well in the past.

And they will do it again.

It just needs attention and focus of an operator that is able and willing to operate in the particular six.

So, let me just try maybe to understand what happened here -- these are properties where the coverage is not particularly good today but you don't see any reason why it can't be good?

That is correct.

Just an operational issue?

It is an operational issue.

I think 90 percent of the issues are operational issues in our space.

Chris Pike, UBS.

Very quickly -- but most of my questions have been answered.

Just a couple of big picture items here -- the pipeline -- I do not think I covered you on any folks last year at this time.

In '04, you closed on a significant amount of property acquisitions.

What did the pipeline look like at this point going forward?

And how does it differ from a year ago?

I would say that our pipeline then was maybe toward 300 million we thought of possible deals, maybe a touch more.

And I might be closer to 200 now.

But I am not sure that is indicative of anything.

We suspect that it is going to be a tougher year because there's so much money in there chasing high-end ALS -- and paying too much.

So that that could hurt our deal flow.

But you know, if you really look back, Chris, to the last three years, we might have easily been a 250, 300 million each of those years but for some large transactions.

And those are very opportunistic, very sporadic.

And it is very hard to tell, so I am not quite sure -- I guess we are being more cautious even than the last 2 or 3 years.

But you never know.

And I guess lastly, please don't comment if you cannot, but -- in terms of just reconcile some the comments not only from the beginning of the call but spoken regarding liquidity and such -- it seems that you have enough dry powder in the current form to close on another 200 million of acquisitions going forward -- 250, 200 million net.

You have a significant shelf out there, and I am just trying to reconcile why you folks have a huge shelf if you're telling me that is going to be a tough road capture coming in your expectations for acquired property -- is a little more conservative but yet you have a significant shelf filed.

We were just running down our shelf.

The rule generally is you go out about 3 years anticipating what you might need.

And people tend to be as high as they can within the general rules of SEC.

And that is what we did.

Rick Murray, Raymond James.

I will try and keep it quick here.

Just a quick question -- we were trying to contemplate what gives rise to you guys reporting prepaid rent.

When we enter into a new leasing arrangement with an operator and we get a fee upfront, 1 percent typically, we treat that as prepaid rent -- and apply that against our straight-line balance.

And then recognize it over 15 years in terms of the income.

Instead of taking it all into income right away.

Okay, great.

Thanks.

And just one last question -- I do not mean to beat a dead horse here, but could you help us understand a little bit better what was sort of unexpected in the G&A line going forward -- and kind of gave rise to your expectations in that regard?

I will start.

There has been a lot of discussion internally about that too, believe me.

We are not pleased.

But I would say that the unanticipated -- legitimately unanticipated cost related to additional costs for SOX, it just seems to be endless.

Two -- the transition cost us money.

It always takes longer to move assets from one operator -- and then especially to three.

And then our compass snuck up a bit even during this year.

But frankly, we should have been a position to update our guidance and so again, this is something that we have to deal with.

And good question -- legitimately question -- we missed some.

Philip Martin, Stifel Nicolaus.

My questions on the investments made in the fourth quarter were answered, thanks.

And at this time, there are no other questions in the queue.

With that then -- on behalf of the management team here, we thank all of you for participating.

Thank you.

That concludes today's conference call.

We thank you for your participation.

You may disconnect at this time.