Welltower Inc (WELL) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and year-end 2008 Health Care REIT earnings conference call.

My name is Ashley and I will be your conference operator today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

Now I would like to turn the call over to Mr.

Jim [Boh], Vice President of Communications of Health Care REIT.

Please go ahead, sir.

Thank you, Ashley.

Good morning, everyone, and thank you for joining us today for Health Care REIT's fourth-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.

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 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.

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

Please go ahead, George.

Thank you, Jim.

I will spend the first portion of my comments briefly reviewing our 2008 highlights, and then address how we are positioned to weather the storm that unfortunately we are all facing.

Finally, I will discuss our plans for the future once the markets reopen.

First, I would tell you that in one of the toughest years on record, both for REITs and the broader equity markets, we are very proud of generating a positive 0.5% total return for our stockholders.

Hopefully it will be much greater in ensuing years, but given the trials we all suffered in 2008 we are very pleased with the performance.

On the investment side, we generated gross investments of $1.2 billion, of which 85% related to our preferred investments, which are a combination of senior housing and customer-focused medical facilities.

At year-end, payment coverage stood at 1.96 to 1.

We continued to avoid concentration risk as our top five operators comprised only 25% of the portfolio, with our largest operator comprising only 6% of the portfolio.

We believe both of these metrics are best in our peer group and are extremely important in times such as these.

On the dividend side, we paid our 151st consecutive dividend in February.

We have decided and we previously announced that we will pay a quarterly cash dividend of $0.68 commencing with our May 2009 dividend payment.

Although the unsecured notes market was effectively closed in 2008, we did manage to raise a total of over $775 million of equity at attractive prices.

I do believe that our strong 2008 performance contributed to our inclusion in the S&P 500 on January 29, 2009, and it is certainly an honor to be included in this group.

I would like to take a moment to congratulate Deb Cafaro, Ray Lewis, and Rick Schweinhart, and the Ventas team on the announcement that Ventas will soon be joining us in the S&P 500.

We view these accomplishments, along with HCP's earlier inclusion as a win for all of the healthcare REITs.

I should add that we are also very pleased to be able to raise $211 million in an equity offering in connection with our inclusion in the S&P Index.

We are always looking for additional liquidity in these times.

Despite our relative success in 2008, we must continue to plan for an economic and a market downturn.

In a sense, we are planning for the worst case while preparing for future opportunities.

We will continue to monitor operator and facility performance in our usual thorough manner.

We will also assume that the capital markets will remain extremely difficult for the foreseeable future.

We view ourselves as risk managers of our particular enterprise.

And in times like this, portfolio management processes are even more critical in light of enhanced risks.

Our portfolio management program begins with strong industry research, origination and underwriting, and then rigorous monitoring of our portfolio by our asset management group.

At the same time, we know we need to manage financial risk as well in these tough economic times.

In normal times, our conservative balance sheet management is largely assumed, because it has been our trademark for 38 years.

But in today's capital-constrained marketplace, where cash is king and balance sheet conservatism is imperative, this focus is even more important.

As a result of this comprehensive portfolio management program and conservative balance sheet management, we have a strong, diverse, resilient portfolio as well as excellent liquidity.

Yet the question for us as we enter 2009 is what our approach should be going forward in the face of a recessionary economy and roiled housing and capital markets.

While we believe our growth platform is second to none in our space, this is not a time for significant additional investment commitments.

We will finish funding development projects underway.

We will only consider additional investments very selectively and then only with an identified source of funding.

In 2008, we continued our practice of recycling assets, acquiring or developing desirable asset types, and disposing of assets that do not have the same long-term appeal in light of healthcare or senior housing trends.

We are focused on investing in combination facilities and CCRCs in the senior housing sector, and more modern MOBS, hospitals, and other medical facilities in the acute-care space.

Conversely, we're disposing of standalone senior housing facilities and smaller MOBs with limited medical services.

In 2008, we were very successful in executing our game plan, as 85% of our investment activity related to modern medical facilities and combination senior housing facilities.

In turn, we received $287 million of disposition proceeds, of which 80% were from freestanding properties.

We are going to continue that process in 2009 and currently anticipate disposing of between $200 million and $300 million of assets.

In the event we can dispose of even more than $300 million in assets, we will be inclined to do so in order to improve liquidity and also accelerate our portfolio repositioning.

In a sense, we would welcome the opportunity to collapse what we consider to be a four- to five-year process into a much shorter time path.

While there is likely to be less investment activity in the short term, we will continue to spend time and money in meeting with existing and prospective operators.

We are a key player in this space and want to maintain our visibility and leadership, especially in these times.

Once the markets reopen and stabilize, we believe that the combination of our access to capital and relationships with operators and systems should lead to a period of unprecedented investment opportunity.

Cap rates are moving upward.

Marginal op investors in our space are gone.

And our full-spectrum investing platform gives us a multitude of different ways to invest successfully.

We are being conservative now, as is mandated by these times.

Yet we are positioning the Company for a period of excellent investment opportunities that will further strengthen our portfolio.

Now a few words about management, an update.

Every year we experience changes in personnel as we attract new talent to the Company and some colleagues decide to move on or to reduce their time commitments due to their desire to commit to other endeavors.

This year, my colleague Ray Braun has decided to move on to a third career.

After serving with him as a partner at a law firm and as a key executive at the Company, I will miss his experience and intelligence; but understand the allure of taking on a new career challenge.

Fortunately, Ray will remain a consultant during 2009, transitioning his responsibilities and relationships to others, and continuing to train our talented, young people.

We truly thank him for his service and wish him only the best.

Another colleague, Fred Farrar, must reduce his time commitment to the Company as he needs to expend more time on his obligations at Klipsch Group, an international audio products company.

We appreciate Fred's willingness to continue as a consultant, maintaining has close relationships with developers and operators.

And his availability as a mentor to John Thomas, our new head of acute care services, will be invaluable to John and the Company.

John Thomas joined our Company on January 19 this year, adding his extensive knowledge, experience, and relationships in the acute-care sector.

Before joining us, John was president and chief development officer of Cirrus Health, a Dallas-based owner and operator of hospitals, ambulatory surgery centers, and other healthcare facilities.

His responsibilities included all aspects of their development activities.

Previously, he served as senior vice president and general counsel for Baylor Health Care System, Dallas, and general counsel/secretary for the St.

Louis division of the Sisters of Mercy Health System in St.

Louis.

We welcome John and look forward to his successful efforts to take a top-flight team with a full spectrum of capabilities to the next level.

John is based in Toledo and is on the call today, as is Jay Morgan, also in the Medical Facilities group, who is located in our national office.

I should say that I am quite proud of all of our people and understand that in the last analysis intellectual capital is our most important resource.

We have built a great team that will change from time to time, but will always provide leadership within healthcare and senior housing.

And with those comments, Scott, I will turn it over to you to take us through the remainder of the presentation.

Great.

Thanks, George, and good morning, everybody.

In my comments this morning I will discuss our recent investment activity and portfolio.

Next I will highlight the strength of our year-end balance sheet, which currently reflects low leverage and adequate liquidity to meet our obligations beyond year-end 2010.

Finally I will discuss our recent financial results and 2009 guidance, which reflects our emphasis on maintaining adequate liquidity in the current environment.

First, regarding 2008 investment activity, we completed $1.2 billion of gross investments, offset by dispositions of $194 million, resulting in net investments in excess of $1 billion.

Our $215 million of gross investments in the fourth quarter were primarily related to ongoing development projects.

We did complete one acquisition during the quarter of a newly developed LTAC in Ohio with an existing operator and initial yield of 11%.

Our portfolio, which now includes over 600 properties with an investment balance of $5.9 billion remains among the most diverse and secure in our industry.

As George mentioned, our senior housing and specialty care portfolio continues to generate strong rent payment coverage.

Our same-store revenue for the senior housing and specialty care portfolio increased 2.9% in the fourth quarter versus last year.

Regarding our medical office building portfolio, I will talk generally in terms of our core medical office building portfolio, which excludes assets held for sale and is detailed on page 30 of our supplement.

The core medical office portfolio generated $21.4 million in NOI for the fourth quarter with an occupancy rate of 90.4%.

Of the 188,000 square feet in expirations in the fourth quarter, we retained 145,000 square feet for a renewal rate of 77%.

Our same-store core medical office building NOI declined 2% in the fourth quarter versus last year, primarily as a result of a 1.8% year-over-year decline in occupancy.

As George mentioned, we are facing a challenging operating environment and we have seen a couple areas of our portfolio that have been more impacted than others.

The first really is in the senior housing area.

Within senior housing, our independent living properties have been impacted by the economy and the housing market.

Yet our overall IL occupancy and coverage remain quite strong.

More specifically during the third quarter, same-store IL occupancy declined 140 basis points year-over-year to 91.8%.

We have also seen slight additional declines into the fourth quarter based on data received through November.

Importantly, our third-quarter occupancy of 91.8% stands 140 basis points above the NIC industry average.

In our assisted-living portfolio, we have actually seen some firming of trends over the last several quarters, as same-store assisted-living occupancy rose 110 basis points year-over-year in the third quarter to 88.9% and has remained flat during the first two months of the fourth quarter.

Despite these fluctuations, our independent living and assisted-living portfolios continue to generate strong payment coverage of 1.31 times and 1.55 times, respectively.

We have also seen the economy impact our entrance fee communities a bit.

We currently have 15 entrance fee properties that are managed by five different operators with an investment balance of $591 million, representing approximately 10% of the portfolio.

It is important to note that not all of the units within these communities require a buy-in or entrance fee.

We have done a calculation, and it's approximately 40% of the units in our entrance fee communities are actually rental in nature.

They would generally include the assisted-living, skilled nursing, and dementia care service components.

The remaining 60% entrance fee component -- excuse me, I did want to make the point that the rental components of our entrance fees are generally filling in line with our budgeted expectations.

Of the remaining 60% entrance fee component, which generally consists of cottages or independent living apartments, saw a general slowdown in activity during the first three quarters of 2008.

The fourth quarter saw even less activity when the economy worsened considerably.

We spent some time working with our operators to re-forecast 2009 budgets.

What we have done is we have decreased our sales forecasts by roughly 20% for existing campuses and 33% for new campuses.

Assuming our operators are able to meet our revised budgets, we believe there should be sufficient liquidity and little to no impact on our forecasted yields.

At this point, we believe the next 12 to 24 months are really a crucial period for sales and deposits at our entrance fee facilities.

Turning now to our development portfolio, we continue to build out existing projects, but have generally restricted new development and chosen not to proceed with projects where practical.

We continue to ramp up deliveries, with $295 million in conversions in 2008.

Over $500 million of conversions are projected in both 2009 and 2010.

With less construction activity across the country, we believe these new assets should be well positioned in their respective markets and should really benefit from strong pricing power once stabilized.

I think this particularly applies to many of our CCRCs that will be some of the newest, most modern, state-of-the-art properties once they are completed.

Now I will turn to liquidity.

As many of you know, we had $137 million in restricted cash that was tied up in the bankruptcy proceedings for LandAmerica Exchange Services, our qualified 1031 intermediary.

We have some good news to report on this front, in that we reached a settlement last week and that the settlement was approved by the bankruptcy court on Monday.

At this time, we have been wired our entire $137 million in exchange funds.

As consideration for the immediate return of our funds, we made a $2 million settlement payment to the debtors' estate; and we also incurred about $500,000 in expenses associated with the proceedings.

Although we were confident that we would prevail based on the merits of our case, the certainty of receiving the cash and avoiding further court proceedings substantially outweighed the minor settlement cost.

Heading into 2009, we have approximately $950 million in available cash and line availability, compared to $691 million in unfunded development from projects underway and only $55 million in debt maturities through year-end 2010.

Our $950 million in availability is comprised of $580 million available on our line of credit as of December 31, 2008; cash and cash equivalents of $23 million; and formerly restricted cash that is now available to invest of $135 million.

In addition, as George mentioned, we received $211 million in net proceeds through our January equity offering in connection with our inclusion in the S&P 500 Index.

We continue to evaluate additional capital raising options that I will touch on in greater detail during our guidance section.

Turning now to the financial results, fourth-quarter normalized FFO of $0.83 per share was up 4% versus the previous year, while normalized FAD of $0.77 per share represented a 3% increase.

For the full year, normalized FFO rose a strong 8% to $3.38, while normalized FAD increased 9% to $3.16 per share.

We did have a number of one-time items for the quarter and the full year which I would like to highlight.

I think first is our gains on the $194 million of full-year dispositions were $164 million.

Our average yield on sales averaged 6.6% for the full year 2008.

The LandAmerica settlement and expenses of an aggregate $2.5 million were netted against the gains on sale during the fourth quarter.

In addition, we also recognized $2.5 million of income in the fourth quarter related to the release of a personal guarantee associated with a lease termination.

That number is included in our other income line.

Fourth-quarter G&A was $13.5 million; but it did include $2.3 million in terminated transaction costs primarily associated with the termination of the Sunrise/Arcapita deal.

As a part of our medical office portfolio upgrade program, we have identified 14 buildings for disposition that have been classified as held for sale at December 31.

These buildings have very low occupancy; are much smaller in size, at an average 20,000 square feet; and generally not affiliated with a health system or hospital.

In addition, these facilities had negative NOI in the most recent quarter and are not a good strategic fit within our portfolio.

I would also point out that by removing these assets from our core medical office building portfolio, our occupancy increased from 87% to over 90% this quarter.

We did recognize $32.6 million in impairment charges related to these assets.

The last item is due to the severe dislocation in the debt market, we terminated $250 million in swaps during November of 2008 and did record a $23.4 million loss for the full year.

Next regarding our dividend, we recently paid the 151st consecutive quarterly cash dividend for the quarter ended December 31 of $0.68 per share.

The Board of Directors also approved a 2009 quarterly cash dividend rate of $0.68 per share, or $2.72 annually, commencing with the May dividend.

In addition to the $211 million raised through our January equity offering, during the fourth quarter we raised a total of $44.7 million in net proceeds from equity transactions at an average price of $38 per share.

This is comprised of some activity under our dividend reinvestment plan, where we issued approximately 381,000 shares for $14.4 million in net proceeds; while under our equity shelf program we issued approximately 794,000 shares for $30.3 million.

Looking now at our credit profile, our debt to undepreciated book capitalization was only 42.9% at the end of the year.

Our interest and fixed charge coverage were 3.8 times and 3.2 times, respectively.

Pro forma for the January offering, our debt to undpreciated book capitalization was further reduced to 40%, its lowest level since 2002.

In addition, our secured debt currently stands at only 7% of total assets, providing additional flexibility as we evaluate additional means of raising capital going forward.

The last item I would like to discuss today is 2009 guidance.

As detailed in the release, we expect to report net income available to common stockholders in a range of $1.59 to $1.69 per diluted share; normalized FFO in a range of $3.20 to $3.30 per diluted share; and normalized FAD in a range of $3.08 to $3.18 per diluted share.

FFO guidance should be compared to the normalized $3.33 per diluted share actual 2008 results as restated for the convertible debt accounting change.

Our assumptions are discussed in detail in our earnings release; but I would like to point out a few items in particular.

I think first is that our normalized FFO per share guidance of $3.20 to $3.30 does reflect a projected 1% to 4% decline compared to our $3.33 restated 2008 results.

Generally speaking, I think this decline is the result of moving to more conservative assumptions which place a greater emphasis on liquidity than the last several years.

In particular, 2009 FFO will be impacted by the significant equity offerings we completed in July 2008, September 2008, as well as January 2009; also by the planned dispositions of $200 million to $300 million at 10% to 11% yields; and by the assumption of zero acquisitions in our 2009 forecast.

We have also assumed that we will receive no increases on any leases tied to CPI in 2009.

I would also note that we have already completed one disposition of a surgical hospital in January for proceeds of $41 million, which resulted in a $13.5 million gain and represented a yield on sale of 9.8%.

We are forecasting same-store NOI for the senior housing and specialty care portfolios, which represent approximately three-quarters of our investment balance, to increase 1% during 2009.

This includes our assumption of zero rent growth related to the approximate 70% of senior housing and specialty care portfolio increasers based on CPI.

It is important to note that we do have catch-up provisions in most all of these leases which would allow us to recover the majority of lost rent if CPI increases at a greater rate in the future.

Regarding our core medical office building portfolio, which represents the remaining one-quarter of our investment balance, we are forecasting NOI to decline approximately 1% this year.

This is primarily a function of our assumption of flat occupancy combined with lower rents on our renewing and new leases, using more conservative rent assumptions to appropriately reflect market rents in the current economy.

Only 8% of our medical office building contractual rents are subject to CPI increasers, but have also been assumed at zero-%.

Our G&A forecast is approximately $46 million for 2009.

This forecast includes $2.9 million in accelerated expensing of stock and options for certain officers and directors, but excludes the $3.9 million expected charge associated with the departure of Ray Braun.

Both of these items will be included in first-quarter G&A.

Now excluding these items, we would expect a quarterly G&A run rate of $10.5 million to $11 million entering 2009.

As I mentioned previously, we will continue to place a significant premium on maintaining adequate liquidity.

At this point, we anticipate evaluating additional capital sources including secured debt, additional equity, and incremental asset sales beyond the $200 million to $300 million in our current forecast.

We are also evaluating buying back a small portion of our debt with near-term maturities.

None of these potential incremental capital sources, again, or uses are included in our current guidance.

So with that, George, I will wrap it up and turn it back to you.

Thank you, Scott.

Our message is pretty clear, we are very well positioned to weather the current economic storm.

And secondly we are prepared to move very quickly and effectively once the markets reopen and pricing is stabilized, to further strengthen an already strong, diverse portfolio.

With that, we are now open for questions.

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Hi, good morning.

A couple things.

On the asset sales, I guess listening to Scott's description -- smaller MOBs, negative NOI, low occupancy -- what confidence level do you have that you can actually sell the stuff that is held for sale in this market?

Well, we're working pretty hard on it, Jerry.

We have been certainly -- and Jay Morgan is running that program.

He should feel free to comment further on it.

[Chris Desalle] is working with him, and we have enlisted our origination team, and I think we are making headway.

But if the pricing is not sufficient, we really don't have to complete those sales this year.

Two, if there is not enough money or not enough liquidity in certain cases, again we are not going to be impelled to go forward.

But we think we're making some progress.

Jay, do you want to add anything to that?

Sure, yes.

Jerry, given the profile of the assets, we think the likely buyer is probably a user or an occupant.

What we have seen out there is that those types of buyers still have access to local financing.

We have received a tremendous amount of activity, a lot of people looking at the assets.

So we are pretty optimistic in the efforts that are in place that we will be able to move the assets over the next 12 months.

Okay.

You talked some about more sales.

Would that be more MOBs or senior housing?

Or just what other kinds of stuff is in the potential pipeline, I guess?

Jerry, it could be any particular category.

It could be freestanding senior housing; and there are some real possibilities there that we have discussed with existing operators who appear to have some financing.

Or it could be additional MOBs.

It is just going to be opportunistic, but it is going to definitely be within the profile of those assets that we wish to dispose of.

Okay.

Then just shifting to the secured debt market, obviously a number of your peers have done that already.

Somebody was on a call yesterday, one of the operators, talking about Freddie Mac sort of tightening up some criteria and stuff.

So would we likely see debt on senior housing and a sense of what kind of terms and stuff are out there at this point?

Hey, Jerry, it's Scott.

I think as you would suspect, we are pursuing all of the typical suspects including the government-sponsored entities.

I still feel like the market is fairly robust.

I don't think the terms have changed that much.

It all depends on term.

But if you are talking general, five- to 10-year type term, typical 60% to 65% leverage.

Again, we have been evaluating probably more of the senior housing assets as the more likely candidates.

IL/AL type properties.

Think you could potentially get something done in the 6.5% to 7% type range.

Okay.

Then the last one for me and I will jump off, just kind of accounting thing.

On the development stuff, I just wanted to sort of clarify.

The straight-line rents sort of change -- or I think the yields you put out, are they the cash yields or where the GAAP yields?

I just wanted to sort of clarify that issue for straight-line go-forward.

I think you were running (multiple speakers) straight line.

They are cash yields, Jerry.

They are cash yields.

And is there straight-line on a lot of that development?

Is it going to move the number just in terms of FAD for next year materially?

I think you're running about $15 million this year.

Is that kind of the right range?

Or is straight-line going to move as you bring on all -- you are bringing on a fair amount of development.

I'm just trying to figure out if it is going to have any impact on straight-line.

All the new ones are -- yes, generally, CPI-based, so it wouldn't have a straight-line component on any of the new ones coming in.

Okay, all right.

I will jump back in the queue if I have more.

Thanks.

Karin Ford, KeyBanc Capital Markets.

Just want to ask a question on your development pipeline.

You said that you were going to not be looking to add to that development pipeline unless you have ID-ed specific financing for that.

Can you just talk about what potential financing is for -- what secured debt and construction debt is available potentially that would cause you maybe to add to development down the line?

The sources of capital are excess cash at the moment.

Two, the governments that we were just talking to Jerry about, as well as disposition proceeds, primarily.

They could be used for either further acquisitions or development as we see appropriate investments.

But we're going to be very, very circumspect, Karin, about making new investments, because we have a methodology really that looks out at least two years to ensure that we have adequate capital not only to invest in development and any agreed-upon acquisitions, but also to cover any note maturities.

So that is sort of a moving target, so we have to be very, very careful about that.

But those are the generally the sources of capital.

And frankly, we are much more inclined for the remainder of this very tough economic times to do acquisitions of modern facilities than do development.

Okay, that makes sense.

Are there any tenants that you are worried about today?

You know, I keep telling people I am a fully recovered lawyer; but I guess I never will be.

We always worry about things.

Chris Simon is sitting in the room, who runs our asset management group.

We are always looking at people who fall or companies that fall back from projected returns, or construction.

But I would say that even with the stress of these economic times, we feel that any problem children, any folks that are off target are relatively minor.

We are dealing with a couple of them right now.

We're probably point to move one portfolio in the Midwest to two operators who seem to be a little bit more liquid and are handling the marketing better.

But I frankly find this to be just typical.

It is what we do.

It is just portfolio management.

If you moved that portfolio to the new operator, would there be any impact on earnings?

In part, and we think very little, if any, on -- I think two of the development projects there, we might have at least preliminarily a 100 or 200 basis points hit to our returns.

But we haven't finalized that at the moment.

Generally, as you look back over our history -- and you have followed us for years now as well -- we generally come out about even, or just down a bit.

The reality is when we move properties it is not just what our absolute return is; it is how the operator performs so that we have good coverages and therefore can make the most compelling case to the rating agencies.

That's helpful.

Just last question is on the medical office portfolio.

You said you are expecting rents down this year.

Can you just put an order of magnitude on that?

Hi, Karin; it's Scott.

You know, I think is really the best we can do, [given] all the moving parts of our portfolio, you have about -- just thinking about it.

80% of the medical office leases are just normally rolling over; 10% of the portfolio is vacant; and as you can see in the supplement, about 10% is up for renewal.

I think where the only variability is on our assumptions for how we are going to fill new space, I think we would probably -- we're forecasting a retention rate of 70% next year, approximately.

Again with occupancies flat, I think it is really a market-by-market basis.

They all went into our combined estimate of negative 1% core medical office building NOI decline forecast next year.

So maybe on the 10% that is rolling, the 70% that you retain will be -- will rents be flat on those?

And then the remaining 30% will be down, call it, 5%?

Does that sound right to you?

It is too different, actually.

As you look through it, every single asset, you could be filling some space that was currently vacant as well.

So again, we have really done a detailed assessment.

Mike Noto, John Thomas, and the team are very much on top of leasing activity.

It's a big focus for us.

I think we needed to I think more appropriately reflect the market rents as well as the state of the economy; and that is really how we put our forecast together.

Okay, thanks very much.

Robert Mains, Morgan Keegan.

Yes, thanks.

One follow-up on the MOB question.

You parse your portfolio into the hospital on-campus, hospital affiliated, and then non-hospital affiliated.

In your projections, are you seeing any difference in renewal rates between those three asset types?

Probably.

This is John Thomas.

The on-campus space is stronger.

There is a move on some of the -- what we have seen recently from larger physician groups moving into new space on-campus.

But from a total NOI perspective, it's not a material distinction between the two.

So again as we talked about the dispositions, those being smaller facilities not really associated with a hospital system or healthcare system, and really over time improving the portfolio to be hospital affiliated, on-campus or off-campus, but with physician groups tied to those strong hospital affiliations.

If you've got -- so the feeling would be then if you have got the hospital affiliation then there wouldn't be a big difference between your ability to renew rents?

Correct.

Okay.

In fact, Rob, if I could just address that as well.

What we are really finding as a trend is the outreach by really good hospital systems to the suburbs to extend their brand.

That move means that many times they are leading with a larger MOB with more medical services.

So, that change is something that John and I are looking at right now, and we are very comfortable with the affiliation off-campus.

That seems to be the way the healthcare systems are evolving.

Okay, thanks.

That is a good explanation.

Scott, two number questions.

One is, in prior quarters you have broken out your loan expense.

Do I assume that that is folded into interest expense now?

Yes, the loan expense line is on the interest expense line in the income statement now.

Okay.

Then the guidance, your FAD guidance, you have straight-line down a good chunk from the fourth-quarter run rate.

Do I surmise that a lot of the stuff that you are selling has straight-line rents or is (multiple speakers) ?

Actually a lot of the Emeritus sales that we had in the fourth quarter had straight-line rent.

So that is kind of a rebasing after those sales were done.

Okay, that makes sense.

That's all I had.

Thanks a lot.

Stephen Mead, Anchor Capital Advisors.

George, Scott.

How do you guys just philosophically view the issue that has gone through the REIT world in terms of the payment of a dividend in stock versus cash?

I just wanted to get your feeling as to your attitude towards the continued payment in cash versus stock.

Steve, as I mentioned in my remarks, the Board agreed to $0.68 quarterly payments.

My own philosophy and I think this management team's philosophy is that to the extent that we are capable of paying in cash, that is a bargain we made with our shareholders.

We intend to continue that, unless the economic times become so bad that we have to consider doing otherwise.

But right now, and given our situation in terms of liquidity, we are very much committed to paying cash dividends.

Then how much flex do you have on the development portfolio and the flow of cash into the development properties?

I'm sorry; did you say flexibility?

Just flexibility in terms of pushing out the delivery date, or discontinuance of some of the development [siders] of what you said you're going to develop in 2009 and finish up in 2010.

Steve, virtually everything in development right now are projects already under way.

We are just going to finish them.

Frankly, we would rather finish them early if at all possible and start recognizing a higher income.

We think they are terrific projects.

But I would say, too, we did kill a number of development projects as the economy got worse.

We picked the best ones and we think ones that are going to stand the test of time, be very, very sustainable, wonderful assets.

For what you are seeing on our books and proceeding, those are going to proceed.

They are going to be very, very good assets.

So the impact on 2010's numbers in terms of what you would expect in a tougher environment as far as the sales and also income stream from those properties relative to the debt service on those properties, how does it shape up, looking into 2010?

Hey, Steve.

It's Scott.

I think if you look at our aggregate development pipeline, the projected average initial yield when they convert to full yielding assets is about 9%.

So you obviously have somewhat of an embedded earnings benefit, as we move those from only capitalizing interest at our average cost of debt of about 5.7% to those higher yields.

George and I have talked obviously inherently these projects were priced and began construction generally one to two years ago.

Also, actually have been financed using capital at costs of a couple years ago in part.

So I think you can never perfectly time the yields ultimately when these assets open.

But we feel like we are getting very good assets at a reasonable yield in light of the current capital markets environment.

Okay.

Thanks.

Rosemary Pugh, Green Street Advisors.

You spoke about for CCRCs and the entrance fee communities that there was less activity in the fourth quarter in terms of lease up.

I wonder if you can provide a little bit more detail.

It looks like your communities assume about 20 to 30 move-ins per quarter.

I was wondering how the lease up was in the fourth quarter.

Hey, Rosemary.

It's Scott.

How are you?

The activity was very nominal in the fourth quarter.

You think about the magnitude of what was going on in the economy, I think we have to view that as an aberration.

In several of our communities that are open, you did start to see a bit of a rebound in January.

So again, we did see very little activity just specifically in the fourth quarter.

So we are watching it very closely.

We watch it really every week.

Again as we said, we have made what we think are appropriately conservative assumptions.

Again, just have to really be watching them over the next one to two years and hope they continue to lease up based on our revised projections.

Great.

Our experience, Rosemary, was that throughout our portfolio there was just a slamming into the wall for virtually all of the senior housing operators that had a housing component or were closer to having a housing component.

So far -- and about the time I think we met out in California in January -- we were seeing people, like, who were a deer in the headlight, who were starting to see some increasing optimism.

So we do think that the fourth quarter was an aberration, as Scott indicated.

We are seeing more optimism, and we will be reporting to you in virtually every call the momentum that we hopefully will see coming back into senior housing generally, and specifically on the CCRCs, which have the largest housing components.

I should add something, too, that we have said before.

And that is we are certainly watching these.

On the other hand, if there is and when there is some rebound in the economy, we think that these assets in particular are going to be the best positioned to take advantage of pricing power, given what they give the consumer, given what they do for the customer.

So we are very cautiously optimistic about what is going to happen with respect to this part of our portfolio.

Thank you.

Omotayo Okusanya, UBS.

Yes, good morning, gentlemen, just a follow-up to Rosemary's question in regards to CCRCs in development.

Scott, I know you talked about this earlier on but I happened to miss it.

The revised assumptions you guys are making in regards to those assets, could you just run us through them again?

Sure.

Again, it is a work in progress, and the work we have done to re-forecast 2009, our aggregate 2009 budget, as a Company we decrease our sales forecast by roughly 20% for our existing campuses; and it's about by a third for the new campuses.

So again, this isn't that large of a universe.

You remember this is only 10% of the portfolio.

Many of these are just very recently opened.

So again, it's appropriate to revise the budgets as we have.

But again, as George said, it is really -- again in the next year or two, of leasing activity will tell the tale.

Omatayo, just to be clear, even with a 20% for existing reduction in sales, or 33% for new, this does not necessarily mean we will take a lower yield.

That is the next step if the economy stays down for another year or two years, I suppose.

But built into our structure is a lot of flexibility in terms of return to us.

So we are still cautiously optimistic that we are going to have the same returns on these assets over time.

Particularly rental coverage, George is in part referencing to, Tayo.

We would probably underwrite -- we do underwrite the CCRCs to an approximate, depending upon the asset, 1.3 to 1.4 times; and mix as well, 1.3 to 1.4 times the rent payment coverage.

But it still is a down 20%?

You wouldn't expect the operator at that point to kind of raise a red flag and say they need some help in regards to rent relief?

No.

Right now, it would not have an effect on the rent, okay?

It depends on the duration of the economy downturn and the housing problems.

At some point, we get out another year or so, we will have more color on it.

Right now, we would not take a rental hit.

Great.

Then generally, you're repositioning your portfolio.

(inaudible) is doing the same thing, [Jay] is doing the same thing.

I guess everyone is talking about what a tough market it this to sell assets.

But across the entire universe, there seems to be like $1 billion of repositioning everyone wants to do.

I just kind of go -- who is buying this stuff?

Because you guys are not buying.

So as they are all trying to sell, who exactly is out there buying this stuff?

Tayo, it's Scott.

It's interesting.

If you look at our assumptions on our dispositions this year, we are actually very confident that we will get a very good percentage, if not all of them, completed.

It is -- no.

Generally speaking, it is operators looking to repurchase the assets from us.

You know, banks; bridge HUD is still available in smaller size.

Generally speaking, none of our single dispositions are greater than really $30 million to $40 million.

So in smaller sizing you get deals done, and those are really the ones we have included in our assumptions this year.

Then just one last question, the catch-up on the CPI, could you explain that again to me, please?

Sure.

They basically have two different structures.

If you have a CPI-based increase, say in a year your rent was supposed to be 8% moving to 8.25%, in that second year CPI was zero; so 8% stayed at 8.0% in the second year.

During the third year, if CPI were significantly large, say increased 5% or more, in that third year we would actually bump back our rent up to the 8.5%.

So instead of going 8.0%, 8.25%, 8.5% you would catch up that factor.

And some even could even go up more to catch the lost year of rent as well.

So that is generally how the CPI catch-up features work.

Great.

Thanks a lot.

[Sabina Bhatia], Basso Capital.

Good morning.

A couple of questions.

One, as far as buying back short-term debt as you mentioned in the conference call, what part of the capital structure would you be looking at?

I presume it would be the converts, become it's a 2011 maturity, unless you guys have some other thoughts on that.

I think we basically have been looking more closely at our 2012 unsecured notes as probably one of the more likely candidates in terms of repurchase.

And we are not talking about anything too large at this point.

We are evaluating maybe $25 million to $50 million type numbers.

But it could make some sense, and we obviously have some capital available.

What would the time frame for that be?

Is it something that you guys would do immediately, or next --?

We don't know, we are still evaluating it.

It depends what the price, the bonds are.

Other uses of capital.

All the factors you would typically expect us to look at.

So I think we just wanted to make the point that we are evaluating at.

Okay.

Last question, as far as your credit facility is concerned, the credit line.

You have a one-year extension option, so I guess it can be extended to August 2012.

Is that correct?

Correct.

That is correct.

Now is that the Company's option?

Under what conditions could this not be extended?

It is at the Company's option.

Okay, so you basically --?

As long as we are in compliance, we can extend at our option.

And it is definitely a one-year extension option?

The term is defined?

Yes.

Okay, great.

Thank you.

(Operator Instructions) Dustin Pizzo, Banc of America Securities.

Scott, just to follow up on the Fannie Freddie stuff.

What percentage of the senior housing assets are unencumbered today?

Then just also, how much capacity do you guys have to go out and do debt with the agencies before some of the covenants become an issue?

Our encumbered assets are about $850 million this quarter.

About 80% of those are medical office buildings.

So only about again 20% of our encumbered assets are related to senior housing.

We are in good shape with secure debt at only 7% of total assets.

And our covenants in the line and the notes are basically not really -- well, not a practical stopping point.

There are 30% and 40%, respectively.

We are more concerned with at what point the rating agencies may start to be concerned with our level of secured debt.

So I think that would be more in the 15% to 18% range.

We have always kind of thought that would be more of a realistic cap on where we would ever want secured debt to go.

Again, a lot of our secured debt we have recycled over time.

As soon as we can pay it off, we do and in many cases roll leases into master leases.

So I think there is reasonable flexibility there.

Okay, thank you.

There are no more questions, I will turn the call back to Mr.

Chapman.

We thank all of you for participating in the call.

Scott and Mike and others will be available for any follow-up questions.

Thank you.

This concludes today's conference call.

You may now disconnect at this time.