Welltower Inc (WELL) 2007 Q4 法說會逐字稿

Welcome to the Health Care REIT fourth quarter 2007 earnings conference call.

This call is being recorded.

(OPERATOR INSTRUCTIONS).

I'd like to remind everyone that today's call is being recorded.

I'd like to now turn the conference over to Ms.

Catherine Shipstead of the Financial Relations Board.

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

In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the Company's Web site, at Health Care REIT.com.

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

At this time, management would like me to inform you that certain statements made during this conference call are nonhistorical and 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, the Company can give no assurances that its 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 to now turn the call over to George Chapman, Chairman and CEO of Health Care REIT, for his opening remarks.

Please go ahead, sir.

Thank you, Catherine.

First I will briefly go through our achievements for 2007, as this is the year-end call.

One we received -- we were very pleased to receive debt upgrades from Moody's and Fitch to BAA2 and BBB flat, respectively.

And we are also very, very pleased at our timing in expanding and extending our unsecured lines of credit to 1.115 billion, while at the same time reducing our interest cost 20 basis points to LIBOR plus 60.

It gives us quite a bit of dry powder in what is becoming a very interesting investment environment.

Pleased to be added to the S&P MidCap 400 index in November.

And again, we were very successful in raising 900 million of capital through three transactions, as well as through our dividend reinvestment plan.

Our solid 6% FFO per-share growth provided in the shareholder return of 9% in a very down year for rates again was very welcome.

I want to talk mainly today, though, about our growth platform, and our portfolio, so clearly people have an understanding of how our portfolio is changing, how it has changed and how it is going to change in the next year or so.

One, last year our growth platform drove net investments of $1.1 billion.

And at the end of 2007 we had one of the most diversified portfolios in the sector, with 65% of our revenues derived from private pay.

And in terms of skilled nursing and assisted living, especially stand-alones, we continue to drive that percentage down.

At year-end, our total skilled nursing and assisting living concentrations constituted 32% and 21% of our portfolio, respectively, down from 44% and 34% two years ago.

And unlike some analysts, we do believe skilled nursing and assisted living, especially assisted living, are attractive investments.

But we have taken the approach that they are most effective in combination projects or in CCRC platforms.

As I mentioned in our last quarter call, we continue to report our portfolio breakdowns in a manner that approximates functional groupings.

Example, independent living and CCRCs, continuing care retirement communities, are grouped together, and properties are characterized as independent living, assisted living, and skilled nursing, based upon the predominant service type.

At year-end, CCRCs, together with other combination facilities -- i.e.

those facilities with one or more combinations of skilled nursing, assisted living, independent living and dementia -- comprise approximately 27% of our portfolio, or approximately 40% of our senior care portfolio.

Viewed in this manner, our stand-alone skilled nursing and assisted living would represent only 24% and 10% of the portfolio, respectively.

Portfolio performance is quite good, as we've driven coverage at the facility level to 1.99 to 1.

Occupancy trends have also been strong quarter-to-quarter with IL CCRC moving up 1% to 93%, (technical difficulty) assisted living up 1% to 89%, and skilled nursing up 1% to 85%.

And while medical office buildings remain flat at 90%, we believe we have an excellent opportunity to drive up occupancies by the fourth quarter of 2008 that should enhance our returns, again, primarily in 2009.

We have high expectations for investments in 2008.

Our guidance, as you read, is 900 million to 1.2 billion, including 500 million to 700 million of acquisitions, and 400 to 500 million of development.

While we are conservative with respect to our underwriting and portfolio management, we believe that we have the best growth platform in the sector.

The platform has been successful primarily as a result of our marketing team that we believe is the deepest and most productive in seniors housing and healthcare.

And the relationship programs that we have developed have created a shadow pipeline of approximately $3 billion.

This gives us a great deal more certainty of investments than if we were simply trying to find acquisitions in the general market.

If you'd refer to exhibit 9 of our earnings release, you'd see that we have 800 million of unfunded development commitments.

This number relates to projects that have commenced construction, and we expect approximately 400 million or a bit more of 800 million to be advanced in 2008, and the remainder thereafter.

You should also note that we expect 360 million of our current development projects to convert to stable projects in 2008, which allows us to discontinue capitalizing interest at our average cost of debt, which is approximately 6%, and begin recognizing yields at stated rates that average 9.1% for these properties.

We expect that the conversions in 2009 and 2010, respectively, will be 400 million and 327 million.

And as each development project converts to a stable outset, there is a positive impact to our FFO.

We've mentioned before that real estate platforms must change over time to address customer preferences.

That can occur through renovations of existing facilities, purchasing new facilities, or development.

I have also noted our preference for combination, or CCRC properties, in senior housing and care.

In the medical office building and acute care space, we believe that many of the new medical office buildings and acute care assets will be much more customer-friendly, and will stress wellness and one-stop shop.

Our unfunded development commitments going into 2008, the 800 million I mentioned previously, include 448 million in CCRCs and 140 million for new medical office buildings.

And while only 24 million relates to acute care, we are making great progress with health systems, providers and developers, to invest in new acute care facilities, and anticipate that amount will increase over time.

We, again, as I indicated earlier, believe that with our relationship program, and our 3 billion or so of channel pipeline, that we have a much higher probability of investment success than simply finding investments in the markets.

The investment guideline for 2008, I should [note], together with our other budgeted assumptions, produce a projected FFO range of 3.27 to 3.37 per share, which is an FFO growth rate of 5 to 8%.

We believe that this FFO growth, together with our current dividend yield, should produce an excellent total return, assuming multiples remain constant.

And I must say that while I don't want to get into predicting whether multiples will go up or go down, we believe that our profile and our full-spectrum platform presents a very strong case for multiple expansion.

With that, I'll turn to Ray Braun and Scott Estes for additional comments on our portfolio and financial results.

Ray?

Good morning, everyone.

I'll start by reviewing our fourth-quarter investments, discuss current market conditions, and then finish with a discussion on our portfolio and reimbursement outlook.

During the fourth quarter we completed a total of 298 million of growth investments.

This included senior housing acquisitions of 21 million at an average initial yield of 7.5% with an expected yield of 10.2%, MOB acquisitions of 31 million at an average yield of 7.5%, capital expenditures and loans of 127 million at an average yield of 10.1%, and funded CIP of 119 million, with an expected average initial yield upon conversion of 9%.

Our development activity, which is presented in detail in exhibit 9 of the earnings release, currently includes 37 projects and a total commitment of 1.1 billion.

We started an additional 292 million of development projects this quarter, and have 34 million of projects completed with an average initial yield of 9.8%.

These include a commitment amount of over 200 million for the construction of several LTACs and two medical office buildings, reflecting the extension of our [programmatic] financing strategy to medical facilities.

On the disposition front, we had 25 million of asset sales and loan payoffs during the quarter that we sold at an average cap rate of 6.6%.

In terms of market conditions, we're seeing some slowing of volume in the second half of 2007.

Cap rates appear to be increasing across asset types.

With the credit market dislocation and our ability to finance transactions, we have considerable investment opportunities for this year.

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

At December 31, 68% of our portfolio was invested in senior housing and care, and 32% of the portfolio was invested in medical facilities.

We currently have 495 properties in our senior housing and care portfolio, with 55 operators in 37 states, and they have a stable payment coverage of approximately 1.5 times.

36 properties are (technical difficulty) with an investment balance of 454 million.

You'll note a couple of new names in our top five operators.

Signature Healthcare (technical difficulty) home quality management and is now our second largest operator.

We have 34 properties with 4582 units and an investment balance of 326 million with Signature.

In connection with the recapitalization, we extended a $110 million real estate loan with a six-year term and a 10% initial rate.

We also recognized a $3.9 million gain on our (inaudible) position in home quality management.

Signature now has enhanced liquidity with a strong platform for growth and an experienced management team.

Our portfolio with Signature has excellent lease payment coverage in excess of two times.

Another new operator in the top five is Senior Living Communities, a regional operator with eight CCRC campuses with a total capacity of 695 cottages, 590 independent living units, 309 assisted living units, 107 dementia care units, and 81 skilled nursing beds.

They operate facilities with roughly 200 plus units on 30 to 50 acres of land, with large clubhouses and fitness rooms, libraries and other gathering areas.

Our medical facilities include 121 medical office buildings and 22 specialty care facilities in 23 states, encompassing over 5 [million] square feet.

Our specialty facilities payment coverage increased this quarter to 2.7 times.

We currently have three specialty care properties in (inaudible) with an investment balance of 51 million.

The medical office net operating income was 20 million for the fourth quarter and 75 million for the year, as outlined in exhibit 4 of the earnings release.

Occupancy at the end of the fourth quarter was approximately 90%.

Turning now to our outlook for Medicare and Medicaid.

In 2008, nursing homes received a full market basket increase of 3.3% under Medicare.

CMS is currently considering an administrative fix to the Medicare rates that may result in a reduction.

The proposal is a cut of approximately $4.7 billion over five years, or roughly 3.5%, to offset increased utilization of the nine new (technical difficulty) categories created in 2006.

We expect CMS to issue a proposed rule for fiscal year 2009 by early May.

To give you an idea of what impact that could have on our portfolio, for each 1% change in Medicare rates, our nursing portfolio payment coverage declines by roughly 3.5 basis points.

We have very solid payment coverage in the portfolio and do not anticipate any material increase in payment risk as a result of this change.

Many states are also facing budget shortfalls as a result of reduced tax revenue collections and weakening consumption.

This could result in Medicaid rates being cut, but historically, state legislators have avoided payment cuts to nursing homes.

Florida has been a particular concern.

In a special session of the legislature, Florida passed a 3% rate cut, effective January 1, 2008.

This also appears in the governor's 2009 budget and is proposed for the first six months of the 2009 fiscal year.

A 3% decrease in the Florida Medicaid rate would reduce our payment coverage by 5 basis points.

Again, we do not anticipate any material increase in payment risk as a result of this change.

With that, I'll turn it over to Scott Estes for the financial update.

Thanks, Ray.

Good morning, everyone.

Our fourth-quarter normalized FFO per fully diluted share increased 4% to $0.80 from $0.77 in 2006.

Normalized FAD per fully diluted share increased 1% to $0.75 from $0.74 in the comparable quarter last year.

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

We paid a dividend for the quarter ended December 31st of $0.66 per share, the Company's 147th consecutive quarterly dividend.

The board also approved a new quarterly dividend rate of $0.68 per share, or $2.72 annually, commencing with the May 2008 dividend, which represents a 3% increase above last year's rate.

Our gross revenues totaled 133.5 million for the fourth quarter, up [56]% versus the same quarter last year, with 89% of gross revenues coming from rental income.

Our interest expense increased to 35.5 million from 24.4 million last year, primarily as a result of debt assumed [through] the Windrose and Rendina/Paramount transactions, interest from our convertible debt offerings completed in November of '06 and July of '07, and slightly higher average borrowings on our line of credit.

Fourth-quarter G&A came in at 9.3 million, representing 7% of quarterly revenues.

We also remain comfortable with the improved quality of our loan portfolio, and made no addition to the 7.4 million loan loss reserve during the quarter.

There were several other items of note during the quarter in particular.

First, other income of 6.1 million in the quarter included the benefit from 3.9 million in income from a warrant equity position which was received as a part of the recapitalization transaction with Signature Healthcare that Ray previously mentioned.

One other item of note in the quarter was that we recorded 11.7 million in gains on the sale of assets, which are recognized as a result of the sale of one independent living facility, one assisted living facility, and five skilled nursing assets during the quarter.

Moving on to the balance sheet, we ended the quarter with net real estate investments of 5 billion.

We remain committed to maintaining an investment-grade balance sheet.

As leveraged at the end of the year, stood at 48% on a debt to undepreciated book capitalization basis, within our targeted range of 45 to 50%.

During the fourth quarter, our adjusted interest and fixed charge coverage increased to 3.2 and 2.6 times, respectively.

As of December 31st, we had only 307 million drawn on our 1.15 billion line of credit, leaving 843 million in availability.

Combining this availability with our DRIP, which has raised to nearly 70 million in each of the last two years, and 30 million in cash on hand, we have considerable flexibility in financing our anticipated investments this year.

Our debt maturity schedule is also in great shape, as we plan to use the line of credit to repay both the 42 million in senior notes, which come due in March, and the [28] million in secured debt, which also comes due this year.

In terms of capital for the quarter, we completed a 3.5 million share offering in December for net proceeds of 147 million, which were used to pay down our line of credit.

Our dividend reinvestment plan also continues to generate solid interest as we issued approximately 371,000 shares for roughly 16 million in net proceeds during the quarter.

Now I would like to discuss our 2008 guidance.

As detailed in the earnings release, we expect to report net income available to common stockholders in a range of $1.55 to $1.65 per diluted share, FFO in a range of $3.27 to $3.37 per diluted share, and FAD in a range of $3.01 to $3.11 per diluted share.

As always, our FAD guidance excludes any cash receipts which we may receive during calendar '08 related to prepaid rent or straight-line receivable payoffs.

Our assumptions are discussed in detail on page 3 of our earnings release, but I would like to point out a few items in particular.

First, as George mentioned, our FFO per share guidance represents strong growth in a range of 5 to 8% over normalized 2007 results, while our normalized FAD guidance represents solid 3 to 7% potential year-over-year growth.

Our G&A forecast of 40 to 42 million is primarily a result of further investment in our infrastructure, including a significant commitment to expand what we believe to be the deepest origination [team] in the sector.

Similar to the last two years, I would point out that our G&A expense in the first quarter of 2008 will include the impact of 2.3 million in non-cash stock-based compensation related to the accelerated vesting of stock and options for certain officers and directors.

I would like to provide some additional perspective regarding how our development pipeline relates to earnings.

Our 2008 investment guidance includes funded development in a range of 400 to 500 million, representing an increase relative to the 307 million of development we funded during 2007.

However, although we do have a larger amount of construction funding projected in 2008, we also have a larger number of projects which are expected to open or convert this year.

As you can see in exhibit 9 of our earnings release, we're forecasting 361 million of development conversions at an initial yield of 9.1%, which would represent a significant increase of 132 million in conversions which occurred during 2007.

Finally, I'll conclude with a topic at the forefront of everyone's mind, which is how do we intend to finance our growth pipeline in 2008.

I think for guidance and internal modeling purposes, we believe that we've taken a more conservative approach to how we finance our growth [this year].

(technical difficulty) able to raise the combination of debt and equity, consistent with our long-term goal of maintaining a strong investment-grade balance sheet.

However, we are also evaluating alternative capital-raising options which are available to us, including potential asset sales, joint venture opportunities, bridge financing, as well as the convertible debt and preferred markets.

Most importantly, I think what everyone should expect is for us to look to move opportunistically in this more difficult capital environment.

Given our considerable capital availability entering the year, we do remain comfortable that we will be able to raise the necessary capital to take advantage of the significant investment opportunities we're seeing today at cap rates which are becoming increasingly attractive.

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

Thank you, Scott.

Let me wrap up briefly, and then we'll open for questions.

About five years ago we made a very strong commitment to full-spectrum investing.

And during the last 15 months, we completed our platform that contains development and property management capabilities.

The results have been gratifying as we have increased our medical office building portfolio percentage to 25%, and we're also quite optimistic that our efforts to grow our acute care investments will continue to gain traction as we are beginning to make inroads with strong systems, providers and development groups throughout the nation.

Let me give you a few examples of medical facility investments.

One is in January of this year, we purchased a 40-bed all-private suite acute care hospital with an attached 40,000 square foot medical office building.

These facilities are on a 6.3 acre site, which should allow expansion for the development of additional healthcare or senior housing facilities.

The facility is operated by physicians and a management company.

And as an example of where healthcare is going, meals are available from a gourmet menu and robots deliver lab samples, equipment and prescriptions anywhere in the building.

In the East, we are investing in a new 246,000 square foot medical office building within a 40 acre site anchored by a major health system.

They will offer customer-focused health and wellness services, providing a continuum of care including traditional medical services, wellness, radiology, therapy, lab testing, fitness, a spa, and child care.

And we also expect to complete investments in two new hospitals with attached MOBs -- medical office buildings -- one in the Midwest and one on the West Coast.

Both would be projects in rapidly-growing areas.

Both hospital systems are academic and medical centers, which are joint venturing with physician groups and attempting to extend their reach out to the customer.

And we're also evaluating additional hospital medical office building, cancer centers, stand-alone emergency departments, and combination rehab site facilities.

So there is quite -- there are quite a number of projects that we are evaluating at the moment.

In the senior housing and care sector, the following are just two examples of combination facilities, or CCRCs, that we have added to our portfolio.

In the Midwest we've invested in a 216 unit campus that includes apartments, cottages, independent and assisted living [units].

Amenities include a pool, fitness room, hospitality center, library, theater, billiard room, club room, Internet cafe, and courtyard.

And this project is part of a 700 acre planned community.

A somewhat similar facility in the Southeast includes a 316 unit campus with a full continuum of care, from cottages to skilled nursing services.

There is a full range of recreational, wellness and social programs, and amenities include a 52,000 square foot clubhouse, ballroom and movie theater.

This project is part of an 1100 acre planned community that includes retail, office and multifamily residential, with green space and trails.

And I should say that we currently have investments in 13 projects that meet the NIC definition of CCRC, that includes AL, assisted living, independent living and skilled nursing.

Once built out in full, our investment in these 13 CCRCs will total $509 million.

And if one were to include campuses, regardless of whether skilled nursing was a part of the project, our large combination CCRC projects would increase to 24, with a total built out commitment of $968 million.

The point of this is that we believe we've made very good progress in diversifying our portfolio, with 25% medical office buildings, a growing segment of combination facilities and CCRCs, and some real traction in the acute care space.

The quality of our real estate is improving markedly as we add state-of-the-art medical office buildings and acute care facilities, as well as larger combination facilities, CCRCs, in attractive campus settings.

Just on another topic, let me take a moment to acknowledge Jeff Otten as a new member of our Board.

Jeff was elected to our board on January 23, 2008.

He is an experienced executive who has operated health systems, including serving as CEO at Brigham and Women's Hospital in Boston.

He has also run medical technology and biotech companies.

He adds great depth and judgment to our team.

And as I have said many times before, we believe that the capabilities of our management team and the board of directors are keys to the success of HCM as a leader in the senior housing and healthcare sectors.

With that, we're open for questions.

(OPERATOR INSTRUCTIONS).

Rich Anderson, BMO Capital Markets.

You mentioned the shadow pipeline, 3 billion.

Did you mention -- and I might have missed this -- what's sort of the source of that?

Where is all that coming from?

Why is it off market to you?

A lot of it, when we were mainly doing long-term care, came out of our relationship programs, lines of credit, where people commit.

Once we do the first project, they commit to bringing us virtually all of their projects over a multiyear period.

We have extended that, to some degree, in perhaps a different way, by -- in the acute care space and the MOB space by forming relationships, both with health systems and developers and other providers.

So it's maybe a little looser than our lines of credit in the long-term care space, but we think that in both cases we add to the predictability, the certainty of doing investments.

Fair enough.

When you talk about -- you said your sort of stand-alone SNF exposure, did you say it was 10%?

I can't remember the percentage now.

It is right now, the way we report it, it is at 32% and 21%.

But when we take out -- when we really consider combination facilities, which we think are stronger assets generally, we drive the stand-alone SNFs, skilled nursing, and assisted living down to 24% and 10%, respectively.

So it's 24 SNF and 10% assisted living?

Correct.

And I would expect that over the next three to five years to, at least in the SNF area, to continue to go down as we do more combination facilities, and frankly, do fewer stand-alone SNFs.

But that's sporadic.

So you have to look at it over a longer period.

That was the question.

Where do you see those percentages going?

But I guess, clearly, it's a push downward.

I would hope to get SNFs -- skilled nursing down to 15% on a stand-alone basis at some point.

(inaudible) time I tell you that, I then find a really attractive set of skilled nursing or assisted living, maybe some of those are ripe for adding other facilities to sites and making them into combination facilities.

So we start down, we go up, and we go down.

But it's going to ratchet down toward 15% over the next three years or so.

You say that in the same breath of how insensitive your coverages are to changes in Medicare reimbursement.

So it's sort of like you like it but you don't like it.

I'm trying to reconcile that.

To some degree we're dealing with perceptions of the capital markets.

We tend not to agree with many of the analysts in terms of skilled nursing.

Skilled nursing impact has been a winner in the Medicare rationalization process.

They are very much favored because they provide good, effective care.

On the other hand, we tend to like campuses because we think -- because we think over time, that's going to be a much more sustainable platform than stand-alone anything.

So we just think diversification and balanced portfolio is the best way to go.

On cap rates, can you sort of quantify the rise you're seeing, and maybe break them out amongst your key property types?

As I indicated in the call last quarter, we think cap rates were at their lowest mid 2007.

And what we're seeing now are deals coming back to us that we previously quoted on, and they didn't get done, and they're coming back to us with higher cap rates.

If you look at the NIC key financial indicators and their mean cap rates, the most recent data that they had was a little bit mixed.

IL was 7.4%, AL 9%, SNFs 12%, and CCRCs 9.1%.

And that was for the third quarter of '07, reflecting deals that were negotiated several months earlier.

So maybe a rise in the 50 to 75 basis point range?

I'd say 25 to 50 (inaudible).

Last question.

Scott, you mentioned the word bridge in your financing alternatives.

And obviously, that's not a really great word these days.

So maybe you can sort of talk about your thought process behind considering bridge financing.

I guess I just used that as a generalization to make the point that I think our model is conservative, and that we assume the traditional blend of debt and equity, but we're looking at all the options available to us.

And I think you can assume we'll be intelligent in making our decisions.

Sounds good.

Thanks.

Kristin Brown, Deutsche Bank.

I was hoping you could talk a little bit about the competitive landscaping and how it might vary by asset type in terms of acquisitions.

I'll start, but Ray will jump in, too.

I think it's, frankly, a lot less competitive than it was because of the capital constraints, that we have a lot fewer of the financial buyers coming in.

If they're coming in, they're still perhaps coming in more on the MOB side, the medical office building side, and more assisted living and independent living, I suppose, because those are more -- they have more of a real estate component.

We've seen a diminution of competition.

So our job, and those of our colleagues, I guess, in the other healthcare REITs who have funds, is to make the best allocation of those funds, and trust that over time, given the defensive nature of healthcare, the inelastic demand for healthcare, that reasonably priced funds will be made available to all of us to continue pursuing very good investment opportunities.

Ray, you want to add something?

I would think this is a very good time for us.

Because as George alluded to, financing options are more limited than they were even six, nine months ago.

So that's the good news.

The negative is that we anticipate transaction volumes will be down because a lot of the acquisition and refinancing activity occurred at the market peak in 2007.

However, as mentioned earlier in the call, we approach our investment strategy a little bit differently, using a programmatic relationship-oriented approach.

And given the size of our shadow pipeline, we're very bullish about the opportunity to (inaudible).

You seem pretty confident in terms of volumes.

But if you don't close the volumes that you're looking at, what's the earnings impact there?

I didn't quite hear all of that.

You're breaking up.

Did you say basically the (multiple speakers) the volumes will impact the earnings this year?

Yes, if you don't meet your targets.

I guess the point would be [with me] more [backing up rates than] the guidance that we gave, and you can see would be consistent with the volume we saw in 2007.

And I think we're very comfortable in attaining the guidance levels we put out at this point, given the potential deal volume we're seeing.

What do you estimate the interest savings will be with the ratings upgrade?

We're still having a hard time hearing you.

I just asked what you estimate the interest savings would be from the ratings upgrade.

From our ratings upgrade?

I think when we saw our relative improvement, our debt cost of capital approximately 20 basis points.

Thanks.

Jerry Doctrow, Stifel Nicolaus.

I have a couple of things, just one specific beforehand.

Non-cash comp for the quarter -- do you have that, and is that going to be a good run rate go forward?

I know you mentioned the 2.3 million, or whatever it was in 1Q, but what was it for the quarter?

1.3 million -- it's in exhibit 13.

It was 1.298 million in the fourth quarter.

And I think generally that a reasonable run rate, again, adding the 2.3 million onetime number to that in the first quarter of '08.

Thanks.

We just missed it, I guess, last night.

Getting broader, you're, obviously, stepping up the development -- I have a couple questions there.

One, I don't know if you can give us any sense as sort of when that -- whatever -- the 360 million and the 400 million are kind of going to deliver.

Is it spread over the year or is it weighted one way or the other?

You might want to think about putting out a quarterly schedule, just to help us do the modeling.

Because it could make a meaningful difference quarter-to-quarter, depending on how the deliveries are timed.

We agree.

We're actually -- for everyone's benefit, we're working on an enhanced supplement, and hopefully if we get our act together we'll get it done in the first quarter.

The number for the 361 million as we looked at it, it is more heavily back-end loaded in the year.

If you had to model, I would assume that at least two-thirds of it would be in the latter half of the year.

Any color on '09?

Farther away, obviously.

At that point it's pretty variable.

We include in that exhibit the mandatory conversion date.

So projects tend to move; could be earlier, occasionally can get pushed back later if there's weather delays or permitting delays we've had a few instances.

We'll take a look at the detail.

You're doing a lot of funding of AL, IL CCRCs.

Your occupancy numbers were up, which is good.

But there's, obviously, been a lot of nervousness in the market about impact of the housing market on those things.

I was just wondering if you can give me any color -- more color from your portfolio about how you think that business is doing, risk from the housing market, and kind of your confidence in going ahead and ramping up development at this point.

Clearly, any residential projects have had some effect from these housing issues.

But we've really been very pleasantly surprised to see that, especially in the buy-in projects, that we're doing quite well, and we're moving ahead very steadily.

It's hard to know exactly whether the projects are being impacted.

They're moving ahead at a reasonable pace to give us the right results.

So much of it is anecdotal.

I just read something about one of our projects down in the Southeast yesterday that came out that suggested that the project was not at all being affected by the housing market, but that happened to be in a particularly strong housing area generally.

So it can't help, but we haven't really noticed material effects on our CCRCs.

I might add, too, that about half of -- more than half of our CCRCs, at least the way we're looking at them, are rental.

And even if we extend it to campuses, which might not have the SNF component, we're about half rental, as opposed to the buy-in.

So the thought would be if any are going to be affected somewhat, it would be the buy-in.

And again, we've been pretty pleased with the success to date, but we're watching it, [clearly].

But even in your buy-in, you're saying you're really not seeing an impact in terms of occupancy slippage or slower lease-ups.

If anything, one project in the Midwest is somewhat behind budget.

But it's actually making up for lost time.

What we're finding is anecdotally, again -- what we're finding is that sometimes the buy-in doesn't happen the way it was budgeted.

In other words, if you're just in early-stage construction, it seems as though people aren't quite that eager to move.

And now that we're almost ready to open that particular Midwest facility, it appears that there is an uptick in the purchasing.

I think we're going to probably have a little bit more feel for the CCRC market in the buy-in and the timing of (inaudible) for you as each quarter unfolds, so we're happy to do that.

Scott, did you want to add something?

I wanted to maybe give everyone a little bit more color.

I think [entrance-fee] communities represent currently about 5% of our portfolio.

There's actually 12 communities in the portfolio today.

Seven of those are under construction.

Four are in fill-up.

Of the four in fill-up, three of the four are actually on budget.

The one that George mentioned that is slightly behind is actually meeting absorption expectations and having a little bit higher expenses.

And the one that is stabilized actually has coverage after management fees of 1.7 times and occupancy of a little over 90% for the last 12 months.

So that's the perspective on the portfolio today, which is pretty reasonable, I think.

And obviously you've got confidence going forward or you wouldn't be funding more developments.

Correct.

We actually think these are going to be very, very strong properties.

And if any of them fill a little more slowly because of the housing crisis, we don't think it's a long-term effect whatsoever.

As Scott indicated, as we look at the CCRCs, the way we're looking at it, nine out of 13 are stable.

And as we extend that to campuses that don't have the SNF component, but those are the larger CCRC combination (inaudible) projects, 16 out of 24 are stable.

So I think we're really being careful about taking on development risk, but we will continue to do that with the operators that prove that they do a great job of looking at the markets, building and filling their facilities.

We think these are clearly better platforms in the long run.

My last question on the sort of acute care side, which as you indicated is a kind of growing business for you.

Anything you're doing there to kind of differentiate yourself from your competitors?

It's a handful of other REITs that are out there in that niche.

I think so.

I think for one thing, we've been in -- we have a full-service platform, as you know.

So we can do the development, or we can interface appropriately with some other developer that we work with.

And we can do the property management on their medical office buildings.

And as you well know, some of the hospital systems will like to have a buffer between themselves and their key doctors so that they don't have to worry about [stark] or fraud and abuse kind of issues.

But I think finally, I think our experience in the healthcare arena for all these years, in my experience, for nine years being on the board of an academic medical center, together with the experience of our acute care people, means that we can bring a lot of ideas to the whole system.

What we're seeing around the country.

What we think might be appropriate for them in their particular market.

And we really expect to continue to add to our infrastructure in that space, because we don't think that marketing to the acute care space is done the same way you do long-term care.

You have to -- one has to bring ideas, experience, be able to deal with doctors and hospital administrators.

And I think we have some capabilities there that others may not.

Thanks.

Philip Martin, Cantor Fitzgerald.

Following up a little bit on Jerry's question, George, certainly the health systems are probably attracted to Health Care REIT as a capital source, or an alternative.

How much of the decision to maybe work with a Health Care REIT is driven by the need for these health systems to expand, and maybe bring in other long-term care alternatives, such as more of a campus-style CCRC program, etcetera?

I want Fred Farrar to feel free to step in after I am done as well.

I think the health systems are looking hard right now for all kinds of ideas.

The world is changing rather dramatically for them, and the slow-moving not-for-profit systems could actually find themselves in a bit of trouble several years down the road if they don't begin to move.

Because there is, one, an outreach sort of movement, so that some of the hospitals that I mentioned -- hospital MOBs that I mentioned that are going out to the suburbs to chase customers, to go where the customer is -- that is so different than, say, five or six years ago, when the only MOBs that really made sense to a lot of analysts were right on the campus attached to a hospital or whatever.

But the fact that there is sponsorship by the hospital system, the health system is maybe building an [LOB] out in the suburbs to be followed by a smaller hospital, or they're building an emergency department to be followed by other types of health facilities, suggests that the world is very dynamic.

So more to your question, we have had some success, especially in, I suppose, planned communities, out away from the central core, in talking to hospital systems about our ability to bring CCRCs and other types of long-term care assets, senior care assets, to them, because those can be viewed, as you well know, as a feeder to that health system.

So it can be very favorable.

Some like that.

Some don't.

Obviously, it depends on the size of the property.

But it could well be that we could do some things for the health system if they have a particularly good site, but it's way too many acres for them; we can also not only bring them the feeder system, but we, in fact, can facilitate completion of (technical difficulty) and the build-out and development of that larger community.

Fred, do you want to add anything?

I think your focus on outreach facilities is very apropos as systems look to go where the patients want their treatment.

And also, our development pipeline to developer partners give us access into those systems that are relationships that could take years to develop.

Do you find, Fred, that a lot of these health systems are lacking enough long-term care or senior living services, and can benefit by some program that a healthcare REIT could bring?

It really varies by market.

Some of the systems aren't particularly focused on that, and others are.

We're seeing more of these, as George mentioned, these planned communities that include a medical component as well as a long-term senior housing component.

Maybe this is for Ray.

Margins at the operator level.

Can you talk a little bit about what's happening at the operator level in terms of margins, rent growth, and even in terms of supply/demand fundamentals, which I think are pretty good?

But again, are these operators seeing what they need to see at the operator level and the demand level for their services to justify their development programs going forward?

Let me break that down into a couple of components.

I think in terms of existing facilities and their operating performance, as reflected by the payment coverages we're seeing, and by the industry statistics being published by NIC in both their key financial indicators and their [map] data, the long-term care and senior housing industries are operating at a very high level, some of the best operating performance we've ever seen.

So the operating fundamentals continue to remain strong.

In terms of new development, that is a market-by-market analysis.

In some markets, the rental rates paid by building occupants will not justify development costs, and in others they will.

So you really have to look at that on a market-by-market basis.

Do you find that the majority of your portfolio is located in above-average growth markets, which I know can be defined any number of ways?

Roughly two-thirds of our portfolio is located in the top 100 MSAs.

So as the MSAs goes, so go the opportunities for us.

Thank you very much.

Rob Mains, Morgan Keegan.

A couple clarification questions on numbers; my other stuff has been answered.

On the other income line, I understand the 3.9 million comes out.

The figure still comes out about 1 million higher than it's been in other quarters.

Is that a reasonable run rate to use for next year?

It bounces around between probably 1 million and 2 million.

One thing we did do this quarter is we moved the property management income from Paramount -- our property management businesses, MOBs that they manage for third parties, up into that line.

Previously it was a reduction in property operating expenses.

That was about 500,000 this quarter.

So I would give modeling somewhere between 1.5 million would probably be about right.

Fair enough.

Just wondering, the guidance for depreciation is kind of -- for the full year would be flat compared to where it was in the fourth quarter.

Am I missing something?

I think guidance is 160.

That is correct.

We, obviously, have a very detailed model with the estimates of timing of everything.

So maybe we could look at that.

And if I notice anything, I'll give you a ring (multiple speakers)

It comes out in the wash with FFO anyway.

Just curious about that.

All my other stuff has been answered.

Thanks a lot.

Omotayo Okusanya, UBS.

Just going back to the development going on that Jerry was talking about earlier on.

2009, the conversion.

I noticed that the yields have come down from where you had them at third quarter.

You have them at 8.7 this quarter versus 9.9 last quarter.

Just wondering if there is anything specific going on with those properties that caused the change.

I think on that -- in regards to that number specifically, the biggest factor is the fact that we've added a little over $70 million MOB construction that is expected to convert in 2009 that skews that number from the number that would have been recorded last quarter.

It was something we started in the fourth quarter.

That is actually the most significant factor.

Otherwise those numbers tend to move around slightly.

Treasuries may move around, but we do have floors on virtually all of them.

With the ramp-up in development activity across the CCRCs, the assistant living facilities, and the (inaudible) medical office buildings, just with the big ramp-up in fourth quarter of '07, do you still expect that you should be able to convert quite a lot of those properties in '08?

So you're pretty much going to have them constructed and ready to go by the end of '08 within a year?

Am I reading that right?

I guess I don't have the number for what we had in here last quarter.

But that number -- we would have had projects that would have been underway before the numbers that would have started in the fourth quarter, in addition to -- I would think most of the projects that we would have started in the fourth quarter would be out further than that.

Generally speaking, you probably average -- if you look at it, it ranges from 12 months at the short end, to 24 to 36 months for a larger campus project.

That's what I was thinking.

The CCRC balance -- you have committed balance of about 640 million here as of fourth quarter.

At third quarter, that balance was 464.

For assisted living, it was 218 this quarter versus 156 last quarter.

But in general, you have your conversions going up for 2008, from 270 last quarter to 360 this quarter.

It just seems like the stuff is expected to come on really fast, and I thought it took longer to develop some of these products.

The one other impact, Tayo, is we had about 40 to 50 million of projects run over that were previously expected to convert in the fourth quarter of this year that rolled over into (multiple speakers)

(multiple speakers).

That explains quite a bit of it.

There were some weather delays and some permitting delays on several of our projects that pushed them into 2008 (multiple speakers)

That is helpful.

Going back to the whole idea of raising capital this year, could you talk a little bit about kind of with all the different alternatives you may have, kind of listing preference what you would like to do first versus what you would like to do least of the four or five options that you stated earlier on?

It's, obviously, difficult to answer (inaudible) issue common stock (inaudible).

We have to basically -- I think the way we intended -- and we're a little different.

We talked about this a lot.

We prefer to give guidance including investments, because I think it's important to give color on the investment growth we're seeing.

But I think we've assumed the traditional kind of 50/50 debt and equity structure.

Obviously, the unsecured market is horrible right now.

I don't think we'd be inclined to do anything there, given where spreads are.

So we will actually be watching all the markets opportunistically.

We actually are looking at some potential for recycling capital in an environment like this.

We think that is a good option available to us.

And then, obviously, we're watching the equity markets closely, and we'll be as opportunistic as we can.

Thank you.

Chris Pike, Merrill Lynch.

Just to follow-up somewhat on that question, I guess back to Kristin's question, I think you quoted the 20 basis point saving.

That's on the line, correct?

If you were forced to issue unsecured at this point, given the re-rating upward from the agencies, where do you think the market is at this point?

We've looked as recently as -- we watch it every day.

It's ugly.

Our spreads, and for everyone in the REIT land, it has gone up very significantly.

I don't think there have been any REIT unsecured issues done.

To try to get estimated pricing today is just an exercise in futility.

But think I think five-year unsecured would be as high as 7.25 (multiple speakers) 10 years (multiple speakers)

Probably 50 out from there, right?

No, it's even 100.

The curve is steeper (multiple speakers).

So, obviously, those are prohibitive.

And then you say -- we, obviously, think about what our long-term cost of capital is, and I think it is [somewhat] less than that.

We don't, obviously, feel like the markets will stay there forever, but don't anticipate doing anything in either of those two markets until conditions improve.

I guess back to the line, understanding you pushed it out this quarter.

At what point do you guys feel comfortable?

And where should we expect you folks to start to look to term out some of the short-term debt into longer-term financing alternatives?

307 at the end of the quarter, right?

Yes.

We have 843 million available on our $1.15 billion line.

And, yes; [there's] potential for DRIP and cash on hand.

We basically could hit the midpoint of our investment guidance and wouldn't need to access the capital markets very much.

On the other hand, the way we've looked at it and the way we looked at our equity deal in December, we have to be opportunistic, because we really see a ton of good investment opportunity.

We look at it every day.

I'm sorry I missed this, Ray, but the yields on the sales and payoffs -- I'm sorry -- not so much the payoffs, but the yields on the acquisitions and the loans in the quarter, and the timing.

Can you provide that for modeling purposes?

(multiple speakers) with new investment (multiple speakers)

No, what you guys -- yes.

The fourth quarter, we have 21 senior housing at 7.5, average (technical difficulty) 10.2.

MOBs 31 million at 7.5.

CapEx and loans of 127 million at 10.1.

And funded CIP of 119 million, with yield upon conversion of 9%.

Do you guys provide the timing in the previous press release when you walked through that stuff?

Because I can go get it.

I have it here, Chris.

That's what I'm really concerned about, is the timing.

The acquisitions, [if you] add those two numbers up, the 52 million or so is mid quarter.

The loans were basically almost mid quarter as well.

So both of those you should model mid quarter (inaudible).

And then I guess back to Ray, from the cap rate question earlier, can you run through coverages on those caps, the [get back] to lease yields?

I quoted the NIC industry cap rates, and those don't come along with coverages.

You can sort of look at our portfolio and what its coverages are to get a sense for it.

But we're seeing -- I would say generally, we're seeing lease yields on MOBs in the 7 to 8, and on seniors housing in the 8 to 9 category.

George, back to your comments regarding MOBs.

I guess on a [Tenant] call yesterday, management spoke to potentially an MOB divestiture.

I'm just wondering if you guys know any specifics about that portfolio, how big it is, and any kind of market chatter on it.

We get some market intelligence, but we don't know enough to weigh in here.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

Rob Mains, Morgan Keegan.

One more question on modeling.

I might have missed this if it was earlier.

You ended the year with shares outstanding of 85.4 million.

How do you get to the 92 million guidance for diluted?

That was my point.

When we model guidance, we include financing or generic financing assumptions, which include a blend of debt and equity.

That would also imply that if I'm not going to assume -- if one doesn't assume an equity offering, one would also probably have a slightly higher interest expense number.

I know you don't give it, but that would come out in the model.

You could run that higher on the line and that would positively impact earnings relative to what we gave in our guidance.

I understand that now.

Good enough.

Thanks.

(OPERATOR INSTRUCTIONS).

We have no other questions at this time.

We appreciate everybody participating in the call, and Scott will be available for follow-up calls.

So that's it.

Thank you.

Thank you, sir.

That does conclude today's conference call.

Again, thank you for your participation.

Have a good day.