Welltower Inc (WELL) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And thank you for standing by.

Welcome to the Health Care REIT third-quarter 2007 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.

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

And now I would like to turn the conference over to your host, Miss [Catherine Shipstead] of the Financial Relations Board.

Please go ahead ma'am.

Good morning and thank you for joining us today for Health Care REIT's third-quarter 2007 conference call.

In the event you did you not receive a copy of the news release distributed late yesterday afternoon, 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 are nonhistorical may be deemed forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995.

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

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

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

Please go ahead, sir.

Okay, thanks very much.

Good morning.

We are pleased with our quarter and year-to-date results in terms of both financial results, investment totals and yields, and portfolio performance.

We believe that our origination platform, relationship investment program and disciplined underwriting have allowed us to generate excellent investments that in turn have generated attractive risk-adjusted returns for our shareholders.

Our portfolio has continued to perform well with coverages of nearly two-to-one before management fees.

Moreover, the portfolio is diverse with our top five operators constituting only 26% of the investment total and with the private pay component equal to approximately 65% of our portfolio -- portfolio investment balance.

The recent credit market turmoil continues to afford interesting opportunities.

Lenders who have been walking away from deals are retrading them.

This opens the doors with REITs with ready capital as operators increasingly turn to financing sources to close deals.

The completion of our $400 million convertible debt offering in mid-July, as well as the successful expansion of our $1.15 billion line of credit at LIBOR plus 60 basis points prior to the credit market shift put us in a position to capture opportunistic deals despite the market's dislocation.

Also, our strong investment grade ratings also afford more access to capital during difficult capital markets.

As an aside now, in the Capital Markets area, I should point out that we are very pleased to receive the news last night that Health Care REIT will be added to the SN&P mid cap 400 index later this week, a very welcomed surprise.

Back to the portfolio.

In the senior housing and care sector, we have stated our intention to increase our percentage of combination facilities with particular emphasis on CCRCs.

Most of these at campuses/projects offer the type of platform that we believe is more consumer friendly and better suited for the future.

As you can see from our financial supplement, senior housing and care now comprise 67% of our portfolio.

This category includes skilled nursing, independent living, assisted living, Alzheimer's, and combinations thereof.

Our supplement currently breaks down our portfolio in a manner that approximates functional groupings; for example, independent living and CCRCs are grouped together and properties are categorized as independent living, assisted living, skilled nursing based upon the predominant service level and facilities with more than one service type.

CCRCs together with other combination facilities, i.e.

those facilities with one or more combinations of skilled nursing, assisted living, independent living and Alzheimer's comprise approximately 26% of our portfolio.

And characterizing the portfolio in this way also has the effect of driving down our truly stand-alone skilled nursing portfolio to only 25% of our portfolio and once we include unfunded amounts in existing development projects, the percentage of combination projects increases to 32% and reduces the stand-alone skilled nursing portfolio to only 23% of our portfolio.

So we really do think we are making progress in repositioning our portfolio to support more combination facilities.

And, one never knows from quarter to quarter what type of acquisitions are going to slow the growth in the combination facilities as we may, in fact, find very attractive stand-alone assets to purchase.

But on the other hand, we are currently evaluating over $500 million of combination investments that could further drive our portfolio change.

The other area of portfolio focus has been in the medical office building and acute care space.

Clearly, we make great strides in growing our MOB platform which now constitutes 26% of our portfolio and we continue to have success in investing in both existing and developmental MOBs.

Our efforts to increase our presence in the acute care space are also making steady progress.

We are currently engaged in planning with seven health systems through our development services group in Nashville and while the actual dollar amount relating to these assignments is not material, we believe these assignments tend to lead to strong real estate investment opportunities going forward.

In addition, we have arrangements or agreements with independent developers that specialize in the acute care arena.

And as a result of their efforts and our own efforts, we have over 15 possible facility investments with health systems totaling over $1 billion that are in various stages of negotiation or actually in the closing process.

We expect that a reasonable percentage of these possible transactions will result in very attractive investments.

I should point out though, that in the acute care space, the lead time to closing and to complete development is longer and more difficult, but we believe that once the pipeline is built, the dollars invested are usually large and provide other -- other possibilities for additional health system projects in the future.

In a sense, these possibilities are similar to our shadow pipeline in the senior housing and care space that today totals over $2 billion as we have discussed in previous calls.

We are pleased with the receptivity of health systems to REIT investments.

Even the not-for-profits are quite open to considering our strategic capital program.

But in all cases, the health care systems openness to our capital is in part a result of our ability to bring ideas and industry knowledge to the table, to execute efficiently, and to be able to provide other services such as design, planning, development and property management services.

Going forward, the real estate platforms in the acute care space will reflect the needs of the ever-more-knowledgeable and demanding consumers, as well as the changes driven by technological and pharmacological changes.

And due to the need to provide solutions to systems and operators, we are deepening our relationship with national and regional developers and consultants who we believe are forward-looking and understand that the real estate platforms of the future are going to be much different than those of today.

For those same reasons, we are also in the process of enhancing the capabilities of our development services group in Nashville as well as those of our property management team located in Jupiter, Florida.

We are truly enthusiastic about the platform we are creating and our ability to capture significant future-oriented investments in all areas of the health care spectrum.

We believe we will be successful in large part because of our longer term perspective regarding senior housing and health care as well as our commitment to developing the real estate platforms in the future.

With those opening remarks I will ask Ray Braun and Scott Estes to comment on portfolio and financial matters.

Ray?

First, review investment activity, provide a market update and then discuss our portfolio.

During the second quarter we completed $230 million in new investments.

This amount included seniors' housing and care acquisitions of $70.5 million at an average yield of 8.4%.

Medical office building acquisitions of $42.3 million at an average yield of 7.2%.

Capital expenditures and loans of $38.1 million at an average yield of 10.8%.

And funded CIT of $79.1 million was an expected average initial yield upon conversion of 9.4%.

Our development activity, which is presented in detail in Exhibit 9 of the earnings release, currently includes 27 projects with total commitments of $822.6 million.

We started an additional $245 million of development projects this quarter and had $23.4 million of projects completed with an average initial yield of 9.4%.

On the disposition front, we have $49 million of asset sales with average current yields of 10.8%.

Turning to the market activity, we have noticed that transactions have slowed during the second half of the year.

The aggressive pricing during the first half of the year has moderated, and we are now seeing deals coming back us to with higher yields.

New deals are slower to come to market as seller's expectations will need to adjust to higher cap rates.

We remain confident in our investment guidance due to our relationship investment program.

Turning to the portfolio, our portfolio composition is included in exhibit 1 of the earnings release at September 30.

Two-thirds of our portfolio was invested in seniors housing and care.

And the balance of the portfolio was invested in medical facilities.

We currently have 492 properties in the seniors housing care portfolio with 57 operators in 37 states.

Fundamentals for seniors housing and care remain solid.

We have payment coverage of 1.6 times for nursing, 1.4 times for assisted living, and 1.3 times for independent living.

The seniors housing and care portfolio has 37 properties currently in fill up with an investment balance of approximately $465 million.

In terms of medical facilities, we have 117 medical office buildings and 22 specialty facilities in 22 states.

Our medical office portfolio currently encompasses 4.8 million square feet.

Payment coverage and occupancy for the specialty facilities are listed in Exhibit 2 of the earnings release.

Payment coverage declined over the trailing 12 months but remains a strong two times after management fees.

We currently have one specialty care property in fill up with an investment balance of $15.2 million.

Our medical office building net operating income was $20.7 million for the third quarter, and $53.

-- $55.3 million year-to-date as outlined in Exhibit 4 of the earnings release.

Occupancy at the end of the third quarter was 90%.

With that I will turn it over to Scott for the financial update.

Thanks, Ray, good morning.

Our third-quarter FFO per fully diluted share increased a solid 8% to $0.79 to from $0.73 in the comparable quarter of last year.

Normalized FAD per fully diluted share increased 6% to $0.75 from $0.71 in the third-quarter 2006.

Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income per common share.

As previously announced, the Board declared a dividend for the quarter ended September 30 of $0.66 per share, or $2.64 annually.

This represents the company's 146th consecutive quarterly dividends and an annualized dividend yield of 6.3% based on last night's closing price of $41.62.

Gross revenues including discontinued operations totaled $126 million for the quarter up 54% versus the same period in 2006 with 94% of gross revenues coming from rental income.

Our quarterly interest expense, including discontinued operations, increased to $35.2 million from $24.3 million in the comparable quarter last year, primarily as a result of debt assumed through the Windrose and Rendina Paramount transactions as well as interest from our convertible debt offerings completed in November 2006 and July 2007.

Our G&A during the third quarter was $8.6 million or 6.9% of revenues.

We remain pleased with the improved quality of our loan portfolio and made no addition to the $7.4 million loan loss reserved during the quarter.

Moving now to the balance sheet.

We ended quarter with net real estate investments of $4.8 billion and our credit profile remains solid.

Our leverage at the end of September remained within our 45% to 50% debt to under appreciated books tap target range at 49% while our adjusted interest coverage remains strong at 2.8 times for the quarter and 2.9 times year to date.

As of September 30, we had only $145 million drawn on our new $1.15 billion line of credit which was closed in August leaving over $1 billion in availability.

We continue to view this as a great advantage allowing us considerable flexibility in financing our future growth objectives.

We used our line of credit to repay $52.5 million in senior notes in August which carried a coupon of 7.5% and our debt maturity schedule remains in good shape.

We have only $42.3 million in senior notes and $29.9 million in secure debt maturing through year end 2008.

Just yesterday, November 6, we used our line of credit to buy back our trust preferred security at its par value of $50 million plus accrued interest.

This is a security originally issued by Windrose back in 2006 at a 30-year maturity and was callable beginning in 2011.

We were scheduled to pay a fixed rate of 7.22% through 2011 and then a floating rate during the remainder of the term.

The single holder of these securities approached us to buy them back which we felt made sense given our current cost of capital relative to 7.22% coupon we were paying on the trust preferred.

In terms of capital for the quarter.

As you know, we completed a $400 million convertible debt offering in July with a coupon of 4.75% and a conversion price of $50 per share, which is used to pay down our line of credit.

Our dividend reinvestment plan continues to generate solid interest as well as we issued approximately 467,000 shares for $17.8 million in proceeds during the quarter.

Now turning to guidance.

For 2007, we are tightening our investment guidance to a range of $1.1 to $1.2 billion from the prior range of $1.0 to $1.2 billion.

Acquisition guidance has been increased to a range of $850 million to $950 million from the previous $750 million to $950 million and development funding remains unchanged at $250 million.

We now expect dispositions of $100 to $150 million for the full year which results in net investments of $950 million to $1.1 billion.

For earnings guidance, we are refining our normalized FFO forecast to a range of $3.11 to $3.13 per fully diluted share from the previous range of $3.09 to $3.15 per share.

And Increasing 2007 FAD guidance to a range of $3.01 to $3.03 per fully diluted share from the previous range of $2.91 to $2.97 per share.

The increase in FAD guidance is primarily a result of cash receipts during the third quarter of $5.9 million.

With that, I'll turn the call back to you, George.

Thank you, Scott.

We're now open for questions.

Thank you.

(Operator Instructions) We will take our first question from Rich Anderson with BMO Capital Markets.

Please go ahead.

Hi, thanks and good morning everybody.

Good morning.

You mentioned the investments for the third quarter.

And I don't know if this is provided in your supplemental, but the CIP of $79.1 million, can you spread that across the four -- or the asset classes?

Is that done someplace in the supplemental and I am missing it?

Rich, that actually is in our investment release, the breakdown that we put out on October 8.

Oh, okay.

The breakdown of $71.9 million by CIP advances by asset class.

Okay, I will take a look at it.

But the other -- the other -- the $70.5 in senior living and senior care, that's straight on acquisitions, right?

That's correct.

And $42.3 MOB acquisitions

Correct.

Okay, got it, thanks.

Just wanted to clarify that.

You mentioned acquisition cap rates higher.

I am -- probably a predictable question here, but can you quantify how much higher those cap rates are that are coming back to you as opportunities now?

25 to 50 basis points.

Is there any difference among asset classes?

I would say generally no.

We are just seeing cap rates rising.

Okay.

George, you talked about skilled nursing and, looking at a more -- a non-combo number of 25%.

I guess the number including combination facilities is 32% down from 39% last quarter.

I have that -- those numbers correct, right?

Will you repeat that, please?

You are at 32% skilled nursing including combination facilities, correct?

Yes.

And it is down from 39% last quarter?

And down 46% about a year ago.

Okay.

So just curious, using either -- with combination facilities or without.

What would you say your target is for skilled nursing and when do you think you might get there?

I would like to be at some point, Rich, 15% to 20% skilled nursing, stand alone probably, if not -- if not lower.

And time frames are very, very difficult to -- to guess about really.

For example, we are dealing with an outstanding nursing home operator right now that we might get home on some acquisitions and we are also hoping to build some state of the art stand-alone nursing facilities around the country.

And both of those would be attractive.

I am just suggesting to the group sort of directionally that we like a combination facilities over time.

I am not trying to suggest in the least that we don't think stand-alone skilled nursing with the right operators aren't very good investments.

In fact as I have indicated in previous comments, they -- nursing homes are very much a -- a favored asset class from a reimbursement standpoint in our judgment.

Understood.

But that -- that 15% to 20% target probably -- when you sort of look at the big picture happens more through investments elsewhere as opposed to dispositions out of that space?

That's our best bet, Rich, yes.

Last question on acute care and making that an emphasis for the Company.

How expensive is it to build acute care hospitals in this day and age with new systems and technology?

Obviously you want to bring to market the very best-in-class type of assets.

Can you quantify how much more expensive it is to build acute care hospital than it was maybe, a couple of years ago?

Well, of course, the differences are just profound depending on where one is building.

If you are talking about California with [OSHPOD] and all of the regulations, it is just huge.

It has maybe gone up three times, perhaps.

In the rest of the country, one and a half to two times, I am just guessing.

And it's -- a lot of it comes down to the making it user-friendly and designing even the single rooms with exactly the same design, et cetera, as well as adding the -- the kinds of equipment today that is driving up the cost.

It's -- it's very significantly higher today.

Why would you say the hospital sort of sector overall would be talking to REITS, as opposed -- they would have easier financing, maybe cheaper financing alternatives versus leasing their facilities to -- from you.

Is that a fair comment?

How has it changed to allow to you get more involved in the business?

I think in the nonprofit world at least it is still probably true that the core asset, the hospital itself, is more likely to be financed with tax-free bonds or some other methodology.

And it would be the MOBs -- the ambulatory surgery centers, et cetera, that doctors would be more involved in, that are more likely targets for us.

But I will tell you, that even with respect to some of the hospitals, we are seeing much more interest in the hospital system monetizing those assets so they can put more money back into better equipment, better design, satellite hospitals out in the suburbs where the consumer base is.

Increasingly, hospitals are looking at involving doctors in even the ownership of the hospital operations, and, therefore, the -- there is more difficulty in using tax-free bonds.

And moreover, I would suggest the other factor is that hospital systems, even the nonprofits, are increasingly -- are moving within increasing speed to be able to at least maintain their market share if not grow it by going out to the suburbs, and then providing a base either through another hospital or emergency departments or ambulatory surgery centers or MOBs to gradually attract the consumer base out in the suburbs which are the fastest growing areas, to their system and bring the patients back to the mother ship, downtown perhaps, for tertiary and quaternary care.

It is pretty clear there is a profound shift going on in acute care and the nonprofits have to play in the same field and face the same competition.

And frankly REITs can move faster and they are more flexible and frankly I think that health care REIT and many of our peers are very knowledgeable and can add a lot of value added.

So, just to finish here.

You would say the majority of your acute care business will still be in the for-profit segment despite your comments?

I really wouldn't want to guess at the moment.

Right now, the prospects we are looking at are probably more heavily weighted toward the nonprofit systems at the moment.

But Rich, we going to have to just wait and see and maybe I will have better reflections on that a year from now.

Okay.

Thank you so much

We will take our next question with Chris Pike from Merrill Lynch.

Please go ahead.

Good morning everybody.

Hey Chris.

George, I wanted to be clear on the acute care side.

I think you mentioned a pipeline of potentially $1 billion worth of opportunity.

And then following up from Rich's comment, that is not all development, right?

That is acquisition as well as development, correct?

Some of it is acquisition.

Okay.

As you establish these relationships, where -- where is the delta between let's say the off-market yields that you are going to achieve versus marketed deals?

I mean, where are you going to have the value at?

Can you qualify the value added there on the acquisition side.

It is very difficult to quantify either the probabilities of getting home with deals or exactly, which ones are -- are the -- very thoroughly marketed deals versus off-market deals where we can get, perhaps, better rates.

It is just much harder to do right now, at least for us, because frankly, the nonprofit world in particular is just sort of becoming very open to a REIT financing.

So, I really wouldn't want to go there.

I just say this for color and really my comments were directional.

They were for color.

It is very difficult to quantify.

But, I do think that what happens is that as we grow our development service and as we form relationships with really top-flight developers and consultants, that we will be selected more and more if we are successful because of value added and, therefore, not to be involved, not in a fully marketed situation, which is as you well know, very advantageous to us.

I guess back to Ray's comments following on to a Rich question here.

I guess you talked about cap rates.

Any particular segment within the health care spectrum that you see more deals or more opportunities coming back to you over others?

Well, I think when you look at the senior housing and care investment arena, a lot of transactions have been done the last couple of years at very low cap rates and we are not seeing as much acquisition activity in that area as we are in the medical office portfolio or the acute care portfolio, simply because so many deals have been done.

So I would anticipate that we would see more activity on the medical facilities side on the acquisition front.

And in fact Ray, I think there are about three or four MOB packages that have come back the last week or two.

Okay.

I guess on the [Nik] data we are still looking at that.

I guess our thought was moving into the quarter we would see maybe potentially some continued weakness on the lower QDL and the independent side given the overall economic softness, housing, so forth and so on.

Do you think that is a trend that is going to manifest itself?

Is that is that what you are seeing when you speak to your operators?

Maybe you can just provide a little more color there.

Over the last year, the operating fundamentals have been very strong.

There was a little bit of weakness that showed up in the [Nik] data that was released yesterday, but it's too early to tell whether or not there is a trend there.

But has it sequentially weakened from Q2 to Q3?

Yes, there was some softness in the independent living market in particular.

Whether that's a trend, we will have to wait and see.

Even if it is a trend, I can tell you that the current levels of occupancy in rental growth in our buildings still provide with us good payment coverage as we indicated in our release today.

Plus supply and demand proposition is still favorable, right?

That's correct.

I guess moving over to Scott.

You talked about G&A as percent of revenue as you -- as you grow the platform and as you grow the management platform, the asset management platform, how should we think about that revenue and G&A relationship going forward, or should we think about it in terms of year-over-year growth.

When do we reach scale and how do we look at G&A as a percent of revenue?

I guess I am reluctant to give a specific percentage --

The direction, I'm not looking for (multiple speakers) in the way of guidance for G&A, but do you think it should it be running between 6 and 7, 6 and 8?

Obviously it is going to be a function of with -- in terms of what I and other analysts model for top line or total revenue, but I'm just thinking where should the revenue, where should the G&A kind of fall out in terms of percent of revenue or some other metric.

My view would be that the approximate level it was at this year is probably a pretty good representation with the opportunity to go down over time.

I think a lot of the infrastructure decisions we have made this year with getting Paramount Property Management set up and the moves I think we made on the origination front and commitment to growing the company and portfolio, a lot of that team has been put in place already.

So I think obviously we will need to add incrementally as we go forward, but I think the point would be that a lot of our infrastructure we made the point of putting in place this year.

Okay and I guess this last question on another one of your comments.

Scott, you talked about the, I guess some of the capital recycling and you mentioned your -- your -- your whack or your capital costs overall.

Where are you guys seeing your average cost to equity these days?

Well, I guess we tend to take a more conservative approach and use the more philosophical 9% to 10% as our equity cost.

Just generally speaking when we consider our blended cost of capital.

Obviously our stock has done fairly well this year relative [to] the peer group.

I think our FAD yield has come down over time.

If we get a little more -- our other model considered a FAD yield in terms of what we can -- incremental investments at as far as being accretive to us.

I think it has actually been more interesting to see what happened on the overall debt side in that -- and people are concerned about the credit crunch and we did an analysis of what has happened to our debt cost over the last three months.

And even though our credit spreads have widened pretty significantly, there has been a significant decline in the 10-year treasury from June to today.

It has gone down from 5% down to 4.3.

So, we checked last night and I think, approximate cost of 10-year notes, I think we could raise 10-year debt today to about 6.6% which is actually only about maybe 25% basis points higher than kind of precredit crunch days.

So actually despite the changes, we actually haven't seen that much of an increase on our debt cost of capital.

So that is unsecured at 6.6%?

How about secured debt?

We don't really use that.

That would be more --we tend to keep our secured debt basket available for potential acquisitions as far as we think about it.

Thanks a lot, gentlemen.

We will take our next question with Kristin Brown with Deutsche Bank.

Please go ahead.

Hi, good morning.

I just wanted to ask in terms of acquisitions.

I know you have a lot of room on your credit line, but how much can you -- can you buy without raising more equity?

Basically we have one point -- a little over $1 billion dollars available.

If you assume we continue to get about an annualized rate of $70 or so million from our DRIP.

Based on that availability we have about $725 million to $875 million available that we would continue to be -- to go through before we need to raise equity.

We are in a pretty good shape from a liquidity perspective and that includes the acquisitions we have already identified in the fourth quarter.

So I guess just looking at it from a big picture perspective, it is in excess of $1 billion available to us today.

Okay.

An then just a follow-up on G&A.

What is your sequential decrease in G&A this quarter?

Remember last quarter we had a $1.75 million finders fee in the second quarter.

So that number was a nonrecurring payment.

Gotcha.

Okay, great, thanks.

We will take our next question with Jerry Doctrow with Stifel Nicolaus.

Please go ahead.

Hi, thanks.

One or two things.

On the MOB side, the operating expenses came in a bit higher than we had expected.

I was wondering if that was kind of one time in nature or whether you have got utility costs or any color there or sense of where we might go from here?

We have Fred on the call.

Fred, do you want to answer that question?

Sure.

The major difference is that sequential decline in occupancy.

The MOB is about 90% and therefore, you see the operating expenses (technical difficulty).

We don't believe that is a long term trend.

It's multiple integrations we had here.

We have identified where our issues are and we have added additional leasing capacity to move the ( technical difficulty).

Okay Fred, you were breaking up a little bit but basically, as a percentage of revenue, it should come down as we bring leasing up.

Is that kind of the right summary?

That is correct.

Okay.

And then just -- while we are on that point.

There is -- one of the issues in the old legacy Windrose portfolio is obviously fairly substantial, lease rollover as we go through, certainly into '08 and forward.

Any color about how releasing is going?

Whether your -- and whether rents are kind of rolling up, rolling down?

We have about 10% or 11% of the portfolio that rolls both in 2007 and 2008.

Our retention rates were lower than we anticipated in 2007, but with the full integration of the Paramount management team being completed this year, we expect those numbers to return to the historic retention rates of [70%] plus.

On lease -- on retention, we are seeing normalized increases in isolated cases we see some decline in the markets and in other cases we are seeing some great strength in the markets, particularly on some of our properties in California.

So if I am trying to just think of the portfolio overall, you would think that we're -- we are kind of up 5% or something like that, or --?

Uh, yes, I guess overall in the portfolio would you look up 3%.

Three percent.

Okay, thanks.

And just one or two other things.

I wanted to come back and just explore a little bit more.

You obviously have focused on this combo facility which particularly I think CCRCs and a little bit of this was asked before.

But, you know, the market particularly in the last even few days seems more concerned than ever about entrance fees and to some extent IL in general.

Obviously you don't share sort of that outlook and just was wondering if you could give me a little bit more perspective why you think CCRCs and kind of this market are good things to do?

Well, you know I think that probably there has been some effect, probably minimal, but probably negative on the whole as a result of the economy and the housing issues.

But we really haven't experienced very much of it to date.

And we just think, Jerry that bottom line, that combination facilities including CCRCs -- and by the way, we have both entry fee and rental models are the more attractive place for -- especially the baby boomers going forward and that is really the prevailing trend and not the shorter-term housing problems.

So, I guess we always look at things somewhat longer term and think these are better assets and probably a better living arrangement for the seniors and so we are not terribly concerned about the short-term turmoil in the housing markets.

We haven't experienced much of a problem at all either in terms of rental and and/or buying.

Okay.

All right, thanks.

And then just one or two technical things if I could.

There is a change likely coming I think in the cash converts.

I think you had indicated it would be about a $0.06 hit to earnings if that change is made.

Just wondering if there is any update or further thinking on that.

Sure, Jerry.

I think at this point it does appear likely that the convertible debt accounting change would be effective beginning in January 1, 2008.

And you are correct that that would involve a REIT statement for a prior period and again the numbers that they stated last time, it would be an approximate impact by year in 2006 of a $0.01 adjustment, 2007 a $0.06 adjustment and 2008 about a $0.07 impact.

Okay.

And then, that would just run forward from there?

Yes.

Okay.

Thanks.

And just, Scott, on straight line.

I wonder if you can give us any color on sort of where that sort of runs from here.

Just kind of directionally.

Sure.

I guess we have our current guidance at $17 million in growth straight line.

It's only about 7% of our FFO today.

I think, generally speaking, as you know, in our senior housing and care portfolio, we have moved away from the fixed increase structure that would require straight lining.

And really, the majority of any incremental straight line that we would incur would be in our medical office portfolio given the shorter nature of the leases and the fact that the doctors like the predictability of predictable rent.

So I would say it may go up or stay flat to go up slightly depending on how much MOB fixed [increasers] we're doing.

Great.

That's all I have, thanks.

We will take our next question from Omotayo Okusanya with UBS.

Please go ahead.

Good morning, gentlemen.

So far there has been more of a focus on acquisitions for the company but I was hoping you could talk a bit about the development pipeline and what is going on in that end.

Specifically, what your views are with regards to more focus on development versus acquisitions and when we can start -- what you kind of see in regards to yields on the development pipeline at this point, whether that's changed.

And when we can start to expect to see some of these properties start to go online and accretive to your (inaudible) future FFO.

I don't know if Ray or George want to give color.

I think one point I would make, at least from just a numbers perspective, is obviously we have seen the development funding dollars start to ramp up over the last several quarters, so directionally, it obviously has increased over the last few quarters.

While we don't have guidance now we continue to see great opportunities on the development front as we go into 2008.

I don't know if George or Jerry wanted to just generally characterize some of the projects.

Well again, I think we have talked about our sort of shadow pipeline of over $2 billion which is almost all of it senior housing and care.

And well more than half of that would be in development projects depending on which are actually funded, of course.

And then in the acute care space, as I was trying to give you color earlier, there are a number of development projects as acute care systems attempt to build the new platforms that are going to be more appealing to the seniors going forward.

So, we are seeing quite a bit of development, and frankly, we think that's appropriate.

We really believe that the old days of indicating concerns about development are really overstated today because of the needs to address the new real estate platforms that will be desired in the future.

So we are very much on the cutting edge there.

We want to do quite a bit of development with the right operators, with the right controls and think we are very well positioned to do it.

I don't know Ray, if you wanted to add anything to that.

No, we are very comfortable with our operators and our development pipeline.

So you are not overly concerned about the -- the latest data coming out saying construction in general has spiked up quite a bit in 2007 on a national basis, and most of your peers and as well as other operators also are talking about significant development ramp-ups as well?

Well in general Tayo, yes we are concerned.

There has been an increase in construction nationally and the rate of construction exceeds the rate of demand growth and our estimate on an aggregate basis.

But having said that, it is all about local markets and we are very comfortable with our projects in the markets they are in.

And our ability to, I think, be very disciplined in terms of our underwriting of those markets.

Okay.

Thank you very much.

We will take our next question with Rob Mains with Morgan Keegan, please go ahead.

Thanks, good morning.

Good morning.

Question on Exhibit 7 where you have the fill up concentrations.

You -- that has both development and acquired assets in fill up.

And the question -- specifically on, keeping on the same under development asset, are those falling into the occupancy buckets that you would expect them to?

Yes.

I think in terms of our underwriting and our fill up projections that we are on target with our projects.

Okay, so -- that's a good enough answer.

Scott, a couple of questions I guess, from kind of taking your guidance and then interpolating what fourth quarter might look like.

Earlier question you mentioned that you have got some releasing activity going on in the MOB portfolio.

And you have kind of suggested that TIs and these commissions move up in Q4.

Is that a rate that we'll probably see throughout '08 as well?

I think -- you are correct, Rob.

Obviously our guidance is on the exhibit 16 in the release and obviously fourth quarter is the only variable left at this point so I think as you correctly assumed on the Cap Ex TI line about a $2.5 million fourth-quarter number, and as far as -- the reason for that is really due to timing and I don't know Fred, if you want to give some general color on, prospects on 2008 as far as the conceptual run rate.

Yes.

It's -- the function of CapEx and leasing commissions and T.I., it generally lags the leasing activity and generally with renewals our numbers are much smaller.

So, improving our numbers on the renewal basis and shifting the mix back to renewals from new leasing and then new leasing in 2008 again with 10% of the portfolio.

We think the numbers should run at the expectation we had this year while the numbers in the performance this year catch up.

Okay.

So, does that suggest that we might see kind of a spike in Q4 then?

We are having a hard time hearing you, Rob.

Can you repeat the question?

Sorry.

Does that suggest that Q4 is kind of a spike?

It is hard to say in my opinion.

Fred, tell me if you disagree, but we obviously do a detailed analysis on a quarterly basis and that is a projection in the quarter.

I think it is a -- a bit of a spike obviously relative to the rate that we have been running at through the first three quarters of this year, but again to Fred's point, I think that, we started the year at $7 million for the full-year forecast and ended it at $5 million.

So whether that is the approximate range going forward would probably be a fair way to think about it and we will give more specifics next quarter when we give you our 2008 guidance.

Fair enough.

Then I know this comes out in the wash when we do the FFO calculation, but was there anything going on with D & A this quarter because it was up pretty significantly on a sequential basis.

Sure.

The -- you are actually very perceptive there.

We actually have the flexibility as a part of our FAS 141 purchase price allocation to make any necessary adjustments to the purchase price of assets that we acquired through the Windrose deal from within one year of the acquisition and it is not an aggregate change.

It is just the value between buildings that we move around.

And we had a consultant do some continued work and again, what falls out of that was adjustments, depreciation and amortization.

I think on that line specifically, there was probably an upward impact of maybe $1 million, $1.5 million.

So as maybe $38.5 million would probably be the right number on the depreciation and amortization line as far as the run rate goes in the fourth quarter.

Okay, all right.

That is what I was getting to but I wasn't sure exactly how.

And then -- you talked a fair amount about development opportunities.

If we look back -- I don't know, at five years ago, you were taking advantage of some very attractive cap rates in the acquisition market, and, you had spoken to several callers about how cap rates have declined and that is one of the reasons why you are looking at development.

In the current environment, it sounds like assuming that if cap rates don't move up you like doing development.

Is there any sort of big picture preference that you would have development versus acquisition kind of philosophically?

That -- I think we probably implied at least that we like development a lot and think it is necessary going forward to develop new real estate platforms.

But having said that, we have to fall back on our usual statements that that were very opportunistic.

There are some great assets out there and if we can get them and they're acquisitions, then that is what we are going to do; and that has an immediate effect on our earnings as well.

So, I think -- you hear us directionally that we want to design the new hospitals, new health systems, and even senior housing in the future.

We can do that through renovation, but it is more likely that we will do a significant amount of development over time, and we think we are very well positioned to do that.

Okay.

That's helpful.

Thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS) We will take our next question from Phillip Martin with Cantor Fitzgerald.

Please go ahead.

Good morning, everybody.

First of all, George, if you could define for us state-of-the-art skilled nursing facility -- or maybe a better question is, what does today's new purpose built state-of-the-art skilled nursing facility look like and how does it interact in today's health care system.

Well, first of all, DRGs are being pushed down to higher acuity.

DRGs are being pushed down to the skilled nursing platforms.

So you are going to see from a medical standpoint much more equipment, gases in the walls, much higher acuity platform.

But on top of that, at least to appeal to, at least the private pay consumers and for that matter, some of the hospital referral sources, there is more common space.

There are more singles, single rooms, private rooms and just the whole place looks a lot less like the factories of old.

They are much more appealing and they are higher acuity and I think that's -- I'd leave it at that Phil.

The inner -- so there is more communication, interaction with the acute care hospital and just the system in general, I guess.

There has to be because they are taking the patients that used to -- that clearly used to be in the hospitals.

So the hospitals have to have some idea that a very ill patient is going to be well cared for with the right staff and with the right equipment and the right kind of services.

What does that do to the margin and the state-of-the-art facility in this health care system?

Generally, we have seen some very good margins coming out of the folks that have a much more consumer-friendly environment, because more often -- the kids are the ones selecting it and they are willing to pay up for the best service possible.

So I think if anything, the margin's improved with more of the private pay, Medicare model with -- insured at a higher quality base.

Is it a mid-20s margin?

Is that fair?

Or is it too hard -- or is it by market?

It is by market.

Okay.

Is mid-20s attainable?

That is a really high number, the high end.

That's a high end?

Okay.

I am just trying to get an idea of the range.

More high teens.

High teens.

Okay, that is fair enough.

Now the -- in terms of the not-for-profit potential here, what could -- what could health care REIT's not-for-profit pipeline potentially be in one year if a few things go right.

Could this be a $500 million pipeline of opportunities?

I'm not sure, it could be.

But if it is, it's likely to be both acquisitions and developments.

So if you were trying to model out, you have to be a little careful about what the earnings effect is going to be given the significant difficulties in getting any of these deals home, dealing with -- especially nonprofit systems and then the longer development schedule, Phillip, for more complex buildings, so.

But it clearly could be at that range.

We'd hope it would be.

Ray has been out constantly on airplanes, so have I and Fred and Dan and others.

So, we are hoping that our, that we're almost through that 9-to-12-month window of really elevating our pipeline in the acute care space.

But it takes time.

Okay.

The other -- the last question I have -- the rating agencies and new developments.

As you are talking to the rating agencies and -- you are clearly, have a pretty big development pipe -- the development pipeline potential is quite large.

How are you approaching with the rating agencies?

And what have been their response?

We have been talking in the 10% to 15% category and right now I don't see it going up because we are still capturing a fairly large number of acquisitions.

And I think right now given our size and given the acquisitions we will attain that we are going to stay in that range at least for now.

I think actually the rating agencies understand our philosophy of developing better and more appropriate and future-driven platforms as being the right way to go, but always a balancing out that need against -- being very careful about development risk.

And again, I think we can go to the agencies and have very effectively because we have had 37 to 38 years of doing this.

In fact, we are geared up to do it.

I think that is an important point, Philip, that they have seen us go through this development cycle before and successfully manage the company through that so we have great credibility with them on the development side.

Okay.

Thank you for your answers.

Thank you, Phil.

We will take our next question from Jim Sullivan from Green Street Advisors.

Please go ahead.

Thank you.

Just a quick question on the MOB development, the size of it and price per foot caught my attention.

Can you provide more detail on what it is, where it is, on campus, off campus, is it preleased or not?

Fred, I don't know if you want to comment.

If not -- Fred is international right now too, so we are having a little phone problem.

Ray, I don't know if you want to comment on it?

No, it's a large medical office building that we are constructing with a development partner in the southwest and it will include medical office space as well as biotech space and we are very early on in the development process.

In terms of estimated completion, and the economics of the deal with respect to your development partner, can you comment on that?

I am not sure.

When is the estimated completion date?

2010.

Projected cash NOI in [excess] of 9%.

And biotech space?

What do you mean by that?

Lab space.

Lab space is a portion of the building.

And is it preleased or speculative?

What kind of --

We are in the preleasing process right now.

All we have done to date is acquire the land.

Okay.

With respect to MOBs.

Fred might have given the number.

I might have missed it.

What do you typically spend on releasing cost when a tenant moves out and what do you typically spend on releasing cost when you renew an existing tenant?

I would defer to Fred, I don't know the answer to that personally.

Fred, if we lost Fred, Jim, we will give you a ring back with the answer to that one.

That would be great.

Thank you.

We will take a follow-up question with Rich Anderson with BMO Capital Markets.

Hi, just a follow-up.

Is Fred on business travel or personal travel internationally.

No comment.

Okay, thank you.

We will take our next question with Chris Pike with Merrill Lynch.

Please go ahead.

Hey, guys.

Just a follow up from Jim's question here on the, I guess the lab space.

Is this something that you guys are going to look more towards or was it just part of the package.

It was part of the package at this point, Chris.

This is a particularly notable project we think in a growing area that will be very much health care dominant.

It's -- and part of what will end up being a satellite hospital, a very significant satellite hospital in the immediate vicinity as well a teaching or an academic medical center.

So we are very, very pleased to be part of this.

We hope it grows into more in that particular area.

And it was -- the biotech is less than 50% of it, but it also helps to draw some of the docs and some of the researchers and as well as the hospital system that we anticipate moving in there in the next year or two.

I am sorry my speaker phone here in my box was going in and out.

Did you indicate where this is?

Southwest.

Excuse me?

The southwest.

Okay.

Thanks a lot.

Ladies and gentlemen, this does conclude our question-and-answer session.

I would like to turn it back over to management for any additional or closing remarks.

Management really appreciates all of your participation and if there are follow-up questions, Scott Estes will be available.

Thank you.

Once again ladies and gentlemen, this will conclude today's conference.

We thank you for your participation.

You may now disconnect.