Welltower Inc (WELL) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Health Care REIT Inc. second-quarter 2005 earnings conference call.

Today's call is being recorded.

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, and I would now like to turn the conference over to Georgeanne Palffy of the Financial Relations Board.

Please go ahead.

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

You have received a copy of the press release late yesterday afternoon.

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 web-cast of today's call, which may be accessed through the Company's website as well.

At this time, management would like me to inform you that certain statements made during this conference call which are non-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 having said that, I would now 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.

The second quarter of 2005 was quite successful, as we completed over 187 million of quality investments.

Year-to-date, we have closed on gross investments of 250 million with dispositions totaling 33 million for net new investments through June 30 of 217 million.

On the portfolio front, our facility coverages continue to improve in all sectors, with composite coverage before management fees and after management fee coverages reaching 1.9 to 1 and 1.52 to 1, respectively.

During the last three-year period ending 12/31/04, we made gross investments of 1.6 billion at very attractive cap rates.

However, as we have indicated earlier, as 2004 unfolded, the investment environment became increasingly competitive.

That process has accelerated in 2005, especially with respect to well-located high-end assisted living facilities.

Cap rates for these facilities have reached historic lows.

In several transactions, the initial cap rates in yield appeared to be below the cost of capital, at least for Health Care REIT.

Accordingly, we have been selectively investing and improving our existing portfolio by eliminating noncore assets.

Our targets for disposition include one-off assets, underperforming assets, sub debt and loans, including loans on non-accrual.

In some cases, these dispositions would also or will also allow us to pay down the straight line receivable and reduce the straight line component of our revenue stream.

We believe we will have success in eliminating noncore assets in the last two quarters of 2005.

On the financial front, during the second quarter, we also improved our financial flexibility and lowered our cost of capital by increasing our revolving lines of credit to 540 million, reducing our all-in borrowing costs by approximately 50 basis points and extending the line for an additional three years.

In addition, we virtually eliminated any near-term refinancing risk through the issuance of 250 million in 10-year -- of 10-year notes with an effective rate of 5.91%.

And with that overview, I'll turn the call over to our President and CFO, Ray Braun, and Scott Estes, our VP-Finance, who will take you through more detail on the portfolio and financial matters.

Ray?

Thanks, George.

Please note that our earnings release is posted on the website at www.HCREIT.com under the heading press releases, and that contains a reconciliation of FAD, FFO and EBITDA to net income.

For the quarter, due to the $18.4 million debt extinguishment charge, we recognized a net loss to common stockholders of $0.03, adjusted FFO of $0.70 and adjusted FAD of $0.68 per diluted share.

FFO and FAD are adjusted for the loss on extinguishment of debt, which I will discuss in a minute.

The sequential decline in adjusted FFO per share from $0.72 to $0.70 was primarily the result of the non-recurring consent fee of $750,000 we received and discussed in the first quarter, and expected G&A expense increase on a sequential basis of $320,000 and the impact of having both a new debt issuance and the 122.5 million of '07 notes outstanding simultaneously for about a month during the 30-day call provision, and the fact that we completed virtually all of our second-quarter new investments at the end of the quarter.

Dividends paid in the second quarter were $0.62 per share and our adjusted FFO and FAD payout ratios were 89% and 91%, respectively.

As previously announced, the Board approved our 137th consecutive dividend to be paid on August 22 in the amount of $0.62 per share.

Gross revenues including discontinued operations were 68.6 million for the quarter.

These revenues were 92% from real property and 54% from assisted living.

As of June 30, we had loans aggregating 35.6 million on non-accrual.

The pool of non-accrual loans has not changed from the prior quarter.

The only change is a balance reduction due to current-quarter cash receipts applied against principal.

On the expense side, our quarterly depreciation, including discontinued ops, increased to 21 million from 17.7 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 5.9 million.

Our quarterly interest expense, including discontinued ops, increased to 20 million from 17.4 million in the prior year, primarily as a result of higher average borrowings under our unsecured lines of credit and changes in our senior secured notes.

Our quarterly G&A expense totaled 4.3 million, representing a 22% increase over 3.6 million last year, but only a $320,000 increase on a sequential basis.

We continue to diligently monitor our G&A expense line item and remain comfortable with our overall guidance for calendar year 2005 of 17.5 to 18.5 million.

Moving to the balance sheet, we entered the quarter with net real estate investments of approximately 2.6 billion.

At June 30, the Company had investments in 426 facilities in 37 states with 51 operators.

As previously reported, our gross investment activities for the quarter totaled 187.1 million, and we had payoffs totaling approximately 4.8 million, generating 182.3 million of net new investments.

New facility investments for the quarter included one mortgage loan for $4.5 million and acquisitions that totaled 172 million and included 25 skilled nursing facilities with 3490 beds for 120 million and 5 long-term acute care hospitals with 156 beds for 51 million.

The balance of the gross investments consisted primarily of construction and other advances for existing operators.

The new lease investments have terms of 15 years and average yields of approximately 9.4% and average expected yields over the term of the investment of approximately 11.15%.

Our credit profile remains stable.

Leverage is reasonable at 37% debt-to-total market cap.

We would anticipate our line balance declining due to the significant amount of dispositions expected for the remainder of the year.

Our adjusted interest coverage for the year to date is solid at 3.26 times, which excludes the impact of the loss on extinguishment of debt.

Our debt maturity schedule is in good shape.

We have only $1.7 million of mortgage payments due in 2005.

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

Our DRIP program continues to do well.

We issued 329,000 shares in the second quarter, generating $11 million.

We would expect issuing approximately 2 to 300,000 shares per quarter through our DRIP going forward.

As we previously announced, we issued $250 million in senior unsecured notes maturing in May 2015, with a coupon of 5.875% and an effective rate of 5.913%.

We used proceeds from this offering to redeem all of our $50 million 8.17% notes due March of '06 to redeem 122.5 million of our 175 million 7.5% notes due in August of '07 and to complete a public tender offer for 57.7 million of our $100 million 7.625 notes due March of '08.

In connection with the redemptions and tender offer we, recorded an $18.4 million charge in the quarter to reflect premium space to retire the existing debt.

On the bank line front, we closed on a $500 million unsecured revolving credit facility to replace our $310 million facility, which is scheduled to mature in May of '06.

Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, reduces our all-in borrowing costs by approximately 50 basis points, extends our agreement to June of '08 and permits us to increase the facility by 50 million through an accordion feature during the first 24 months.

We also closed on a $40 million unsecured line of credit facility to replace our existing $30 million credit facility, which matured in May of '05.

The new facility is an annual revolver scheduled to mature in May of '06 and reflects reduced pricing from the previous facility.

And with that, I will turn it over to Scott Estes, who will talk a little bit about the portfolio.

Thanks, Ray.

At this point I would like to shift our discussion to portfolio matters.

Please note that covered statistics reflect latest 12-month activity through 1Q '05, whereas balances, facilities and bed counts reflect amounts as of June 30, 2005.

Our overall payment coverage is at approximately 1.90 times, an increase of 6 basis points from the prior quarter.

Our portfolio is 99% stable assets, 91% of our properties are owned and 85% of our owned assets are in master leases.

At quarter end, our assisted living portfolio was comprised of 234 facilities with 15,700 units and an investment balance of approximately 1.3 billion.

The stabilized portfolio is comprised of 231 facilities with 15,400 units, an investment balance of 1.3 billion and payment coverage of 1.49 times, an increase of 2 basis points from the prior quarter.

Our skilled nursing portfolio is comprised of 179 facilities with 24,500 beds and an investment balance of 1.1 billion.

Our payment coverage remains strong at 2.18 times, an increase of 3 basis points from the prior quarter.

Next, I would like to provide an update on the reimbursement front.

First, in Medicare, CMS issued a proposed rule to refine the Resource Utilization Group, or RUG, system effective January 1 of 2006.

The refinement is expected to result in no change in aggregate spending in fiscal '06 versus the previous year.

Due to the timing of the various refinements, the expected impact in fiscal '07 and thereafter is a reduction in aggregate spending of roughly 1%, assuming no other changes.

The net impact varies among geographical regions, RUG categories and urban versus nonurban locations.

On average, we would expect Medicare rates in our portfolios to decrease 0.3% in fiscal 2006, which will have a slightly negative impact on payment coverage.

In addition, because reimbursement rates for certain RUGs will decline under the new system, operators must adjust their patient mix to maximize profitability.

Payment coverage may come under pressure until operators make the transition.

Next, with respect to Medicaid, not all state budgets have been finalized at this point, but on average, we expect Medicaid rates in the nursing home portfolios to increase by 3% in fiscal 2006.

We expect the average rate increase to be neutral to our payment coverage.

None of our 26 states are expected to enact an across-the-board rate cut.

However, due to either case mix adjustments or rate freezes, we expect rates to be essentially flat in nine of our states, including Ohio, Texas, Missouri, Illinois, Mississippi, Georgia, Maryland, Oklahoma and Nevada.

We do not expect the new rates to cause additional payment risk in these states, however.

I would like to now discuss management's expectations for 2005, and of course, these comments are management's expectations only and are subject to the Safe Harbor statement read in the beginning of our call.

All expectations discussed regarding new investments, asset dispositions and earnings are subject to the factors listed in the Safe Harbor statement.

2005 earnings, as previously announced, the Company revised its 2005 net investment guidance to a range of 100 to 200 million from the previous guidance of 200 million.

The revision in net investment guidance is due to an increase in the anticipated dispositions pursuant to our active asset management program to a range of approximately 50 to 200 million during the remainder of the year.

The new investments will primarily comprise leases that will not require rents to be straight lines.

Due to the onetime debt extinguishment charge, the Company now expects to report net income available to common stockholders in the range of $1.05 to $1.13 per diluted share.

Excluding a loss on extinguishment of debt, the Company is reaffirming its guidance for 2005 FFO in the range of $2.90 to $2.98 per diluted share and the Company now expects to record straight-line rent of approximately 10 million for the full-year 2005 before any additional cash payments outside normal monthly rental payments and is increasing its 2005 FAD guidance to a range of $2.72 to $2.80 from the previous $2.66 to $2.74 per diluted share.

The Company continues to anticipate the G&A expenses will total between 17.5 and 18.5 million for the full-year 2005.

That concludes our report, and we will turn it back to you, George.

Thanks very much, Scott.

We are very pleased with the improvements in our portfolio -- the very strong coverages and the quality of our operator base.

The portfolio quality should strengthen further as we continue our rigorous portfolio management and allocate and reallocate our resources to the best operators and properties.

This strength, together with excellent access to attractively priced capital, positions us to capture solid investments during these very competitive investment times and to step up our investment volumes when improved investment opportunities become available.

And with that, we'll open for questions.

(Operator Instructions).

Jerry Doctrow, Legg Mason.

I just had a few things.

On the straight-line range, you had this -- I think it was $2.4 million of sort of cash that was sort of outside the normal stuff.

It didn't come in, though, on the income statement as far as I could tell in terms of fees and stuff.

I was just wondering if I could get a little more color on sort of what that is and whether we would expect more of that as we go through the rest of the year?

That's primarily fees we get upon closing the transaction, such as prepaid rents, and when we sell an asset and record the gains, we pay the straight-line rather than at the time we sell it.

So that's what's included in the 2.4.

Okay, but it doesn't come into the basic income statement?

It's just a straight-line calculation?

It's just reducing a straight-line receivable?

That's correct.

And we've gotten the cash, so we reduce the receivable.

FIN 46, which a couple of your colleagues have had issues like this where they are making some kind of loans for operator -- covering, I guess, operating cash flows and that sort of thing.

Is that something you guys have taken a look at and any issues we should be worrying about in your portfolio?

Because I know you do some mezz financing.

And I just had that question.

We absolutely have been looking at it for the last several quarters, since it was enacted, and we have models set up that our auditing firm has reviewed, and we've analyzed all of our investments and concluded that FIN 46 was inapplicable.

Just one or two other things quick, if I could.

We have had a common offering sort of in our modeling assumptions for sort of the second half of the year with the increased dispositions -- do you have the need to issue equity sort of beyond the DRIP stuff?

At this point, we would anticipate that our line combined with our disposition activity will provide sufficient cash to meet our acquisition expectations.

And then one last thing and I will let somebody else ask.

We had a deferred rent item of like 825,000 from a deal I think you had done in the first quarter coming back on -- I think it was in third quarter.

Is that still sort of on track?

That's correct, Jerry.

We did grant a rent concession for the first two quarters of '05 in connection with the transition of some properties and that has now expired, and we've in fact received the rent for the quarter -- or for the month.

Lou Taylor, Deutsche Bank.

Can you guys just go over -- you had mentioned earlier in the call on the lower transaction fees for the quarter.

Just what were the causes again?

We raised -- I can describe it better -- that we had a, what, $750,000 consent fee from -- on a potential sale of a hospital that didn't actually occur during the first quarter.

So it's essentially non-recurring in nature.

That's what I thought, okay.

Secondly, on the debt extinguishment charge came in around 18.5.

You guys thought it would be 17.5 to 18.

What caused it to be outside the range or caused it to be a little bit higher?

We underestimated some of the unamortized cost.

And when we got into it, we saw it was about another $0.5 million.

And what's the ROE on the debt extinguishment payment that you made as you guys look at it?

Well, I guess the way we looked at it is there were three components.

One was the debt maturity schedule and extending it out.

Two was the immediate interest savings over the term of the remaining investments, which was roughly 7.5 to $8 million.

And then third was the hedge against future rises in interest rates, which was approximately -- if interest rates over the next three years go up 75 basis points, we made money on it.

So, that's kind of the way we analyzed it, really.

Okay, but just on an ROE basis, what does it come out to be?

Yes, I mean, I don't have that calculation.

You guys had mentioned about cap rates being in some instances being below cost to capital.

Can you just translate that into a nominal number for us?

Into a what?

A nominal number, as in cap rates 8, 9, 10, 11%?

I mean, where -- how far have they gotten?

Well, we're seeing cap rates as low -- in the fives, we think, Lou, and 6, 7, 8%, and depending on how one determines cost to capital, it's clearly below a blended cost to capital for virtually all of the health care REITs.

If one is to take his dividend rate somehow as the equity cost to capital as some sort of incremental cost to capital, which we don't think is appropriate, then one could perhaps justify going down to these cap rates, but it's -- for everybody's assessment of his or her own cost to capital.

We are not inclined to think that the dividend rate really equates with the dividend yield.

We think that there has to be a higher expectation in terms of issuing equity and in terms of, therefore, the cost of that equity capital.

So it's for everyone to do, Lou.

I made a general comment and at least the way we look at things, fairly conservatively, some of the returns are inadequate.

Just last question.

In terms of your acquisitions and dispositions this year, what do you think the average cap rate will be?

I would think on dispositions, the average cap rate is going to be 11 to 12 and on acquisitions, it's going to be 9 to 10.

(Operator Instructions).

Greg Andrews, Green Street Advisors.

Could you talk a little bit more about the acquisitions made during the quarter?

Let's maybe start with the specialty care facilities, since you don't have a big concentration in that area.

Could you just tell us a little bit about what you bought and why?

In the specialty care area, it was five LTACs with 156 beds, and we paid roughly $51 million for those.

We have some other LTACs in our specialty care portfolio, and we have seen good results from that asset class and thought this investment made sense.

We feel it's a very reasonable extension from skilled nursing.

Yes, I can see that.

Does the -- you mentioned kind of the blended yield on all the investments made during the quarter.

Would these be at a higher yield or a lower yield to that sort of blended average?

They are roughly at the blended average.

And if I look at it on a per-bed basis, the cost here is significantly higher than what's in your portfolio.

Is there anything that kind of explains that difference?

It is higher, but when we look at the averages for the asset class and some of the recent transactions, we believe we got a good valuation on those assets.

Okay.

And finally, on that group in terms of coverage ratio, what kind of coverage ratio were those underwritten at?

Roughly 1.5 times.

And you don't feel like it needs to be higher for that facility -- this type of facility compared to nursing homes just because of, say, the higher CapEx?

No.

We were comfortable with our underwriting on this.

Okay.

And then in terms of the nursing home spot during the quarter, could you talk a little bit about where those are located?

And it looks like the per-bed cost there was on the low end.

Why is that the case?

I mean, 10 of the buildings were in Texas, four were in Florida, we had a couple in Ohio and the rest were broken up among several different states.

We thought the per-bed cost ranging between 25,000 and 45,000 depending upon the state were in line with our expectations.

Okay, and turning to the balance sheet, it looks like your construction in progress is now down to almost nil.

When did those projects roll out during the quarter?

And are you pretty much done with funding construction at this point?

Most of the projects that were construction converted toward the end of the quarter, and we only have one remaining property in construction.

But given what our operators are talking to us about, we would expect that we would have potentially some more construction in progress going forward and we're also looking at some development opportunities.

Yes, I mean, last call we talked about additions to existing facilities that have wait lists, which to us are the most solid of all investments.

And there are operators in our portfolio who have some development opportunities that could -- that we would agree to fund and they would be part of a master lease.

So, I think you should look for additional construction in progress.

Okay, great.

Thanks.

And then one last question.

The dispositions that you are talking about in the second half, are those things that are currently under contract or things that you'd hoped to put on your contract by the end of the year?

We have an agreement with our operators.

We think it is in our mutual self-interest and will really improve our portfolio and give them the great opportunity to access lower-cost capital as well.

In terms of the operators, they do have agreements -- generally, they have agreements with financiers to accomplish their goals.

Now, whether all of them close and whether all the conditions are met, we're not going to speculate too much, although we think in this environment, there is a high probability that a large percentage will actually close.

Ray, anything else on it?

Any color?

I think that's it.

Robert Belzer, Prudential Equity Group.

Just a few questions.

Currently have a couple more on acquisition as far as in the quarter.

You mentioned I believe that they were closed towards the end of the quarter, but was there any impact on earnings from the acquisitions in the quarter?

I think they were all closed virtually at the end of the quarter, Robert.

We had one day of earnings from them.

Okay, great.

And you mentioned the coverage of 1.5 on the acquisitions.

Was that blended for both the nursing homes and the LTACs?

No. that was what the LTACs were underwritten to.

Okay, and how about the nursing homes, what was the coverage for the nursing home investments?

I think our expectation on those coverages was 125.

Is that after management fees?

Yes.

And was this transaction with one operator?

Yes.

Well, two operators, but the bulk of it was with one.

And was its split between the LTACs and the nursing homes in terms of operators?

Robert, could you repeat that question (multiple speakers)

Did you ask for the breakdown?

Yes, I'm just wondering if the nursing homes were a separate operator from the LTACs?

No, one of the portfolios we acquired was both LTAC and nursing homes.

(multiple speakers) Same operator.

Okay, and then on -- just a question related to your disposition specific to the mortgages.

Are you providing any incentive to have the mortgages paid off?

No, no.

We expect payment in full, including some unaccrued interest.

And you're not waiving any prepayment penalties or any kinds of (multiple speakers)?

No.

As George mentioned in his comments, we -- given the environment today, we thought it made sense to approach some operators and work them out of the portfolio at this point, and that's what we're doing.

Gary Taylor, Banc of America Securities.

You may have gone through this.

I couldn't -- I think I might have missed it.

But when you talk about your dispositions in the second half, have you talked about the specific property tax?

I know you made a comment around it, but--?

We haven't gotten into a lot of detail on those, and as George mentioned in his remarks, we've approached some operators and requested that they explore refinancing options in buying our properties, some SNF, some ALFs, with the goal being to get rid of noncore assets -- sub debt, loans on nonaccrual, those sorts of things.

We don't know exactly which of those operators will be successful in refinancing us out, so we refrain from disclosing a lot of detail on that because there's too much uncertainty around it.

And what does noncore mean to you?

Does that just mean noncritical mass in geographic markets or how do you -- what does that mean to you?

What I indicated in my opening remarks were that we include one-off assets because we prefer master lease deals.

Underperforming assets are those that could underperform going forward or are somewhat riskier investments because of coverages.

Sub debt, as Ray just indicated, and we did some in the first part of the year, and mortgage loans in general because we would prefer to be as close to 100% on owned properties as possible, and certainly, within that category, any loans on nonaccrual, where we can eliminate those from our portfolio and perhaps capture some of the unrecognized interest would be very favorable.

Okay, great.

And I just want to be clear.

When you say you will sell these at 10.5, 11% cap rate, what's the yield that you are losing?

It's roughly between -- again, it depends on which ones sell, but if you look at the pool, it's roughly between 10.5 and 11.

You lose 10.5 to 11, your new investments (multiple speakers)

Current earnings yield, correct.

And so your current investments -- theoretically better assets come online at lower yield, so that overall portfolio yield comes down a little bit in the second half?

That's correct. (multiple speakers) It comes down slightly.

And what is the dynamic that allows you to lower the straight-line guidance?

Well, I think as part of the disposition program and getting one-time cash payments, that will decrease it.

We don't include that in our initial estimate, Gary.

We started the year I think at 14 million straight-line rent forecast, and due to that 4 million in cash payments we received year-to-date, the guidance is now 10 million, and we don't assume any additional cash payments during the second half of the year, although that may happen.

I thought -- yes, I can understand that.

I thought I read that your 10 million guidance was ex-any non-recurring cash payments.

That's correct.

Any more.

Any additional.

Any additional.

Okay.

And then just last question is on second-half guidance just in terms of how to think about that.

You've reiterate your guidance for the year, but it does imply obviously a sequential step-up in FFO.

Is that primarily to come because we just haven't seen the earnings impact of the acquisitions you did in the 2Q?

Is that where the sequential step-up comes from?

Because I think your guidance suggests that net-net, you will end the year with about the same total balance sheet investment as you have right now.

Yes, I mean, That's a large part of it, plus redeploying proceeds of investments that are on nonaccrual.

And the tariff or the (multiple speakers) the rent concession is coming out for the second half.

Small tariff?

No, it wasn't a small tariff.

It was the one that was the repositioned assets that Ray talked about earlier that had a rent deferral for the first half is now paying rent.

Robert Mains, Ryan Beck Brokerage.

Just a couple of sort of follow-ups here.

On the rent concessions, is that 825 a quarter that you will now be booking?

Or is 825 a catch-up?

How much was that?

Yes, yes (multiple speakers)

It was 825 a quarter?

That's correct.

1.65 is a concession to the first half of the year.

Okay, so those both come in Q3, Q4 but then not in Q1 '05?

Is that right?

That's correct.

Okay.

And then on the specialty care facilities, I know they're not a big part of the portfolio, but coverages there have been pretty significantly going up this year.

Is that a mix issue or is that something that's specifically going on with those facilities?

I think part of it is some of those assets were going through a stabilization process, improving occupancies and coverages, so I would not expect them to increase dramatically from this point.

Okay.

And of the 13, just remind us, what's the breakdown of types of facilities that are in that bucket?

We have LTACs.

Eight LTACs.

Eight LTACs, a neurosurgical hospital, an orthopedic hospital and then one behavioral (multiple speakers) Two hospitals that are acute with a mix of LTACs and behavioral.

Okay.

And just the neuro and the ortho hospital -- are those -- those specialty hospitals, are those with doc investors?

Yes.

Yes.

But they are advised when they're grandfathered?

They're grandfathered.

They are.

Philip Martin, Stifel Nicolaus Investments.

A couple of questions here.

On your dispositions, you mentioned 50 to 100 million here in the second half non-core.

But if you look beyond that, are there other assets in the portfolio that if the market remains a seller's market, that you would look to dispose of other assets beyond this in 2006?

And not one -- in terms of the 50 to $100 million of assets range.

I would think once we get through the next two quarters and our -- the acquisitions we're working on now that there would not be many more assets in our portfolio.

Yes, there are a few one-off deals in that, but it's small numbers, Philip.

Secondly, you mentioned -- certainly, the acquisition market has become more difficult.

You've talked a little bit about expansions, but if the acquisition market for your skilled nursing and assisted living remain difficult, you had expansions out there, some new construction potentially over the next couple of years.

Would you look to increase specialty hospitals as a percentage of the portfolio?

We've done a lot of investing, really, over time in specialty care hospitals, and we do think that they are a very important niche in the health care delivery system, and we're certainly not averse to doing more, Philip.

You know, that's just part of our ongoing marketing program.

I think that we would probably, right now, at least, in our assessment, limit them to probably 15% or so of our portfolio, unless the Board and management agree to go after more.

That's a possibility, certainly, given the fact that assisted living, at least for the time being, has become very mainstream and is subject to very big risk -- competition from some very low-cost financiers.

So, it's a possibility.

Okay.

And then just one last thing here.

The five LTACs.

Did you say 51 beds there, Ray?

Did I -- five LTACs, 51 beds, 51 million?

How many beds in that LTAC?

156 beds.

Okay, 156.

156, $51 million.

Perfect.

Okay.

I appreciate it, thank you.

(Operator Instructions).

Jerry Doctrow, Legg Mason.

Just any color on the timing of dispositions, I guess with a little bit in this quarter and then the rest of the year, for modeling purposes?

As we said in the release, Jerry, the expectation is thought to be in the last four months of the year, so for modeling purposes, whatever number you're going to use, you can assume at some -- at whatever point during the last four months you'd want it to estimate.

Okay, and two other little things.

G&A actually is up a bit -- a couple of million dollars in terms of your guidance from sort of the current first-half run rate.

Are we just being a little cautious there, or is there some reason why it would be that much higher in the second half?

That's on the first-half run rate, which was lower than we expected for the --

You're running about somewhere between 16 and 17 -- your guidance I think is between --

Yes, it obviously implies some sequential increase during the last two quarters, and I think that's just normal process -- some of it year-end timing.

So, we reaffirmed that guidance.

We reaffirm the annual, so it's just where expenses fall within the quarters, Jerry.

And then, Ray, one of the things I wanted to make sure we were clear on, I think you had mentioned that there was some sort of doubling up of interest payments in the quarter because you had the 30 days outstanding whatever for the tender.

Could you roughly quantify that?

I just wanted to make sure we kind of backed that out from the run rate.

Approximately 350 grand.

Scott O'Shea, Deutsche Bank.

Could you just repeat the dollar amount of mortgages on nonaccrual?

Was it 33, did you mention?

Roughly 35.6.

35.6, okay.

How do you think that's going to progress?

Is that expected to come down through sales and then be eliminated by the end of the year, or trail off gradually as properties improve?

Any kind of outlook for that?

It's expected to come down some, Scott, based upon current disposition expectations, and to not go away, probably, by year-end but to be eliminated over time, as you indicated.

Are there any sale leasebacks on nonaccrual at this point?

You wouldn't do sale leasebacks on nonaccrual per se. (multiple speakers) refers to loans.

Anybody over 60 days in the sale leaseback portfolio?

No.

The bank that you mentioned gets more room on the revised line now.

Do you think you'll need to potentially do a bond deal in the second half or will asset sales kind of give you enough room to kind of offset any acquisitions?

Right now, as Ray indicated earlier in response to a question on equity rates, we frankly do not expect to have to go to the capital markets based upon what our expectations are on dispositions.

Okay.

And the last question I had is on your operators getting financing to take you out.

Do you have any color on where they are getting the financing?

Is that local banks or the CMBS market or HUD financing?

Government-sponsored agencies -- Fannie, Freddie.

There are finance companies that are offering bridge financing to those types of programs -- commercial finance companies, the GE Capital types of the world, Merrill Lynch Finance, those types of companies.

Okay, good.

Thanks very much.

Appreciate it.

Rick Murray, Raymond James.

I just had a quick question and then I guess it kind of follows up on an earlier question, with regard to the LTACs you purchased in the quarter and just sort of your outlook with regard to that part of the market as a potential avenue for increased investments in the future.

I guess I was curious, I guess last quarter I sort of got the sense that you guys were going to be more actively pursuing investments in that arena, and it seems that perhaps your enthusiasm has been tempered here a little bit.

Has anything happened with regard to pricing recently that has made that market somewhat less attractive or anything like that?

Just a couple of comments, Rick.

One, everything is, in the REIT world of investing, is very opportunistic.

And two, I think it's probably fair to say that there is some pretty aggressive pricing throughout health care.

And three, within the LTAC market, there are just a limited number, really, of operators and a limited number of facilities, so that will happen somewhat erratically in terms of investing.

So, we're still looking hard at that and we're looking at specialty care hospitals as well.

Our chosen field, as you well know, is long-term care.

But I'm sure that we will report additional investments in the so-called specialty care arena, and LTAC is, as I indicated earlier, a very natural extension of skilled nursing.

Mitch Tremain (ph), UBS.

It's actually Chris here.

George, your opening comment, which is pretty compelling, I guess it's a follow-up to Lou's question, when you're talking about negative spreads between caps and WACs (ph), who's buying health care properties at four or five caps and are they atypical investors in this space?

Do you find maybe typical multi-family sorts coming in and trying to look for yield -- I mean, who's willing to put up a five handle for some type of health care facility?

First of all, I'm not going to necessarily tie a particular four or five or six or seven path to any one of these buyers.

But if one looks to Middle Eastern money, to European money -- international money, if you really look at what the capital costs are outside of the United States, and cap rates outside of the United States, frankly, some of those investors are able to buy at perhaps lower cap rates in the U.S. and find the very attractive U.S. investments.

Others are sort of mainstream, whether it's REITs, specialty lenders who are willing to reassess their costs of capital and to, you know, pay perhaps more than at least we would, given our conservatism, so there is an array of folks that are chasing deals down to very low cap rates, including international buyers.

And what is your conservative assumption for an equity discount rate?

I know Ray talked about rates pushing up -- I believe it was 75 bips from here.

So even where current paper is priced, you're still looking, I would think, at an 11, 12% discount rate on the equity side.

Is that fair?

It could be.

We certainly, when we're talking to our Board, talk in terms of 10 to 12%.

We think that might be a little conservative, so we could be a little more aggressive in terms of looking at our blended cost to capital.

But if one really looks at property cap rates, they have fallen dramatically and the actual costs of capital for folks have not dropped commensurately.

And it's sort of an interesting topic in the financial world today.

And there is even a chance that interest rates, as you indicated and as Ray indicated, may in fact continue to go up.

So, I think this is a time to be fairly conservative in terms of assessing the actual cost of capital, where debt and equity costs are today and where they may go in the future in terms of locking in deals at very low cap rates.

I guess we are thought of as very conservative in this arena.

That's just the way we think about the world.

Greg Andrews, Green Street Advisors.

In terms of the existing book of specialty care facilities, it looked like the revenues were down sequentially from the first quarter, and I'm wondering if there's anything that in particular that explains that?

I think that that can primarily be accounted for from the onetime fee we received in the first quarter.

Okay, great, thanks.

And then on the balance sheet, accrued expenses and other liabilities was up from the first quarter.

Is that dividend or is there something else going on there?

No, that's -- we have, in connection with our acquisition, we have a potential payment on an earnout-type basis that we recorded as accrued liability.

What would be the incremental amount that you might owe under that arrangement?

$17 million.

Sorry, how much?

17 million.

Okay.

And for that payment, you would -- would you be receiving anything in addition to what you've already acquired?

Yes, we would earn additional rentals on that.

Philip Martin, Stifel Nicolaus Investments.

One last question.

Do you promise, Philip?

Yes, I do promise.

And probably I'm the last one.

The specialty hospitals -- when you've talked to the rating agencies, are there any restrictions with the rating agencies that you have on increasing your specialty hospital portfolio?

What's their view on specialty hospitals?

I'm not sure that the rating agencies have empowered me to try to give you their point of view.

But I know that at least one of the rating agencies would be somewhat supportive of enhanced diversification by doing more specialty care hospital investing.

Okay?

But again, I think all of those sort of general sort of conceptual positions are always tied to the quality of investing.

So, one has to be a bit careful in making those kinds of comments.

At this time, there are no further questions.

I will now turn the call back over to management.

We appreciate everyone's participation in our earnings call.

And if there are follow-up questions from anybody or clarification, please feel free to give us a call.

Thank you.

And this will conclude today's conference call.

We do thank you for your participation and you may disconnect at this time.