Welltower Inc (WELL) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by.

Welcome to the Health Care REIT third quarter 2008 conference call.

(Operator Instructions).

This conference is being recorded today, Tuesday, November 4, 2008.

I would now like to turn the conference over to Kathy Price of the Financial Relations Board.

Please go ahead, ma'am.

Thank you, operator.

Good morning, and thank you for joining us today for the Health Care REIT third quarter 2008 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 website at www.hcreit.com.

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

At this time, Management would like me to inform you that certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and from time to time in the Company's filings with the SEC.

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

Please go ahead, sir.

Thank you, Kathy.

I will begin the presentation by making a few comments -- brief comments regarding the Sunrise transaction.

We disclosed a potential deal on September 2 at the time the purchase and sale agreement was executed.

During the due diligence period, the general economy, the capital markets, and the cost and availability of capital all changed dramatically.

So as we approach the end of the diligence period, through an analysis of all of the relevant factors, we determined that the deal under the original terms was no longer in the best interests of our stockholders, and were unable to modify the terms in a way that made sense for all parties involved.

There was no termination or breakup fee associated with the deal, and our initial $5 million deposit has been returned.

We currently estimate that we will have approximately $1.5 million $2.5 million in abandoned deal costs, which will be expensed in the fourth quarter.

We continue to think highly of Paul Klaassen and Mark Ordan and their team.

But at this time we're still subject to a confidentiality agreement with Sunrise, and ask everyone to respect the fact that we cannot provide more than these prepared remarks today regarding the termination of this transaction.

When we review our portfolio generally as we near the end of 2008, we're pleased with what we have accomplished.

Our goal of refocusing our portfolio on combination senior housing and care properties, and medical facilities, has largely been met.

And by year end we expect to have approximately 70% of the committed balance of our portfolio in combination properties and medical facilities.

Moreover, two-thirds of our tenant revenues will be private pay.

In the next year stand-alone facilities will be below 25%, and the facilities that remain will tend to be newer and more customer focused.

We are reaching our goals due to our targeted investment and disposition programs.

For the full year, we expect 82% of our new investments to be in combination senior housing and medical facilities, and 86% of our dispositions will be stand-alone properties.

Before turning to other topics, let me comment on the general nature of our portfolio.

While senior housing and care, as well as even the acute care space can be adversely affected by a down economy, we believe that the health care sector is generally much more demand inelastic than other sectors.

And moreover, senior housing, and health care for that matter, all benefit from a very strong demographic wave.

To the extent there could be some dislocation in the senior housing and health care sectors, we believe we are in a unique position to address property or operator issues.

Our underwriting is excellent, and once we close a deal, our asset management function, i.e., portfolio monitoring, allows us to detect warning signs at a very early stage.

By addressing these problems early, we are able to work through with the operator to address issues when they are manageable.

In the worst case, as we've shown in the past, we are able to move properties to other high-quality operators with experience in the same geographic area.

Our deal structures also offer a great deal of comfort to us as substantially all of our properties, excluding MOBs -- medical office buildings -- have corporate or personal guarantees; two-thirds have letters of credit, security deposits, or escrow accounts; and in addition, nearly 90% of the senior housing and care portfolio are in master lease structures.

But one of the most important protections relates to our proactive repositioning of the portfolio over time.

We began our move to combination properties years ago.

The results are quite gratifying.

We expect to continue the disposition program during the next three to five years with emphasis on older, stand-alone, skilled nursing assets.

And in the acute care space, real estate platforms have been changing dramatically as technological and pharmacological changes have driven noninvasive and minimally invasive procedures generally on an outpatient basis.

Moreover, health systems are increasingly and appropriately focusing on the customer experience.

Accordingly, we have already positioned the acute care portfolio to focus on the newer customer-friendly platforms.

Finally, we believe we are in good shape to benefit from a changing cap rate environment.

We can fund all of our capital commitments and debt maturities through 2010 without raising additional capital.

As you know, we've raised $685 million through equity issuances to date in 2008.

And our $1.15 billion line matures in 2011 and can be extended at our option into 2012.

Debt maturities total only $60 million through 2010, and we will also continue to recognize some level of proceeds from dispositions.

And alternative liquidity options also exist including debt -- either on existing assets or as part of a transaction -- equity issuances, and joint ventures.

We believe that HCN will be one of the first companies that will be able to issue equity or debt at attractive prices and once the markets begin to clear.

As we look back at 1999 and 2000, the markets were also roiled.

We took that opportunity to stay close to our operators and began lining up investments in late 2000 and early 2001.

We completed the first equity race in the space in the second quarter of '01 and made great investments in the second half of 2001, as well as 2002 and 2003.

We do recognize that today's environment is quite different than that of the previous period.

But we do believe that preparation for future improved market and economic conditions will result in a period of excellent opportunity and that we will be positioned to take advantage of these opportunities when the capital markets open back up.

At this point, I would like Ray Braun and Scott Estes to make some comments relative to the portfolio, and the senior housing and health care sectors, as well as our financial results.

First, Ray?

Good morning, everyone.

I'll cover investments, the market, our portfolio, and reimbursement.

During the third quarter, we completed $349 million of gross investments including $125 million of acquisitions at average initial yields of 8.2%.

For the full year, we have completed $1 billion of gross investments, including $439 million of acquisitions at average initial yields of 8.5%.

We funded $210 million in development during the quarter.

We currently have 32 properties and seven expansion projects underway with a total commitment of $1.5 billion.

There were $54 million of conversions during the quarter at an average initial yield of 9.3%.

We also had $18 million of dispositions during the quarter.

We expect transaction volume to slow in the fourth quarter.

Our relationship investment strategy continues to generate opportunity.

But we are limiting new commitments until the credit market is stabilized to insure our liquidity.

We will maintain our commitment to select development projects and acquisitions already in the pipeline.

Regarding prices, cap rates are increasing across all sectors.

Cap rates for seniors housing are 8% to 9%; skilled nursing, 12% to 13%; MOBs, 7.5% to 8%; and hospitals in the 14% to 16% range.

Turning to the portfolio, we have 483 properties in our seniors housing and care portfolio with 56 operators in 37 states.

Stable payment coverage is 1.4 times for independent living and CCRCs, 1.6 times for assisted living, and 2.3 times for skilled nursing.

On a same-store basis, payment coverage increased 18 basis points in our skilled nursing portfolio and six basis points in our independent living CCRCs portfolio, while declining six basis points in the assisted living portfolio.

Notably, the same-store independent living and CCRC occupancy increased 70 basis points year over year and remains strong at 92%.

Medical facilities include 128 medical office buildings with 5.8 million square feet, and 30 specialty care facilities in 27 states with 1,869 beds.

Stable payment coverage for specialty facilities was 2.4 times, and we currently have five specialty care properties and fill up with an investment balance of $87 million.

Medical office building net operating income of $22 million in the third quarter, and occupancy declined 60 basis points to 88.5%.

We currently expect MOB portfolio occupancy to be approximately 90% by year end.

Turning now to reimbursement, last quarter we reported average Medicaid rates in our skilled nursing portfolio will increase by 1.7% for fiscal year 2009.

According to data provided by BDO Seidman, the average national Medicaid rate steadily increased from 2000 to 2007 at roughly 5% a year, or a total increase of 41%.

Looking at our top five skilled nursing states, Medicaid rates have increased at an average between 4% and 6% per year in each of these states.

While we believe rates may increase at a lower rate during challenging economic times, we do not expect long term -- a long-term reduction in Medicaid rate growth for skilled nursing facilities.

As we mentioned last quarter, CMS provided a 3.4% market basket increase to skilled nursing rates for fiscal 2009 and delayed the recalibration of the RUG payment categories.

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

Thanks, Ray, and good morning everybody.

We had another strong quarter from an earnings perspective.

In third quarter normalized FFO per fully diluted share increased 9% to $0.86 from $0.79 last year.

Normalized FAD per fully diluted share increased 7% to $0.80 from $0.75 in the comparable quarter of 2007.

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

We recently declared the dividend for the quarter ended September 30 of $0.68, or $2.72 annually, representing a 3% increase above last year's rate.

The payment represents the Company's 150th consecutive quarterly dividend.

Turning to operating results, gross revenues excluding discontinued operations totaled $145 million for the third quarter, up 22% versus the same quarter last year, with 91% of gross revenues coming from rental income.

Our interest expense was essentially flat versus last year at $33.5 million despite higher borrowings under our line of credit, primarily due to lower line costs and an increase in capitalized interest as we build out our development pipeline.

Third-quarter G&A came in at $10.8 million, in line with our expectations.

We believe this run rate of approximately $10.5 million to $11 million is appropriate for the fourth quarter of 2008.

There were several other items of note during the quarter.

During the quarter, we did have payoffs with an aggregate book value of $18 million, and the most significant disposition was the sale of an underperforming hospital to Kindred Healthcare.

All the assets were sold at a 6.15% cap rate based on in-place rents, and we recognized the $12.6 million gain on sale as a result of the third-quarter disposition.

We also had $41 million of assets held for sale on our September 30 balance sheet, which represents the second tranche of Ameritas assets that were sold on October 20 for $77 million.

These assets were sold at an attractive 6.1% cap rate based on in-place rents.

I'm moving now to the balance sheet.

We ended the quarter with net real estate investments of $5.8 billion.

We improved our credit profile significantly during the quarter through our July and September equity offerings, which reduced our leverage to 41.6% on a debt to undepreciated book cap basis versus 49.1% the previous quarter.

Importantly, our debt to undepreciated book cap ratio is now at its lowest level in the last four years.

Our trailing 12 month adjusted interest coverage of 3.9 times and fixed charge coverage of 3.3 times were impacted by the large gains on asset sales during the second and third quarters, but excluding these gains our interest and fixed charge coverage were a strong 3.0 times and 2.5 times, respectively.

I now would like to take a minute to walk through our liquidity position and access to capital.

I think most importantly we have nearly $925 million in cash and line availability and only $60 million in debt maturities through the end of 2010.

As of September 30, we had $763 million available on our line of credit, cash and cash equivalents of $18 million, and restricted cash available to invest of $66 million.

These amounts, combined with the additional $77 million of proceeds from our October Ameritas asset sale, results in the approximate $925 million in availability, providing considerable liquidity heading into the final quarter of 2008.

I would also like to take another minute to walk through our development commitments.

As of September 30, we have $1.4 billion of development commitments with $878 million unfunded.

We expect to fund an additional $167 million in the fourth quarter of this year and $545 million in 2009, reducing our unfunded commitments to $166 million by the end of next year.

As I noted previously, we have adequate liquidity to meet our development obligations with current cash available before considering additional capital sources.

We are confident on our development commitments and reiterate these assets will be best in class with 96% either combination senior housing or medical facilities.

Furthermore, by the end of 2009, we expect to convert over 40% of our committed balance to full yielding assets.

I did also mention our near term, that we have limited debt maturities, again, only $60 million in debt maturing through year end 2010.

Turning to capital rates during the quarter, we raised nearly $580 million in net proceeds from equity transactions in the third quarter at an average net price of $44.56.

Most recently we completed an 8.05 million share offering in September for net proceeds of $370 million, which were used to pay down our line of credit.

We saw strong demand in the transaction with upsides from 6 million to 7 million shares, and note that the over allotment was fully exercised.

Under our dividend reinvestment plan, we issued approximately 353,000 shares for $17.2 million in proceeds during the quarter.

Now I would like to take a minute to turn to our supplemental information package, which we've expanded a bit again this quarter.

First, I would just point out on page 11, we've added footnotes to the NOI disclosure for the non-cash items in discontinued ops to allow for calculations of in-place cash NOI.

Also on page 20 of the supplement, we've added a new chart with the breakdown of revenues by asset type in our top 10 states, and we've also added revenue concentration by operator.

I think you'll see the overall portfolio is very well diversified, as no state represents more than 14% of revenues, and our top five operators represent only 28% of revenues.

Also on page 32, we've expanded disclosure for unstabilized properties.

New charts now track how many properties have been added and how many stabilized, both by occupancy category and by property type.

We did have eight properties convert to stable status during the third quarter.

Finally, on page 33, we added portfolio trend charts that highlight our tenant concentration, payer mix, and asset concentration over the last three years.

These charts illustrate our portfolio diversity with only 39% of our investment balance with our top 10 operators and 65% of revenues from private pay.

Last quarter, we also did add our construction portfolio book to our website with detail on each of our current development projects.

If you haven't had a chance to review the book, it is available at www.hcreit.com/construction.

We do expect to get this quarter's version posted onto the website later today.

Lastly, I'll discuss our 2008 guidance.

We've refined our investment guidance to $1.2 billion from the previous range of $1.1 billion to $1.4 billion, including acquisitions of $600 million and development funding of $600 million.

Net investment guidance has been revised to $950 million from the previous range of $700 million to $1.1 billion, including dispositions of $250 million.

Regarding earnings, we've increased our normalized FFO guidance to $3.34 to $3.39 per share, representing 7% to 9% year over year growth, and we've also increased our normalized FAD guidance to $3.10 to $3.15 per share, representing 6% to 8% growth over the previous year.

I would point out that our current outlook does not include any abandoned deal costs related to the Sunrise Arcapita transaction.

That concludes my remarks.

George, I turn it back to you.

Thank you, Scott.

We are now open for questions.

(Operator Instructions) Lou Taylor, Deutsche Bank Group.

George, can you talk a little bit about your -- just investment kind of philosophy and outlook?

Given your availability, given your development spending needs, do you think you're going to be active either acquiring or disposing assets in the next say couple of quarters are so?

Lou, that's -- it's sort of an imponderable.

But we're going to be extremely selective in taking advantage of any opportunities.

And it's incumbent upon us as well to let cap rates adjust -- totally adjust in the various sectors.

We do hope that we complete some additional dispositions, however, and some of the methods are still available to some of the folks who want to take us out of some of the stand-alone assets through the agencies, who have been pretty good the last quarter or so.

So we're going to be probably slower, Lou, until the markets really open and give us cost-effective capital, and -- but we're going to find probably some very good selective assets that we can put our money into.

But clearly in these times we're going to have to be very, very careful.

Okay.

And then can you comment just on the occupancy trends at the assisted living and the independent living?

They seem to be eroding steadily through the first half.

And can you give us an update in terms of how much further they've eroded since June 30 and what your expectations are in terms of the pace of erosion going forward?

Or pace of improvement?

Well, let me make a couple of general comments, and then Ray and Scott, you should step in.

One, it's not surprising that they would be under some pressure given the closeness to the housing market, especially with IL over time, and even in the assisted living.

We've found, Lou that even in the acute care space there is some weakness that comes about when the economy is down for several quarters, whether it's the increase in bad debts or whether it's a delay in even pursuing elective surgeries.

So it's not at all surprising in IL and AL that there would be a little softness.

But as you look at each one of our operators, I know one of them is down because they refused to cut rates.

So they decided to keep the revenue line per unit high.

Another one did actually decrease rates, did some discounting, and so the occupancy stayed high, but the revenue was a little lower.

Scott, Greg, do you want to add anything?

I'll just also reiterate, it doesn't impact our earnings.

We do not have the (inaudible) structure issues, so there's no impact there.

And additionally, our coverages are very strong, so we don't anticipate any increase in payment risk.

That would be one point that I would add, Ray, that all (technical difficulty) across the board (technical difficulty) are actually in excess of our underwriting standards.

I think that's important.

And I would say one factor, at least in assisted living this quarter, I know our overall occupancy was also impacted a bit by some of the dispositions we had.

Lou, I would go back to one of my initial comments, and that is that you can see some softness from here and there in health care in senior housing.

But I would much rather be there than almost every other -- in any other sector in the economy.

So we're pretty comfortable right now.

Ee Lin See, Credit Suisse Group.

For your investments, what is the target debt versus equity percentage, and does that change in light of the difficult capital markets?

Then just a second question, can you talk a bit about the NOI decline or the occupancy declines of the different segments in the last three sessions?

Thanks.

This is Scott Estes.

How are you?

I think first, I would just comment in general on our leverage metrics.

I think we're committed to maintaining our investment-grade ratings, and as we've said in the past, we consistently manage the balance sheet over the longer term for debt to undepreciated book cap in the 40% to 45% type range.

Could you repeat your question again about the NOI for us?

Yes.

Actually, my first question was not about the debt-to-equity as the whole company, but for your investments.

What is the percent of debt versus equity?

And has that changed in light of the difficult capital markets?

If the question is, will we be making investments to own real estate and lease it to operators, versus extending mortgage financing, we will be primarily owning and leasing assets.

Okay.

And my second question was, can you talk a bit about the NOI growth of the different segments in the last recession, like which segments did better than others?

(inaudible) in a bigger picture (inaudible) in the last recession, which sectors did better than others.

I think for our structure, generally, it's nice because you can see in our same-store senior housing portfolio, we generally have increasers that averaged in this quarter, you can see, 2.8%.

So I think the vast majority of our portfolio is fortunate enough to have a lease structure that, as long as the operators can pay us rent, we actually get a reasonable 2.5% to 3% type increases in the majority of our senior housing portfolio.

Jerry Doctrow, Stifel Nicolaus.

A couple -- this has been covered, but I just wanted to kind of redo it a little bit.

Obviously, a lot of uncertainty in the market, so you can't be specific.

If we're trying to think through to sort of '09 at this point, maybe even 2010, directionally we should be assuming obviously the construction stuff gets funded, lower acquisition volumes, higher yields, and is that sort of what you would kind of expect, just broad-brush?

Yes.

Okay.

And are we seeing any -- in terms of some of the newer acquisitions or anything, I mean I think Ray may have talked about cap rates.

But in terms of just yields and stuff, are you starting to see movements on pricing?

I know with some of your relationship investments you have got the ability to reset prices based on various indices or whenever, so at this point in time, you obviously didn't do Sunrise at say a 6.6 cap.

Is there some sense about or any deals out there that are kind of confirming where cap rates might be?

I think it's clear, Jerry, given the transactions that are being offered to us, that people are looking for capital, and they are understanding that cap rates are going up.

I would say that the most -- the sector that is most resistant to that reality is in the medical office building space, where people are still talking about 6.5% to 7% cap rates or a touch higher.

We frankly feel that that is delusional.

But I think it's changing.

I think it's up to us to be patient and to make sure that we've seen as much as possible the move to the new stabilized cap rates before we perhaps dabble in some really attractive investments.

So we -- again, we look at this as a period opportunity going forward.

Right.

And then I think my last question on rates -- it looked to us like some of the yields on some of the new investments I think you're putting on in 2010 on the construction side actually come down a little bit.

So I guess I was trying to understand on the development pipeline, what sort of a yield expectation there, and do you have any flexibility to sort of move those rates or are you kind of locked in at a rate that maybe you committed to six months ago on a project that's coming online in 2009?

Let me make a general comment, and then turn it to Scott, who will have more precise data.

What happens in every period of changing cap rates is that we feel that we can only move certain cap rates so much for projects that have been in the works for a quarter or two.

And one of those is part of what you're seeing in the rates for the third quarter.

Excellent property.

We did move up some of the rates, and we kicked away some other deals.

But there is some obligation at times to fund those.

On the other hand, when cap rates are down, we were pretty good at being able to grab some very high rates before rates plummeted, as well.

So that's just part of the transition.

Scott?

I would add that we generally -- well, we always have a floor in terms of the initial yield that's determined at the start of the project.

And again, we generally set the initial yield at the time of certificate of occupancy.

Generally it's set at a spread over a comparable treasury at that time.

I think your specific question about the 2010 projected initial yields were actually impacted slightly by a couple of the new development starts we had in the third quarter.

And specifically, we actually started two really phenomenal medical office building projects that will convert in 2010, and they are at approximately a 7.5% yield, but really premium showcase assets.

So these numbers, if you're looking quarter over quarter, are sometimes impacted by what is coming into the development bucket.

Okay.

And I guess I would just expect on development for the yield to be higher than that on MOBs.

Is that -- just because of the development risk.

But these are leased assets that you're building, so you've got a guaranteed income stream?

Or are you taking lease of risk on the MOBs?

In the particular one that was embedded in the development pipeline last quarter, we -- it's a very, very solid state-of-the-art medical office building.

And it's partly -- being funded in part -- it may be a little lower than we would like it to be in due deference to the developer partner of ours who brought it to us.

I was just going to point out that it is a very strong tenant, and it is actually 100% pre-leased, Jerry.

Rich Anderson, BMO Capital Markets.

Thanks, and good morning everyone.

I wanted to talk to you about cap rates I guess a little bit further.

You mentioned, George -- and everyone on the call talking about rising cap rates, and that's of course understood, but you are one of the few REITs that, at least based on the average NAV estimates out there, are trading at a premium to your NAV.

So are you saying that that NAV estimate is stale in your view at this point?

George is looking at me, Rich.

I don't think that's the way to look at it.

We really talk a lot about our cost of capital.

And we see a lot of good investment opportunities out there.

The biggest disconnect is the incremental capital we can raise.

And I would actually argue as we look to continue to maintain our liquidity and look at our assessment of where deals can be priced and our cost of capital and in your terms, thinking about either a FAD yield or an NOI yield, that I think our equity is actually an excellent source of new investments.

And I think it's actually priced appropriately.

I think it's too early to say really where cap rates ultimately will turn.

I think our comments are really, the market is trying to feel itself out in like more from the capital difficulties as opposed to a lot of transactions being done at significantly different prices yet.

Well, whether you talk about NAV or you talk about other multiples and other ways to value us, Rich, we think that the market has begun to recognize quality of the new development and some of the acquisitions we're doing and that that will play out very favorably for us in the capital markets.

And is there a way to -- you look at your -- you're monitoring the environment and are hesitant to jump into acquisitions as cap rates rise.

Is there a number in mind -- maybe that's simplifying it too much, but in terms of a rise in cap rates -- that will start to get you interested?

Is it 50 basis points?

Is it more than that?

Or is it tough to say?

I would rather not speculate on that.

It really would depend on the relationship.

It would depend on the quality of the project and type of project and -- as well as our assessment at that time of the environment and where it's going.

It's just really impossible to do.

That's a fair comment.

I understand.

A couple more quick ones.

Just looking at your guidance, and fourth quarter implies $0.80 to $0.85.

And if we put in your abandoned deal costs and your equity, we still don't really get near the low end of the range.

And I was just wondering if you could comment on what could get you to $0.80 in this environment, or is that just pure conservatism?

We would hope it's pretty conservative, Rich.

I think we tend to be conservative too in our LIBOR forecasting.

I know that I generally -- we forecasted 4% in terms of LIBOR at this point for this year, and obviously today they are 2.4%, when I looked this morning.

So I think that's clearly an area of conservatism.

We would hope we don't end up toward the lower end of the range.

So like if your interest expense sort of stays where it's at, you should be at least the middle to upwards to the higher end of the range?

No comment on specific numbers.

You guys know how to model, and we obviously had a sizable equity offering on September 3rd, as well.

MOB retention rate dropped to 61%.

Anything to read into that?

Fred, do you want to comment on the retention in the MOB portfolio for us?

Sure.

We had 100 and -- 220,000 -- 187,000 square feet expiring in the third quarter.

We had another 186,000 expiring in the fourth quarter.

We think our yearly retention rate will be around 65%.

It's a little bit down.

A lot of that has to do with some of the dynamics in the building, where we had ten-year leases all expiring, and some master leases.

We expect that to get back up above 70% next year.

I will point out we only have about 390,000 square feet rolling next year, or about 60% of what we had this year, Rich.

Okay, good stuff.

Then lastly, maybe for Ray or George or anyone, how have things changed in terms of joint ventures and how the terms and structures have changed in this environment?

I don't think they have necessarily changed.

They are all very specific to the potential joint venture partner.

They are still people who think they can get 15% and 20% returns, and some of the more conservative folks have their own policies about entering into joint ventures.

So it's really very sporadic.

It's very much a product of the specific negotiations with a specific potential joint venture partner.

I think we've probably had discussions with probably eight or nine of them.

So I think if we have the right product and the right opportunity, we can probably pick the right joint venture partner.

It's just as much of an opportunity to you today as it was three months ago?

Well, I think it's an opportunity like it was six months ago.

I think it might be possibly more important to us at some point in the next quarter or two because we're seeing some pretty attractive investments, and if we can work a little harder on the joint venture possibility now, I think that would be a good use of our time.

So we're looking at it very hard.

Philip Martin, Cantor Fitzgerald.

I guess this is a question for all of you.

Can you give us a bit of a perspective from the operators and the health care systems and tenants, etc.?

How are they adjusting to this new environment?

I would have to think your relationships are leaning on health care REIT a bit more.

As a financial source, you obviously bring a lot of experience and many skills sets, but as a financial source you have to be a beacon of light in this environment.

So can you give us a perspective from the operator and health care systems standpoint?

Well, to the extent that all of us in the health care REIT public sector are having problems, a lot of the operators are having even greater problems.

So we get calls everyday day for it.

We just have to tell them that unless we can get the right kind of opportunity and -- with ownership and so that we do not take any undue risk, we just can't do anything for them at this point.

For the really good ones that have been long-term relationship (inaudible) we will stretch as far as we can, we aren't going to put the Company in jeopardy to do that.

But I would say this, that it's really hard work out there for the operators.

They are bucking a down economy, and while they might be more resistance to the down tick in the economy than other sectors, it's still a lot of hard work.

It's slower fills in the -- more of the housing component of senior housing, and I will tell you that even in the hospital area, as I said earlier in my remarks, the bad debts are tending to go up, elective surgeries are going down.

So everybody is working real hard.

And it's not a fun time to be an operator in the senior housing or health care side.

Ray, do you want to add anything?

You know, I think operationally, George has covered it.

The economy is affecting occupancy levels, procedure levels, etc.

And on the financial side the good news for most of the senior housing operators is that a lot of debt was refinanced over the last couple of years when rates were very low.

So there's not a lot of pressure from debt maturities.

Are they -- are the operators or tenants leaning on a health care REIT any differently than they have in the recent past?

Are they asking for more health or more assistance or different structures or different ideas?

All of the above.

Is that the same on the MOB side, Fred, as you talk to health care systems and doctors and potential tenants for the MOB space?

Well, you know in the 1.4 million square feet that we have leased directly to systems, that's primarily where we'll talk to the systems.

They're looking for a little more assistance in terms of TIs.

But other than that, we're not seeing a whole lot of --

Are the systems seeing -- I would have to think that given the demand in the health care space over the next five to ten years that many of these health care systems are forecasting, are they willing to be a little more flexible on price?

Are they adjusting their return expectations, because that's a small price to pay in the face of the increasing demand and the competitiveness over the next five to ten years?

Is that a fair statement?

I can start, Philip.

I think that it's been amazing to see the last couple of years just how open health systems have been to alternative financing generally.

And that trend is only continuing and becoming stronger due to the dislocation in the bond markets in part and in their more traditional sources.

So we find them to be interested in talking to us, and they are beginning to understand what the pricing has to be.

It's probably the latter point, though, the pricing -- at least as compared to the old days of bond financing -- that probably creates the biggest gag reflex.

We're getting over that though.

If this trend -- if the economy stays down for another couple of quarters, as it's likely to do, I think we're going to see some really good opportunity.

Perfect.

Thank you.

Rob Mains, Morgan Keegan.

Just a couple of detail things left.

Scott, if I look at the reconciliation of your outlook, it seems that you're talking about gross straight lines kind of bumping up a significant amount in the fourth quarter.

Is there a reason for that?

I assume there is a reason.

I guess I'm asking what it is.

I don't think it should, Rob.

I think -- I'm trying to look at where we're at for year to date.

Like in the 15% range, and you're saying 22% for the full year.

No.

It should be about -- well, whatever that implies.

What -- about $6 million or so.

Right.

Okay.

All right.

Just getting back to the question about what's going on with the MOBs, can I kind of assume from your comments, Fred, that this is, in terms of lease expirations and sort of the structure of how they are going, that this is kind of a hump year, and that the next couple of years we're not going to see some of the challenges that we're seeing this year.

Yes, I think that's a pretty safe assumption.

Okay.

And in terms of investment opportunities, you touched on that there is some blood being shed among the operators.

Have you considered mezzanine debt or other types of transactions like that?

Not what some of the other folks have done about existing debt, but operators out there who might have a short-term liquidity issue where profitably, Health Care REIT could help out?

Is that something that could be on the table or plate?

We've looked at that, Rob, and we're being asked to look at that.

The danger here is with the liquidity [crunch] (technical difficulty) hitting the operators harder than its hitting us.

One has to be very concerned about protecting ourselves from a potential bankruptcy or the like, where we could get hurt by having that kind of debt outstanding.

So it will be done not terribly frequently, and it will be done after a lot of teeth gnashing before we would do that right now.

The return might -- even if you can get a 13%, 15% return, I'm not sure that's worth it, given that the potential risk of an operator bankruptcy or some other liquidity problem.

And then just to clarify, in the case of an operator bankruptcy, if you've got a lease that's covering amply, essentially there's nothing that -- there's no immediate harm to you?

Well, there shouldn't be.

I mean unless he could make a decision to reject a lease.

But most of them are in master leases anyway, so I don't know why they would do it when we're covering pretty well.

So we're feeling pretty good about it.

Jim Sullivan, Green Street Advisors.

Hi.

It's Rosemary Pugh here with Jim Sullivan.

Brookdale's stock has dropped dramatically in recent weeks.

What do you see as the outlook for that operator, and do you have any concerns about your portfolio?

I will just speak generally, and Scott, you might want to comment again more specifically on any downside you see.

But I think that Brookdale has made a lot of progress in terms of growing its operating culture again.

I think Bill Sherif and the team is doing a very excellent job in terms of adding a good operating structure and procedures.

So we're very high on that management team.

But there are liquidity considerations that Bill and his team have to face just like every other operator, and we're very hopeful that the market will begin to -- the equity markets in particular, will begin to recognize the progress they're making and to give them some capital that is cost-effective for them.

And in the -- on the line side, I think that they're doing all they can to preserve that availability.

I think as Ray said earlier, they -- like a few of our other operators -- put a fairly good line in place at the right time.

But these are very heady times for -- these are very tough times for operators, and we just wish them well.

Scott, did you have any additional (multiple speakers)

I would add, Rosemary, that Brookdale's coverage -- I won't give the specific number, but it's -- their coverage is above our portfolio average.

I think that's important.

Our portfolio with them is about $293 million book value today.

About $231 million of that is in three different master leases.

And the $62 million or so of individual leases are all cross defaulted to the other master leases, so we're generally pretty comfortable with how Brookdale is doing at this point.

And the reason why that is outside the master lease structure is that there is underlying debt that required SB kind of treatment.

And then over time, it will be moved into the master lease as the underlying debt rolls off.

(Operator Instructions).

Chris Pike, Merrill Lynch.

I guess a question with respect to lease term fees.

Scott, are there any lease term fees either in the reported numbers or your expectations going forward?

No.

And then I guess back to an earlier question on yields.

While the development yields may have come in, Scott, that doesn't include any kind of escalators, so the yields that you provide are just simply the initial yields; correct?

That is correct.

That is just the initial yield to give an indication of where it would flip to once it gets out of CIC.

So historically those have been like 25 bp up's per year on your in-place; correct?

That's correct.

Okay.

Good.

I guess just looking at acquisitions and dispositions, to be clear I guess given your guidance, there's another $100 million baked in of sales, but I guess based on your comments you still have some on your balance sheet that are held for sale?

The ones that were held for sale as of the 9-30 would be Ameritas assets (multiple speakers)

So that $100 million -- so Scott, if I'm thinking about it right, and basically in your guidance, your outlook, you are calling for the remainder of the year another $100 million, but you still have $40 million held for sale.

So net/net you still are expecting or hoping to dispose of an additional $60 million of assets?

That's about correct, Chris, yes.

And is there any particular I guess segment that you guys are focused on, given I guess your views on caps and your views of value at this point?

Are you talking about new investments or (multiple speakers)

Actually net investments in general.

I think you also need to acquire another $150 million for the remainder of the year.

So I guess the question is, how do you see that mix occurring?

Do you see yourself buying more of one type of asset versus another, given some of the dislocations that you're seeing?

And subsequently do you see yourself selling out of one particular segment over another given similar types of dislocations?

I really think that you want to go back to what we told you earlier, and that is that our favorite groupings include combination facilities including CCRCs in the senior housing space, and we would really like to do a lot more in the acute care arena, especially as it relates to maybe suburban outreach satellite hospitals for really excellent systems, as we've done with attached MOBs.

And I would hope that we would maintain that discipline, Chris, going forward.

86% of our dispositions are fit into the stand-alone category.

And over 80% by year end will be in that -- those favorite classes.

Now, I can't tell you that I would walk away from a really unique opportunity.

These are the kind of royal times when you run into them.

So it is a little bit opportunistic as well.

And I guess that's what I was getting at because I know you've always said that you have no problem selling an asset that is still (technical difficulty) fill up from a value perspective.

So I was just trying to better understand to the extent if you're seeing some of those opportunistic dispositions and/or acquisitions outside your basic strategy emerge, but -- okay, guys, thanks a lot.

We are, and we expect to, and we -- stay tuned.

Charles Place, Kennedy Capital Management.

I had a real quick question here as it relates to the loan receivable on the balance sheet.

Your loans -- you talk about -- or you mention in your press release about how your guidance excludes unanticipated additions to the loan loss reserve.

Can you just refresh my memory of the types of loans that you're making?

Are there any unsecured loans in there?

And what prompted the loan loss reserve that's on the balance sheet as it is -- the $7.4 million?

And just maybe talk a little bit more about the type of operator or group that's receiving these loans.

Sure.

I think the vast majority of our loans are either first, second, or third mortgages or loans where we have a leasehold mortgage interest.

The loan loss reserve -- we make an assessment every quarter of the adequacy of that reserve based on our pool of at-risk loans.

And based on where we've been at, we've actually been comfortable with where the reserve has been, actually for as long as the last two and a half or so years, to three years.

And I think generally we are focused on making equity investments and view the loan option as something we do with our longer-term relationships, generally a part of a larger financing program where we would maybe provide some loans to an operator where we also have leases with them.

But as we -- I guess as this year has progressed here, have you seen or has your -- any increased concern in any of the loans out there that you are -- that you're worried about?

Honestly, I would say marginally yes.

But I think we -- the loan -- obviously the principal balance is intact, and I think we always look at potential loans for putting them in a non-accrual.

And that number has been between roughly $20 million and $40 million over the last probably two to four years.

And right now, I think it's -- what is it?

At $39 million at the end of the third quarter?

So we're not recognizing interest on a small pool of the loans.

And that's increased kind of it as the -- across -- or through the year here?

Very slightly.

(Operator Instructions).

We have no further audio questions at this time.

I would now like to turn the conference back over to Management for any closing statements.

We would just like to thank everybody for their participation and make sure they understand that Scott and Mike and others will be available for some follow-up questions later.

Thank you.

Ladies and gentlemen, this concludes the Health Care REIT third quarter 2008 conference call.

If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with the pass code 11120871.

ACT would like to thank you for your participation, and you may now disconnect.