Welltower Inc (WELL) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the third quarter 2009 Health Care REIT earnings conference call.

My name is Casey and I will be your operator today.

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

We will be facilitating a Q&A 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 Bowe, Vice President of Communications for Health Care REIT.

Please go ahead, sir.

Thank you Casey and good morning everyone and thank you for joining us today for Health Care REIT's third quarter 2009 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'd like to remind everyone that we are holding a live webcast of today's call, which may be accessed through the Company's web site as well.

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 any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its projected results will be obtained.

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 SEC.

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

George Chapman, Chairman, CEO, and President of Health Care REIT for his opening remarks.

Please go ahead, George.

Thank you, Jim.

We have used the last two or three years that have been very difficult in the economy and in the capital markets as an opportunity to essentially condense five to seven years of planned progress into two or three.

In the capital markets we have lengthened our maturities, enhanced liquidity and deleveraged.

And along the way we have match funded our development pipeline through equity raises that have totaled over $1.4 billion for 2008 and 2009 year-to-date as well as through agency paper totaling $266 million with an average rate of 6%.

We are now in a position to raise both equity and debt capital and begin a new growth phase for the Company.

In the portfolio, we made tremendous progress in executing our game plan to emphasize combination facilities in the senior housing sector and new state-of-the-art, customer focused facilities in the medical sector.

We have pursued this goal through our usual culling through our portfolio, adding favored new investments and selling assets that are less desirable in the long-term.

In executing these plans we have generated significant gains.

In 2008 and 2009 year-to-date, we have net gains after any losses or impairments relating to this activity equal to $151 million.

In the fourth quarter of this year, we have already recognized gains of approximately $20 million on the sale of a skilled nursing portfolio.

Generally, our portfolio is performing quite well with an overall facility coverage level of 1.98 to 1 up from 1.94 to 1 in the previous quarters.

Our skilled nursing, assisted living and independent living facilities performed well with increases in facility coverages quarter-over-quarter.

Not surprisingly in these tough economic times independent living and CCRCs have the greatest occupancy pressure because of the elective nature of the services.

Yet IL coverages remain solid at the 1.28 to 1 level and the reduction in occupancy has been offset by rental increases as well as enhanced attention to operating efficiencies.

Anecdotally, I can report to you that we have seen a nice rebound in occupancy in July and August for some of our larger operators.

In all cases, the lack of construction in the senior housing and health care sector, together with increasing demand for these services bodes quite well for the facilities in the next three to five years.

Let me comment generally on CCRCs.

We continue to believe that these facilities are some of the best assets in our portfolio and are quite desirable to seniors.

ASHA, the recent ASHA study found that the youngest, healthiest and wealthiest seniors are drawn to CCRCs for their many amenities and services.

Clearly entrance fee communities have been most effected by the economy because of the relationship they have to the housing market and the large initial payment required and yet we are generally pleased with our operating teams and their willingness to do the blocking and tackling necessary in these times.

For example, during the first nine months of 2009, we have had 158 entrance fee move-ins, only eight behind our budgets.

The rental component within these facilities has now reached 70% occupancy.

Our largest operator continues to progress with approximately 60% entrance fee occupancy with 27, 10% deposits with scheduled move in dates.

Moreover, its rental occupancy stands at 79%, with good momentum likely to move that rental occupancy to between 85 and 90% by year end.

Virtually all of our CCRC operators have adopted some form of deferred purchase program that allows residents to move into the CCRC by making a down payment with full rent payment when their house sells.

These deferred obligations now exceed $14 million across our entrance fee portfolio.

All of our operators also take deposits that to date have converted at an 80% rate into purchases.

Accordingly, with 48 deposits within the current CCRC portfolio, there are additional fundings expected as well.

We are closely monitoring these properties and continue to see progress.

As Scott will detail, we have decided to defer certain CCRC rental payments based upon the current supportable rent stream over the next 18 months and to the extent that sales continued at or above the current pace, and deposits are converted at high levels into move-ins, we believe this approach is likely to drive solid revenue growth over time as the deferrals are paid.

Our medical office portfolio is beginning to show the results of hard work by John Thomas, Mike Noto and the Medical Facilities Group.

This quarter we fully integrated the Medical Office portfolio into our proprietary Vantage asset management software, further enhancing what we believe to be one of the best asset management programs in our industry.

Occupancy in the Medical Office buildings at the end of the quarter was 90.9% and should finish the year over 91%.

The team has generated strong leasing activity for both new and renewal leases and we anticipate a full year retention rate of 70%.

Third quarter Medical Office building operating income was the highest contribution we reported to date and it will continue to increase next quarter, with the full impact of our new development properties that recently completed construction.

Our origination team within the Acute Care and Medical Office sector is cultivating some great new relationships and investment opportunities and we are close to finalizing several very attractive new projects in the acute care space that will further enhance our portfolio.

Relating to the market going forward, we have made it clear that critical changes are occurring both in senior housing and medical facilities.

The primary driver of the change is the customer, who is demanding top flight services and state-of-the-art real estate platforms.

In senior housing, larger units and facilities are required with more and better services.

In Acute Care, as more procedures become non-invasive or minimally invasive, the customers would rather have the services performed in an environment that is right sized, customer-friendly and accessible.

We believe this is an opportune time to acquire and develop such projects.

Throughout our history, we have developed new facilities that were needed as senior housing and health care evolved.

In the '70s, we developed and invested in new purpose-built skilled nursing homes that replaced the older mansion-style facilities.

In the '80s, we invested in independent living facilities.

In the '90s, we were a leader in the emerging assisted living sector that filled the gap between skilled nursing and independent living.

And during the last decade, we have been developing and investing in combinations of the above, as we believe that the ability to age in place is a significant benefit to seniors and a competitive advantage to operators.

We believe similar changes are occurring in the medical arena, whether with respect to MOBs, hospitals, or other types of acute care facilities.

Accordingly, to address the need for better real estate platforms, we began development on a number of facilities during the last several years.

During 3Q '09, $234 million of development projects came in line.

In particular, three medical office buildings with strong health systems opened, with a total of 577,000 square feet of space.

These projects are all pre-leased at an average occupancy of 92.6%.

Another benefit of MOB development is that because of the rigid pre-leasing requirements, substantially all development at medical office buildings immediately move from development to stable upon construction close.

Moreover, our hospital development projects also have substantial credit behind them, essentially eliminating the practical effect of rent-up risk that is inherent in senior housing.

Year-to-date 2009, over 40% of our $1.4 billion of total development were in these two categories.

We will continue to invest in new attractive development projects going forward, as senior housing and health care sectors continue to evolve.

In order to drive this growth and produce additional value for our shareholders, we have also been adding key personnel to our team to originate state-of-the-art facilities across a full spectrum of senior housing and health care and to execute effectively within our full service platform that includes development, design, and property management services.

We will be disappointed if we do not make acquisitions by year end or early in 2010.

And with our infrastructure and the stabilization of the markets, we expect to continue moving toward more normal levels of acquisitions and development in 2010 and 2011.

And with that, I'll now turn to Scott Estes, our CFO, for a brief financial and portfolio overview.

Thanks, George, and good morning, everybody.

Third quarter was an active one in terms of both capital markets and portfolio management.

Our equity offering in September generated $357 million in proceeds.

We placed $133 million of new secured debt with Freddie Mac at a blended rate of 5.9% and prepaid $59 million of secured debt maturing prior to 2012 with an average rate of 7.2%.

We successfully tendered for $161 million of our 8% senior unsecured notes due 2012, which will lower future interest expense and improve our debt maturity schedule.

On the portfolio side, we completed $234 million of high quality development projects, including the three medical office buildings affiliated with strong health systems that George just mentioned, with over 577,000 square feet that are 93% pre-leased, adding immediately to earnings.

Our unfunded development at the end of September had declined to only $329 million on our $967 million of projects still under construction, and we're projecting another $277 million of construction completions in the fourth quarter.

In terms of third quarter investment activity, we completed a total of $126 million of net investments.

Gross investment activity of $156 million was primarily ongoing development funding, while dispositions of $30 million included 10 medical office buildings, totaling roughly 175,000 square feet.

The 10 properties were previously classified as held for sale.

I would point out that subsequent to quarter end, we sold one additional medical office building and six skilled nursing facilities for gross proceeds of $51 million, generating a $20 million gain that will be reported in the fourth quarter.

I would also note that we received loan payoffs of $40 million related to two of our skilled nursing operators thus far in the fourth quarter as well.

In terms of portfolio performance, I mentioned our $234 million of construction completions this quarter, which included about $60 million of combination rental senior housing and $174 million of health system affiliated medical office buildings.

Including the $277 million of projected fourth quarter completions, we will have completed almost $725 million in development projects during 2009.

We did start one new project during the third quarter, which is 120,000 square-foot, $36 million medical office building that's 100% preleased to a high quality health system in Missouri at an initial yield of 9.3%.

In addition to our development activity, five properties also converted from unstabilized to stable this quarter, reducing our unstabilized properties to 36 at the end of the quarter.

In senior housing, both our assisted living and skilled nursing portfolios continue to perform well in the tough economic environment.

Our stable assisted living coverage increased one basis point versus last quarter to 1.58 times, while stable skilled nursing increased three basis points sequentially to 2.24 times.

Our IL CCRC portfolio continues to experience some occupancy pressure, resulting in a slight decline in coverage to the current 1.28 times level.

However, as George mentioned, our initial read of July and August performance suggests that occupancy is on pace to improve at approximately 50 basis points in the third quarter, in both our IL and AL portfolios, and by about 10 basis points in our skilled nursing portfolio.

Regarding our entrance fee communities, we have 14 entrance fee properties with an investment balance of $715 million, representing 12% of the portfolio as of September 30.

We continue to believe these are among the best physical assets in our portfolio that are seeing varying degrees of fill-up velocity in light of the economic downturn.

However, as George mentioned, we have continued to see an increase in the number of move-ins and are tracking relatively close to our revised budgets through September.

Although we're pleased with this progress and the increase in traffic across the communities, in light of this slower fill-up we have revised our short-term return expectations for our entrance fee portfolio.

As we assess the future cash flows of these communities over the upcoming 12 to 18 months, we recently made the decision to reduce the current rent on our nine open communities from a rate of 9% to an average rate of 6% effective July 1.

These communities have an aggregate lease basis of $385 million.

At this point, we believe that these communities will be able to support these new rates until we can begin to recapture deferred rent, but as always, are contingent upon the ongoing fill-up of the communities.

I do think it's important to understand the distinction that our rent reductions are structured as deferrals so, unlike other property classes, when our entrance fee properties are able to support higher rents in the future, we would be able to recover any deferred rents.

Lastly, I would point out that this deferral is included in our updated 2009 earnings guidance.

Turning now to the specialty care portfolio, this portfolio continues to perform very well, with strong payment coverage over two times after management fees.

We have amended our disclosure slightly on Page 27 of the supplement to include only the last four quarters of information rather than eight so we can capture a larger population of our properties in the data.

Regarding our medical office portfolio, the medical office portfolio generated $22.3 million in NOI this quarter, and occupancy increased to 90.9%.

We continue to forecast a full year retention rate this year of 70%, and note that our third quarter retention of 63% was slightly below forecast due to a single facility in Texas, where 10,000 square feet of space moved to a newly opened building in the area.

Our core MOB NOI forecast is now $89 million for the full year 2009, which now includes a little more than $4 million of NOI from the three development properties that converted during the third quarter.

I would now like to take a moment to discuss our same-store revenue results on Page 23 of the quarterly supplement.

First, the entrance fee community rent deferral previously discussed had an impact on same-store results.

More specifically, third quarter same-store IL CCRC rent was reduced by $2.4 million due to the deferral at certain entrance fee communities, resulting in the same-store revenue decline of a little less than 15% quarter over quarter.

However, excluding these projects, IL CCRC same-store revenue increased 1.9%.

Our same-store specialty care revenue continues to be impacted by a $242,000 quarterly rent reduction, provided to one specialty hospital, which we discussed on last quarter's call.

As a reminder, on this facility, this facility is still paying us approximately 10% on this investment.

However, the reduction caused specialty care same-store revenue to decline 1.4% in the quarter.

However, excluding this facility, same-store specialty care revenue increased 1%.

Excluding the effect of both of these items, our aggregate same-store portfolio revenue rose 0.7%.

Lastly, I would point out that we would expect our same-store IL and specialty care comparisons to be impacted by these two items over the next several quarters as well.

I'll turn now to financial results.

Third quarter normalized FFO of $0.77 per share declined 10% versus the previous year, while normalized of $0.72 per share declined 12%.

These declines are primarily a result of the significant capital activities completed over the last 12 months, which included over $1 billion in equity and secured debt.

We also had several nonrecurring items this quarter.

Debt prepayments in the quarter resulted in a $26.4 million debt extinguishment charge that served to improve our maturity schedule and lower future interest expense.

We also had an $806,000 loss on sale from the 10 medical office buildings sold during the quarter at final prices which were slightly below carrying value.

Finally, the $1.9 million impairment charge is related to the other four MOBs held for sale as of September 30, based on actual or projected sale prices which are slightly below where we had them on our balance sheet.

Again, all of these items are excluded from normalized FFO and FAD results.

Regarding our dividend, we recently declared the 154th consecutive quarterly cash dividend for the quarter ended September 30 of $0.68 per share, representing a rate of $2.72 annually.

On the capital front, we raised a total of $568 million of capital during the third quarter.

This includes the $357 million from our September equity offering, $133 million of seven-year secured debt with Freddie Mac at an average rate of 5.9%, $14 million under our DRIP program through the issuance of 358,000 shares, and $64 million under our equity shelf program through the issuance of 1.6 million shares at an average gross price of $41.88.

As a result, our liquidity position remains very strong.

At September 30, we had $1.1 billion in cash and line availability, only $329 million of unfunded development, and sufficient liquidity to meet our upcoming maturities through 2012.

As George discussed, we believe we're now in a great position to begin deploying capital for the right investment opportunities.

Our credit profile remains excellent.

Currently our debt to undepreciated book capitalization is down to 35% at quarter end, while interest and fixed charge coverage are 3.5 times and 2.9 times respectively.

I would also point out that on Page 10 of our supplement, we've added a net debt to trailing 12-month EBITDA ratio and I think we measured very well on this statistic at a ratio of 4.6 times.

Despite successfully tapping the secured debt market to a greater extent this year, our secured debt remains only 9.8% of total assets at the end of the quarter.

Finally, turning to guidance, we have updated our investment expectations and tightened our 2009 earnings guidance ranges.

We now project development funding of $550 million, and dispositions of $250 million, resulting in $300 million of net investments.

Regarding earnings guidance, we've narrowed our normalized FFO to a range of $3.10 to $3.12 from the previous $3.07 to $3.14 per diluted share, and our normalized FAD to a range of $2.92 to $2.94 from the previous $2.91 to $2.98 per diluted share.

Our expectation for net income available to common stockholders has been reduced to $1.61 to $1.63 per diluted share, as detailed in our press release.

That concludes my prepared remarks and I'll turn it back to you, George.

Thank you, Scott.

We're now open for questions.

(Operator Instructions) Your first question comes from the line of Michelle Ko with Banc of America.

Hi, good morning.

I was wondering if you could give me a little bit more color on the rent deferrals, if you anticipate taking any more of those further down the road and in terms of timing when you expect things to improve.

Michelle, the exact timing of increasing the return is difficult.

I would say this, that we could have taken, I guess, more risk in terms of the liquidity of our operators and not taken this large of a deferral, but we chose to do that to be conservative, hoping that we're positioning ourselves to have some nice increases, revenue increases over the next three to five years.

What we've seen so far has been that tours have essentially gone up by 30 or 40% at the CCRCs between the first and the third quarter.

If you look at some of our larger operators, largest operators' ongoing properties that didn't just open, for example, we've seen sales double between first and third quarter.

And, and the other variables -- I'm trying to give you a matrix.

The other variables are when will the people sell their homes and therefore begin to pay off the, the deferred obligation they have, which totals $7 million or so for our largest operator, $14 million overall.

And moreover, when will they convert the 10% deposits, both at our largest operator and throughout the portfolio.

Those are all variables and that's why we chose to be what we think is pretty conservative.

So we're hoping that, in fact, we will not have any further reductions.

We're hoping that there's a clear path upward, but there are a number of variables.

I would say this.

We have a much greater sense of optimism, as do our operators, and the data is bearing that out.

Scott, did you want to add anything?

The only thing I would think just maybe from timing purposes, we looked essentially 12 to 18 months out, so I would probably -- our best assumption at this point would assume we stay at the same rate through most of next year as well.

We're optimistic and hopefully could maybe start to recapture some of the deferred rents by the end of next year, but probably for conservatism purposes, you could assume the same rate from now through next year.

Okay, and also, could you comment on the increased level of activity and property transactions and where you think cap rates are for the different health care property types, and also, if you could comment on your decision, whether it's better to develop or maybe make more acquisitions in the future, which you prefer, and, you know, the yields associated with each.

Scott, why don't you give them the cap rates and I'll comment on development.

Sure.

We're seeing both on the seniorhousing side, Chuck Herman and the team, as well as John Thomas on the medical facility side, see a pickup in potential activity.

In regards to specific cap rates, in senior housing, I would still say the independent and assisted living cap rates are still probably in the, you know, 8 to 8.5% type range.

You still obviously have the agencies lending to the space as impacting the market pricing.

In the skilled nursing area, we are not as actively looking at transactions.

I would say the cap rates there are probably in the 11 to 13% range.

And then medical office buildings, I would probably say would be in the 7.5 to 8.5% range.

I don't know.

John or George, do you want to add any color on the market --

John, do you want to answer that on the medical facilities area?

I think that's right for the higher quality on-campus, or off-campus affiliated properties, that's probably where the range has started to settle into.

And then on development where we continue to see a lot of opportunity, it's still north of 9, even on the highest quality projects.

As to your question on development versus acquisition, I suppose in a perfect world, we would rather just buy brand-new, purpose-built facilities because it immediately drops to the bottom line in terms of our earnings.

But the reality is that the world is changing and I would suspect more in the acute care side than the senior housing side, the need for different real estate and better real estate platforms is more prevalent.

We, we have purchased an attached cancer center out in New Jersey a year or two ago and we would like to buy more of those.

But on the other hand, many of them have yet to be built.

So we're going to have to do some development to be in the forefront of acute care, investing in development.

In the center housing side, I think that there are going to be some good opportunities to do some development, assisted living and dementia, for example, have worked out very well with some of our top operators.

IL, AL combinations, and as well as CCRCs, but I just think that there are going to be -- there's going to be more ability to acquire in the senior housing side perhaps than in the medical facility side.

But having said that, every time we make a guess like that, different opportunities come about and the world changes.

But that's our current thinking.

Great, thanks so much.

Your next question comes from the line of Mark Biffert with Oppenheimer.

Good morning.

George, just continuing on with the developments, a number of the operators, Brookdale mainly came out and said they are starting to look at their expansion projects again.

How are you guys helping out with that?

Would you look to lend to them to help them complete those expansions in some of the assets that maybe they lease from you?

I think the best transactions we can do, the best investments we can make are to help great operators like Brookdale expand their existing facilities where they already have waiting lists.

Those are just perfect deals to do, and we would do that all day for Bill, and for that matter, our other operators.

We think those are terrific.

And what kind of yield would you expect to get on those?

Well, probably more than they want to pay.

But we, we would probably -- that would be a process of negotiation.

It's certainly the current market would have to be considered along with the existing terms for their, their existing projects.

Okay, and then to the nonprofit hospital world, I'm just wondering if you can comment if you guys are planning on targeting that world where credit maybe is not as available for them, given what we're seeing and, you know, a lot of their charitable giving may be down as well.

Hey, Mark, it's John Thomas.

I think we continue to have great access to opportunities there.

The credit markets for them have eased a little bit and so I think right now on two or three projects that we are in discussions about, you know, really the competition is their own balance sheet versus our development services.

But we, we expect to continue to add some development directly with nonprofits and came online this quarter with what is now the largest single tenant in our medical office space, which is Aurora, which is a very strong nonprofit system based in Milwaukee and we're very pleased to have them jump to the top of our MOB portfolio.

Did you guys bid - I mean, SNH bought a portfolio from those guys.

I mean what -- what are you seeing from opportunities?

Is Aurora and other people coming out?

Are these portfolio-sized opportunities, or are these one-off assets that people are trying to sell?

We have, we've got I would say in discussions with a number of nonprofit systems, some larger portfolios than others, some off market, some on, but we continue to see some good opportunities.

But I think these are, what we're talking about right now are really some larger portfolio trades with those nonprofits in particular.

John, I might add, too, that one of the benefits, I believe we have when we're trying to capture some transactions is the fact that we can also provide them with development and design services and some thoughts about where the systems should be going and more often than not in the acute care space, other than some one-off transactions, the ability to, to add ideas and to add some, some real value is helpful in capturing deals and capturing development opportunities.

That's correct, George, and again, the nonprofit systems, again see us as somebody they can trust with their physicians when they sell us their on-campus buildings or partner with us in their on-campus buildings, and again, those nonprofits we're looking to work with are those that have expansion or are looking at health care reform as an opportunity to expand their reach with their physicians and integrate technical and outpatient services in new buildings and are looking for us to help them think through that process and then develop those facilities for them.

Okay, and then lastly, George, I'm just wondering, this is looking out down the road three to five years.

Obviously the senior housing space will be much improved over that period, but I'm just wondering if you can talk about maybe the percentage of your NOI you expect to have in each of the different segments that you guys are playing in.

Again, this is just guess work, but looking at the world as it exists today and our capabilities, I would expect senior housing and care to be somewhere around 50 to 55% as our attention to medical facilities, MOBs included, gets some traction.

And within senior housing, I would expect that our skilled nursing, stand-alone skilled nursing portfolio would be down to 15% or so and our stand-alone IL, and for that matter, AL might be down to 7, 8%.

And most the rest of them will be combinations of some sort and then, again, as we look at combinations, I would expect probably the entry, entrance fee properties to be more like 10% of the total and most of ours to be rental, but we still think that there is just a great place for the entrance fee communities.

Within the medical facilities, it might be around 45% then, Mark.

I would guess that, that the medical office buildings would be 25% and hospitals and other types of medical facilities would be 20%.

That's just my guess right now.

Great, thanks.

Your next question comes from the line of Jorel Guilloty with Morgan Stanley.

Good morning, gentlemen.

Good morning.

We've noticed that the projection in initial cash yield for 4Q09 conversions increased 40 basis points to 8.9% from what you had in second quarter.

We were wondering if this is reflective of a change in the asset mix coming in line or if it's indicative of the market in general.

It's Scott.

I don't think it's really reflective of any changes in the specific assumptions.

The only addition we had in our projects under way was the one MOB I mentioned at 9.3%, and I think the numbers -- at least over the most recent couple of quarters I think are bouncing around a little bit just based on timing, for instance, we closed a couple of the MOBs this quarter a bit earlier than previously anticipated so you just have movements by facility type that are moving maybe quarter to quarter.

Okay, and the other question I had was in terms of same-store revenue growth, which excluding the impacts of rent deferrals, is 0.7%.

I was wondering if you can talk a little bit more as to the, why the number was lower when compared to previous quarters.

Sure.

It's Scott again.

I think we were excluding the impact of the couple of exceptional items.

We were advertising kind of 1 to 2% same-store revenue growth and I think we would be on pace for that this year.

What you're probably seeing some impact from is about 70% of our leases in the senior housing area have increasers that are based on CPI, where it's only about 7% in our medical office portfolio, but in essence, with CPI turning negative, I think the first month was December of 2008 through current, you missed out on a little, some of the increasers and I was even looking at the data, if CPI stays where it is probably by the end of this year, you would start to be able to, you know, recapture some of those increasers and who knows next year, but that's probably been the biggest factor why just sequentially you have seen some, the number turn to be about 1%.

All right, thank you, guys.

Your next question comes from the line of Dustin Pizzo with UBS.

Hi, good morning, guys.

Hi, Dustin.

Just quickly, I may have missed this, but the rental income numbers that are in the supplemental for the quarter, those already reflect the rent deferral?

Yes.

Okay.

The deferral is effective July 1, so that would be in all of our numbers and quarterly earnings impact, yes.

Okay, perfect.

And then on the MOB portfolio, can you just talk a bit about what's behind the decline in operating margins that we see in there?

And is it specific to either the Rendina portfolio or the legacy Windrose assets, or is it just across the board?

This is John Thomas.

It's really a very small number of facilities.

Probably the biggest impact, and we talked about this I think last quarter on the same-store number, was a very large ASC that rolled out of one of our buildings.

We have replaced the tenant.

We've actually replaced that tenant with two tenants, but conversion of that ASC into essentially two smaller ASCs and at lower rents than were there historically so that's probably the single biggest impact.

It's probably a third of the same-store impact.

We've actually increased our occupancy on a same-store basis and absorbed some space last year that through this year, some very aggressive leasing activity.

We've also had made some investments in some people, increasing our leasing team and some other resources.

So overall, I think we're still in line and we are really well positioned to continue to increase not only our same-store, but really our core numbers continue to improve and by the end of the year, we will have leased well north of 600,000 square feet this year.

So we're very pleased with where we are and we would like -- we had a slight timing miss, as Scott mentioned, attributable to a couple of renewals in one building that surprised us and that can't happen.

But we feel good about where we are for the rest of the year.

Only thing I would add, too, Dustin, on the margin, as you look at it, there's some higher expense items like utilities.

A lot of our portfolio is in the southeast typically in the, you know, in the third quarter results, so as we look at that, that impacted margin this quarter.

We had some higher utility costs in the portfolio as well.

Okay.

That's helpful.

And then as you look at the expirations in 2010, what are your expectations for the rent--

Couldn't quite hear you, Dustin.

You're breaking up a little bit.

Sorry about that.

I was just saying on the '10 expirations, what are your expectations for where market rates are relative to the in-place rents?

We have a -- we're ahead of pace on next year, so some of our renewal numbers reflect some pretty aggressive leasing for next year for renewals.

So we're doing a good job on particularly getting two to three years increased terms on those renewals and I think some of the in-place rent we're trying to stretch out and get 2 to 3% increasers on those renewals to current market rate.

So I think we're still working through the expectations for next year and we'll have a better estimate of that.

But again, our renewal leasing, we had a lower amount next year of expirations and continue to be well ahead of track on where we expect to be next year.

Okay.

That's helpful.

Scott, just finally, turning to the loan book, I know you talked about the nonaccrual balances last quarter, but seeing as that number hasn't really changed much, are there any moves being made on your part to foreclose and how many loans are really in this bucket and what is the associated underlying asset value there?

The loans, you're correct, the loans that are in our nonaccrual bucket really haven't changed.

For everyone's benefit, the loans on nonaccrual stand at $72.4 million as of the third quarter.

We obviously do have a reserve in place of $7.6 million.

As we look forward, there's about five different buckets of properties in that portfolio.

There's one specialty hospital in there and probably the majority of the rest are independent living campuses, where you have some unit or cottage sale components to them.

So you haven't really seen a lot of fluctuation, because as we assess the carrying value and the appropriateness of our reserve, we have to look forward often times, you know, three to five to even more years in terms of making estimates for future sales in terms of the appropriateness of the reserve.

And I think for an earnings recognition perspective, we're taking as conservative stance as you can by keeping them on nonaccrual.

Scott, I might add a couple things.

One, we have had, as it relates to the mortgage loan portfolio, we've had some payoffs in the fourth quarter that were $40 million that we'll be able to report, well, we are reporting.

And then the other points I would make, and it goes really back to the last question as well, when John reports on the MOBs, you can expect us to be very aggressive in terms of buying new and better and larger facilities, MOBs, and developing them.

At the same time we will probably continue our culling out process of our portfolio and we will select some MOBs for sale.

And frankly, our feeling is if we have any impairments or if we have any losses, we'll do it anyway because we sort of combine some rigorous activity in terms of selling some that we think are going to produce some very good gains as we have the last two years, $150 million, now $170 million, and we will take impairments and we will take losses on the sale of MOBs.

Similarly, if we find by the year end that any of the loans are -- should be written off, we'll do that.

And don't be surprised.

We've done that throughout our history and we're going to continue to do it.

It's just part of our process of portfolio managing.

Thank you.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Thanks.

I wanted to go over to the Capital Markets side.

I think you categorized it as sort of a lot of this catch-up stuff maybe has been done and you're now looking at maybe acquisitions.

So as we go forward, I guess I want to just get a little better sense of how you're thinking about the Capital Markets, obviously unsecured debt costs have come in a lot, I think even since we talked the last time on this call.

So if you're funding new stuff, what might you be using?

How much need do you feel to continue to buy back the 8% or do some of the other debt refunding at this point in advance?

Jerry, I'll start and then Scott, please add any comments.

We have been pretty successful in terms of moving our maturities out.

We're not sure really that we have to do much more work at this point.

We have our whole line available to do transactions or to use in whatever way is appropriate and we're finding that, as you say, the unsecured debt markets have come in for ten-year maybe 7%, maybe 6, a little less than that.

So we think we have the ability to access capital.

We also have had, like our colleagues in the health care REIT sector, we've had pretty good support in the equity markets.

So that -- as our stock price moves up, the chances of the converts, convertible debt actually exercising their right as opposed to pushing it off for five years, becomes less of an issue.

So I think we're in very good shape right now.

What we're waiting for, Jerry, is to know exactly what transactions, acquisitions, we are going to have and are proceeding to closing, and what other development projects we are going to pursue, you know, subject to keeping some limits on that activity.

So it's really a hard dance, but right now we have adequate capital and we have access to adequate capital and we're just waiting to be certain about our, our acquisition and development activities.

And just maybe to kind of recategorize that or characterize that, so we might be back to a more normal pattern, where you'll build up acquisitions on the line and then go out and do, say, unsecured and kind of proportionally issue equity?

And on the equity, would you be more likely to do larger deals or use the continuous equity issuance?

I said in my remarks that I thought we're approaching a more normal time and so I think you characterize it appropriately.

We like the, sort of the continuous equity program to a certain extent, but we also know that we need the support of the investment banks and the bankers, so we will from time to time do some equity transactions as well.

But, again, we're going to keep our leverage at a somewhat lower level than perhaps we did the last three or four years, which is usually shooting for 45 to 50%.

Right now we're probably more like 40 to 45%, so we're going to continue our discipline, perhaps at somewhat lower levels until there's even more visibility on the Capital Markets.

Okay, and just last thing, you said that you are going to return to kind of a typical average -- in your mind, what's that number for acquisitions?

Well, I told people, I've told the Street that with John's team and Chuck's team and our reach in the marketplace, and our relationship-driven programs, both in senior housing and increasingly in acute care, that we're a team that is built to do up to $1.5 billion a year.

Now, that means that there have to be adequate possible transactions and development out there and it's been a little sticky in the transactional side, a little bit unevenness in the bid to ask area, but we are built to do that kind of volume and we're built to then watch all of those assets with our asset management team.

So I think we can do that.

Okay.

Thanks a lot.

Your next question comes from the line of Rich Anderson with BMO Capital Markets.

Hey, thanks.

George on, that last comment, the $1.5 billion, that was total investment dollars out the door per year, or is that just development?

Oh, no, that -- Rich, when we think about it right now, and again, the world changes, okay, dramatically sometimes.

We usually think that with our development, with our relationship folks, we can do 2, 3, $400 million, maybe up to $0.5 billion, we think that we can do development of $300 million to $500 million and then maybe new deals of another $300 million to $500 million.

And then we're inevitably going to be selling $100 million to $150 million, maybe $200 million, so maybe the net number is more like $1.3 billion.

I actually said that wrong.

I meant to say at any time development, your development pipeline could be how large?

Well, it -- the way we look at this, we would really like to drive development and for that matter, fill-up properties that are mainly related to senior housing for the reasons I mentioned earlier, down to maybe 10% each.

Right now we're a little higher than that and we've explained to the Street that that is partly a result of the marketplace catching all of us cold, you know, so that we have development under way and we can discontinue stable or acquisitions, so we got a little higher than we wanted to be.

We got up to the high teens on our development and I don't think we want to be there.

But we'll gradually work it down to probably 10 to 15% development a year.

Okay.

Back to the deferral rent strategy for your entry fee, I'm just trying to do the math.

I think you gave, you gave the lease rate decline from 9 to 6, but did you say what your investment balance was in those nine assets?

Maybe you have it in your disclosure.

Let me connect you -- yes, there was an aggregate deferral from roughly 9 to 6% on the current lease basis of $385 million.

The same-store number does not include two properties that came on within the last year, so that number is more like the $280 million same-store lease basis.

To do the math to get to the $2.4 million I would use 280?

That's right.

Okay, fine.

Now, what are the status -- you mentioned you are thinking that you kind of captured this and these are the nine lease-up entry fee communities -- but you have seven others under development.

What is the status of those and how are they progressing towards, toward a point where you will have to start thinking about the lease rate deferrals idea for those?

Yes, we, yes, we actually have nine that are open and there are five that are under development of the total of 14.

You can see those numbers on Page 30 of our supplement.

There are currently about $350 million that are still under development.

They are coming on, there's about two or three of them coming online toward the end of this year and then another two I think about mid, middle of 2010.

We list the initial yield in our supplement because that is, as the current contractual yield, which for those two lines is 10% on one and about 8% on the other.

We don't know, it is still contingent upon continued fill-up between now and when the assets open, but to be conservative, could we see a potential 6 to 7% type initial rate there?

Yes, I think it's possible.

Lot of variables still, but that's probably up to you and until we actually negotiate anything, we'll obviously let you know every quarter.

Okay.

I think you mentioned that your entrance fee operators are 8% behind budget, is that right?

The actual move-ins.

The move-in number is only 8 units behind.

Year-to-date, we have 158 move-ins versus the projected move-in number of 166.

Okay, so if it's just that, just that slight bit behind budget, why such a big cut to the, to the lease rate, the deferral?

Why does that -- is it just wiggle room, or what's the story?

I think that we're probably being conservative.

We hope we're being conservative.

I think it's that comment and then also the nature, as you mentioned, George, there's a pretty significant deferred amount as well.

A lot of these, again, we're only getting 10 to 20% of the entrance fee, building up a significant receivable.

Also the healthcare component fill-up, which is probably not a factor here, because the rental components of these buildings are actually filling fairly well, so I think that's probably the biggest factor and we're just trying to set an appropriate rate that is sustainable over the next 12 to 18 months.

And you feel as though that all of the deferral, all the building AR is collectible over the next couple of years?

We think that it is.

I mean the folks are obligated to pay.

Now, what happens if there are deaths and other things, I mean there could be some slippage, but there is an obligation to pay, and they are living there.

And enjoying it, generally.

So it looks very certain.

Okay.

Fair enough.

And then lastly, just as an explanation for me, I'm just looking at your supplemental on 15 -- no, 16 and 17, and you have year-to-date and third quarter gross investment activity.

In the third quarter, just looking at the entrance fee, it looks like you made investments in five of the seven.

Am I reading that right, for the third quarter that are -- I'm confused.

I'm trying to draw a connection between the 7 for year to date, or is that two that have since gone to the operating portfolio?

This would be the investments during the quarter on the projects that were under construction.

If something converted in the quarter, the dollars would also be in that chart, but the specific question, the entrance fees, we have two CCRC entrance fees and three combination entrance fees.

That matches the development projects on the other page we just highlighted.

Okay.

So two have since gone to the operating portfolio?

Yes, I think so.

And we can check and talk after the call, but that's what would be the factors there, Rich.

Okay, thank you.

Yes.

Your next question comes from the line of Rob Mains with Morgan Keegan.

Yes, good morning.

Pretty much got everything I needed to know about entrance fee communities.

Just want to make sure I heard you right earlier, Scott.

The $2.4 million is reflected in this quarter's rental income line?

Yes.

Okay.

Then also in the updated FAD guidance, CapEx and TIs were up.

It looked like that was kind of a blip in this quarter.

Was there anything particular going on?

Rob, it's John.

I think the, part of the biggest blip, was I mentioned before the ASC that rolled out.

The proprietary hospital left the ASC of a long-term master lease and repositioning those, that ASC into two smaller ASCs which had both been leased required additional TI to do that.

But that project sounds like that's done now?

Yes, it's -- they are moving through the TI buildout now, so those will come online I think one by the end of the year and the other half by the first quarter early second quarter of 2010.

Okay, so we should be kind of drifting down to a more normalized quarterly rate?

Yes.

Okay.

All right.

That's all I had left, thanks.

Your next question comes from the line of Omotayo Okusanya with Jefferies & Company.

Yes, good morning.

Most of my questions have been answered.

Just two quick ones.

In regards to Freddie and Fannie and their requirements now when they are underwriting backing senior housing properties, could you give us a sense of what kind of terms they are asking for now and kind of what it looks like versus six to nine months ago?

Yes, this is Scott.

I don't think the terms have changed a heck of a lot.

It seems like to me like pricing still is zeroing in around the 6% range.

It depends obviously terms and then what you're looking at shorter, or length of term.

Honestly, we actually removed our incremental secured debt assumption, because I think as George mentioned, we're looking at the unsecured market spreads between that and the secured markets, probably a bit more narrow, so I guess as the REITs think about it for us, if 10-year unsecured is 7% and think it would maybe be in the mid 5 to 6% on a secured ...

Mike Crabtree, is there anything you would add in terms of the secured markets?

I think the only thing going on right now, Tayo, is that they are underwriting a little tougher, so they might have a leverage of 65 %, but they are leveraging a tougher underwritten NOI.

So I think that's what you might be finding.

That's helpful.

And then just in the supplemental on Page 23, I know we've talked about the $2.4 million of rent deferrals, but there was also a rent adjustment for the specialty care hospital?

Yes.

Could you just talk about that a little bit, what that was?

Sure.

It's a hospital that's been in our portfolio.

We basically reduced rent by about $242,000 a quarter, but are still receiving a return of about 10% after that reduction.

So it's based on performance at the hospital and a sustainable rental rate.

So, we're still actually getting a reasonable yield but the 240 some thousand dollar reduction quarter versus last year impacts the reported results.

What was the issue with the hospital itself?

It's just revenue pressures, or--

Yes, actually a lot of that is based on procedural volume that fluctuates often quarter to quarter and over time.

So, you look forward and make an ongoing assessment of appropriate rental rates in the hospital world.

Okay.

Does the hospital have any particular specialization?

I'm sorry.

Yes, orthopedic.

Neuro and orthopedics.

Neuro and ortho hospital, okay.

Appreciate that.

Sure.

Your next question comes from the line of Karin Ford from KeyBanc.

Good morning.

Good morning.

Can you give us the cap rate on the fourth quarter sales and the rate on the fourth quarter loan payoffs?

Yes, the fourth quarter loan payoff I know averaged probably a little higher.

It's about 11.5% when you blend it together.

There are two pieces to that $40 million that we alluded to.

The skilled nursing portfolio I believe was on our books for about $27 million where we had a $20 million gain.

I don't have the cap rate in front of me on that one.

I could get that for you.

Probably around 10.

And just final question, can you tell us how much you currently have acquisition wise unit contract and letter of intent today?

No.

Okay.

Thanks.

Your next question comes from the line of Buck Horn with Raymond James.

Quick question, maybe a little early to know this just yet, but do you know if a senior household might qualify to use the new $6500 move-up tax credit as part of using it to enter an entrance fee community?

The first time home buyer?

Well, it would not be the first time home buyer.

It's the new move-up tax credit that congress is passing for home buyers that have lived in a house for at least five years.

We're all taking -- everyone's looking at each other across the table.

We have -- that's probably the first time we thought about that, so we'll look into that.

We'll get back to you, Buck.

Great, thanks.

(Operator Instructions) Your next question comes from the line of Jim Sullivan with Green Street Advisors.

Good morning.

Good morning.

You talked about some optimistic data points with respect to the CCRC fundamentals, but a very contrary data point would be the bankruptcy of Erickson.

And when you were talking about the motivations for the rent deferral in your portfolio, you mentioned I think the liquidity of your operators.

So I'm curious what you make of the Erickson bankruptcy, and I'm curious with respect to your operators that were headed on this path if not for the rent deferral.

Well, we're very unhappy to see the Erickson bankruptcy because John and Erickson have been leaders in the sector.

The model is really quite different from ours in a lot of respects, in the sense that there's a bifurcated involvement between a nonprofit and a developer and some of the funds go to different buckets and therefore may or may not be accessible by the residents under certain circumstances.

John develops and manages very large communities, more at a middle market price point, but there are certainly a lot more marketing and sales that have to occur.

And I would say this, Erickson was very aggressive about expanding, Jim, and probably was out there with too many projects at a time when the markets just crashed on him and for that matter all of us.

I don't see that as frankly much more than the typical headline risk that we all face from time to time when any particular sector that we invest in has sort of a problem.

Our sales are slower, as you know, and our rental is pretty good so, you know, this is one of the reasons we diversify, is that there's going to be something that's a little more difficult with respect to one of our segments from time to time and then it shifts from time to time.

John just had a huge development pipeline and I think ours is much more manageable.

Okay, thank you.

Then on a separate topic -- 11 to 13%, were you referring to cap rates or lease yield?

Cap rates.

So what were the lease yields?

-It depends on the property.

We typically underwrite skilled nursing assets to stabilized coverages of 1.5 to 1.

So if you had a 12% cap rate at an 8% initial yield, that would be the concept.

But we haven't been doing as many of those lately.

Thank you.

At this time, there are no further questions.

Okay.

Well, let me wrap up just by thanking everybody for participating and per usual, Scott and his team are available for follow-up questions.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.