Ventas, Inc.
Q2 2008 Earnings Call Transcript

Published: 7 Aug 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to Ventas Second quarter 2008 Earnings Conference Call. My name is Silvana and I will be your coordinator for today. At this time all participants are in a listen-only mode. We would be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a remainder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to your host for today Mr. T. Richard Riney, Executive Vice President and General Counsel. You may proceed sir.

[T. Richard Riney:]

Thank you, good morning everyone. Welcome to the Ventas conference call to review the company's announcement yesterday regarding its results for quarter ended June 30th, 2008. As we start, let me express that all projections and predictions, and certain other statements to be made during this conference call, may be considered forward-looking statements within the meaning of the Federal Securities Laws. These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission including the company's annual report on Form 10-K for the year ended December 31, 2007, and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements, and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is that of this date only and Ventas expressly disclaims any obligation to release publicly, any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note the quantitative reconciliations between each non-GAAP financial measures contained in this presentation and its most directly comparable GAAP measure as well as the company's supplemental disclosure schedule are available on the Investor Relations section of our website at www.ventasreit.com. I will now turn the call over to Ms. Debra Cafaro, Chairman, President and CEO of the company.

[Debra A. Cafaro:]

Thanks Rick, good morning to all of our shareholders and other participants and welcome to our second quarter 2008 earnings call. I am pleased to be joined in Chicago by my Ventas colleagues. Ventas's balance sheet and operations are continuing to perform well, despite the sobering conditions in the financial, economic and housing market. We are finding selected healthcare investment opportunities of manageable size from the credit list dislocation that should provide our shareholders with excellent risk adjusted returns. And we are maintaining our full year normalized FFO guidance of $2.75 to $2.82 per diluted share. For the quarter our earnings were excellent and our liquidity position and balance sheet remain exceptionally strong. Today we'll discuss our earning portfolio performance and expectations for the balance of the year. After Rick Schweinhart reports on our financial results, we'll be happy to take your questions. This quarter normalized FFO per share was $0.71, a 4% increase over the first quarter. During the quarter, we sold assets that generated a gain of over $26 million we also reached an agreement to sell five senior housing assets in a transaction that will likewise result in a gain on sale. The pending sale price of $62.5 million represents an attractive cap rate of 6.5% on operator EBITDAR at the assets and our rents. Those transactions provide liquidity for us to recycle into attractive investment opportunities. On the investment front, we have recently made about $173 million of new investments, these include a newly opened medical office building that was in lease up during the second quarter and should generate un-levered yields to Ventas of over 9%. And as we foreshadowed in prior conversations with you we also purchased two pieces of healthcare debt at a discount this quarter. We are currently in an interesting investment market because debt returns, which are safer than equity returns can exceed equity cap rate in certain selected situations. This is principally due to the desire by lenders to sell debt securities even when the debt is excellent quality, well secured and high performing. So this inversion of normal investment metrics makes us interested in buying or originating limited amounts of health care debt because we believe it can provide our shareholders with the superior risk adjusted return. Our goal is to make manageable, multiple investments in quality health care operating companies, where we believe we are in safe capital structure collateral and repayment position. With that as background, this quarter we purchased $112.5 million principal amount of debt in skilled nursing provider Manor Care, for a substantial discount. The loan piece we acquired is secured by a first mortgage on 339 assets and represent 38% loan to value on those assets. So it is very secure with great cash flow coverage of over three and a half times. The unlevered yield to maturity is 533 basis points over LIBOR. Likewise, we purchased $50 million principal amount of corporate debt in HCA, a premier national hospital company for less than $45 million. This HCA investment should produce un-levered yields to maturity of over 9%. Please note that we are not trying to time a bottom or trade debt securities, rather we are averaging into a dislocated debt market in a measured way, in companies and assets we understand and know, working with motivated sellers of the debt and taking advantage of opportunities we seek to produce superior risk adjusted returns for our shareholders. Turning to a portfolio review, our triple-net lease assets continued to perform well. The Ventas triple-net lease portfolio is stable and secure, with solid occupancies and cash flow to rent coverages across the spectrum at independent living, assisted living, skilled nursing facilities and hospitals. Our triple-net lease portfolio of 416 assets accounts for 54% of our revenues and 76% of our NOI. A particular note

[Richard A. Schweinhart:]

Thank you, Debbie. Second quarter 2008 normalized FFO per diluted share was $0.71, compared to $0.70 in last year's second quarter and $0.68 in the first quarter of 2008. Second quarter results were better than the first quarter, mainly due to improved triple-net lease revenue due to escalations, improved Sunrise NOI well developed by decreases in property level of expenses. Our $1.6 million lease termination payment fee increases in loans receivable and investment income. Less interest expense slightly offset by higher G&A and increased share count due to our February equity rates. Second quarter FAD per diluted share were $0.68, compared to $0.65 in last year second quarter and $0.64 in the first quarter. Normalized FFO this quarter totaled $98.7 million, compared to $82.1 million in the second quarter of last year and $92.4 million in the first quarter of this year. Normalized FFO and earnings are reported after deducting minority interest. Normalized FFO for the second and first quarters of 2008 and the second quarter of 2007 exclude the net benefit of $4 million, $10 million, and $6 million respectively of income tax benefits and merger related items. Normalized FFO increased $17 million from last year's second quarter, recently due to acquisitions. Revenue increased $42 million; of that $6 million was due to rent increases and $36 million due to Sunrise properties, resident rental and services fees. Normalized FFO increased $6 million from the first quarter of 2008. Revenues increased $2 million with resident rental and services fees, basically flat. And rent escalations in MOB revenues accounting for the increase. Sunrise property level expenses totaled $69.3 million for the second quarter and $143.6 million for the first half of the year. Second quarter expenses benefited from property level expense credits and expense reconciliations such as property taxes, insurance, and corporate allocations. Interest expense was essentially flat with the second quarter of 2007. Interest expense decreased $400,000 from the first quarter of 2008, due to repayment of debt. Our second quarter effective interest rate of 6.6% improved slightly from 6.7% in the second quarter of 2007 and was flat with first quarter of 2008. General, administrative and professional fees including stock-based compensation for the second quarter of 2008 totaled $9.6 million, consistent with our expectation of $36 million to $40 million annually. On February 1, 2008 we issued $4.5 million common shares producing net proceeds to the company of $192 million. As a result weighted average diluted shares grew to $138.7 million in the second quarter, up from $136.7 million shares in the first quarter of 2008. We currently have $93 million outstanding on our $850 million revolving credit agreement and unused capacity of over $750 million. Our debt to total capitalization is excellent at 36% at quarter end and our net debt to pro forma EBITDA is 5.2 times. Our guidance for 2008 remains between $2.75 and $2.82 per share. Our key assumptions remain the same. The total Sunrise NOI from our 79 assets range from a $140 million to $145 million and SG&A extends approximately $36 million to $40 million. Our guidance does not include other unannounced acquisition or divesture activity. Our second quarter showed stable growing results and we look forward to continued stability and modest growth during the balance of 2008. Operator, we will now take questions. Question And Answer

[Operator:]

[Operator Instructions]. And the first question comes from the line of Michael Bilerman from Citi. You may proceed, sir.

[David Toti:]

Hi, this is David Toti here.

[Debra A. Cafaro:]

Welcome.

[David Toti:]

Thank you. Couple of questions around the balance sheet, what you believe is your sort of maximum capacity or appetite for structured finance portfolio at the top end?

[Debra A. Cafaro:]

Are you asking us what our capacity is or our appetite for making investments in debt?

[David Toti:]

Yes. Basically, if you are buying debt pieces and pieces of the capital structure; how do you see that portfolios popping out or maturing?

[Raymond J. Lewis:]

Hi, David, this is Ray Lewis. I think as Debbie mentioned in her opening remarks, we think there is a good opportunity in the market right now to generate good risk adjusted returns for our shareholders by investing in debt. That having been said I mean it will always be a relatively small portion of our portfolio, and I don't foresee us really having any more than say 5% of our total value in a debt portfolio at any one point in time.

[David Toti:]

Okay. Are there loan loss reserves established for these?

[Debra A. Cafaro:]

We are really at the leading edge of this program; and so as required, we would establish reserves. But at this present time, there are none.

[David Toti:]

Okay. And then I'm just sort of moving over to sort of a transaction environment; are you seeing an increase in sort of distressed opportunities across respect from of investment areas?

[Debra A. Cafaro:]

I mean the areas, the healthcare areas that we participate in, skilled nursing, hospitals, independent and assisted living and medical office by and large are showing good defensive characteristics and are generally performing quite well. So there are very limited, if any, distressed opportunities in our sector unlike some of the more classic commercial real estate basis.

[David Toti:]

Okay, yes that was my expectation as well. And just a sought of a detail question relative to some of the debt that you purchased; I think it was the $100 million piece. That appears to have a higher yield than some of the debt that was structured in the same transaction that's lower in the capital structure, can you provide some color on that?

[Debra A. Cafaro:]

We can, I mean again I think we are trying to be patient about our acquisition opportunities although again not timing the market just waiting to see when we can buy manageable slices of what we believe are really secure debt pieces at returns that we think are attractive. The market changes everyday in these securities and so we are trying to make intelligent manageable investment.

[David Toti:]

Great, thanks for the color I will get back in the queue. Thank you.

[Debra A. Cafaro:]

Okay, David; thanks.

[Operator:]

And the next question comes from the line of Karin Ford from KeyBanc Capital Markets. You may proceed.

[Karin Ford:]

Hi, good morning. First just a question on Sunrise, you mentioned that you have some expense declines there and the margin improved quite a bit sequentially. Is that a trend or is that just a one-time event that happened in the quarter?

[Debra A. Cafaro:]

Well, the way we are looking at it, Karin, is that we are sort of expecting a full year of NOI to be in this sort of 140 to 145 range, and so we would expect that margins would go back to a more normalized level in the second half.

[Karin Ford:]

Okay, fair enough. Second question is on the guidance. You had a good quarter, you had the lease termination fee and you made some pretty attractive investments. Just curious to why you left guidance the same, and what if anything offset some of the positive things that may have moved guidance somewhere upward?

[Debra A. Cafaro:]

Well, the reason, that we kept guidance the same is that we are trying to give the market our best expectation of where the year is going to out as it always is and that's really the range where we expect our earnings in FFO to come in. And in terms of... if we expect a sort comparable second half from Sunrise to the first half and we had already included in our guidance originally the investment of about 150 million cash that we had on hand. So, it would really take additional investments to kind of move the needle. And if we find those, and then that will be great and we will advice the market at that time.

[Karin Ford:]

Okay fair enough, final question the credit statistics that you gave on the mortgaged debt investment was really helpful. Do you have similar or any type of credit type indications you can give us on the HCA debt?

[Debra A. Cafaro:]

We can, I mean those are corporate bonds, so it's different... a little bit little animal, [ph] but in terms of the company HCA itself they have interest coverage of over two times and they're about six times levered. So they're doing quite well and obviously the premier hospital company in the nation. So we feel good about that as well.

[Karin Ford:]

Okay, thanks very much.

[Debra A. Cafaro:]

Thank you, Karin.

[Operator:]

And our next question comes from the line of Rob Mains from Morgan Keegan. You may proceed

[Robert M. Mains:]

Yes. Excuse me thanks. Good morning. I just a follow up on the question on Sunrise NOI. Could you either, I don't know if you can quantify or just give a little bit more depth into what went into the expense reductions or I guess those were reductions, but kind of reverse those in the quarter?

[Debra A. Cafaro:]

Sure, I think Rick touched on those; they are basically things like property taxes, insurance and so on.

[Robert M. Mains:]

What happened was that they were closed or were reversed, what exactly caused the expense to go down?

[Debra A. Cafaro:]

Well, again basically as we told, when we acquired the portfolio, we expect the quarters to be lumpy, and we are really looking at this portfolio and the NOI performance over the course of the year. And so basically we are expecting sort of we had $71 million NOI, sort of first half and then we are expecting sort of a comparable second half on the NOI line.

[Robert M. Mains:]

Right. I understand. I just wonder if this seasonal pattern we should be looking or is this kind of like...

[Debra A. Cafaro:]

No, I mean, again I think it's expected lumpiness and I think you'll see sort of revenues and expenses, both trend a little higher in the second half.

[Robert M. Mains:]

Okay. Fair enough. Thank you.

[Debra A. Cafaro:]

Thank you.

[Operator:]

And the next question comes from the line of Rich Anderson from BMO Capital Markets. You may proceed.

[Richard C. Anderson:]

Yes, thanks, and good morning everybody.

[Debra A. Cafaro:]

Hi Rich.

[Unidentified Company Representative:]

Hi Rich.

[Richard C. Anderson:]

In terms of REIT, do you now take the assets out of your TRS and free up space there? And if so is there any financial impact as a result of that?

[Debra A. Cafaro:]

Good question for those of you who are not REIT geek like I am; the idea is...

[Richard C. Anderson:]

You are not calling me a geek, are you?

[Debra A. Cafaro:]

Yes, I called myself one.

[Richard C. Anderson:]

Okay.

[Debra A. Cafaro:]

Theidea is to build that would just pass to benefit the REIT industry that had a number of positives in it among them, the tax free subsidiary cap is raised from 20% to 25% of you total value. And in addition, there was healthcare prong up the statute that gives healthcare REITs structuring benefit as we go forward. And some more tax efficiency and planning. And when we acquired Sunrise, we were able to do under existing law and in compliance with existing law. But as Rich alertly points out, I think the idea will give us a benefit of moving some of the assets around internally to create a more tax efficient structure over the long term. So we won't see any immediate financial impact but over a longer period of time it will result in more tax efficiency.

[Richard C. Anderson:]

Okay. And just on the topic of Sunrise, you guys are really into the mansion product, but can you comment about how the Sunrise business is done across its different price points and where mansion might stack or some of the lower quality types of products?

[Raymond J. Lewis:]

Sure Rich, this is Ray, I think that if you've listened to Sunrise's comments recently, you will know that they are really refocusing their efforts on the mansion product going forward. And I think that it speaks to the fact that is sort of the best product in their portfolio primarily because it's a purpose built product around the Sunrise operating model. It tends to be the case of our portfolio. It is located in high period entry infill locations and major metropolitan markets. As the consequence, you tend to see the mansion portfolio and if you look at ours as an example generating higher average daily rates, performing a little bit better in absolute occupancy. And so I think that speaks well to the quality of that product type relative to their other products.

[Richard C. Anderson:]

Okay. A small one here. But I think I saw this right that merger related costs, even though it's on your nominal measure, normalized measure of FFO. But it went up second quarter versus the first. Why did that happen? And is there anyone to take from that?

[Debra A. Cafaro:]

I can answer that quite simply. In that line is our litigation costs, rising out of the merger and so now that we are in full swing of discovery. Those costs are going up that's why.

[Richard C. Anderson:]

You mentioned that your plans to sell five assets to a current tenant, seems like you are not... does that tenant... does it start with the letter K?

[Debra A. Cafaro:]

No... no, it doesn't. But if you would like to buy a vallow [ph]... no it doesn't. It doesn't.

[Richard C. Anderson:]

Okay and then last is on medical office, with 3% of the portfolio it really seems like this has been an area, where you probably wanted to be bigger by this time in medical, correct me if I am wrong on that. But it just seems like that has been a part of the investment conversation for the past year or so. And still pretty small percentage of the total. Are you sort of happy with this or are you frustrated that you are not, just like, say 10% of your business at medical office. I mean can you comment on that... on the environment and what sort of slowed it down?

[Raymond J. Lewis:]

Well, I think Rich, you are right. I think if you to ask me a year ago, I would have said we probably would be a little bigger than we are right now. But we are being patient and we are focusing on opportunities that build important relationships that will help us to grow this portfolio in the future. And more importantly, focusing on doing deals that are going to make money for our shareholders. So I am actually happy with where we are. We have a number of good relationships that have led to multiple transactions we announced. Development deal in the first quarter. We are making progress. We are doing the things that we want to do and we are well positioned when we find those good opportunities to count on them. So it's a patient strategy. I'm pleased with what we are doing. And hopefully as we continue to execute, the portfolio size will grow and profitability will follow.

[Richard C. Anderson:]

Okay. And maybe just a quick follow-on. What would you... how would you quantify your existing dry powder today as we progress?

[Debra A. Cafaro:]

Well, we saw it basically less than $100 million of spending on the revolver and the capacity there is 850. And in addition, our credit stats are about five times debt to EBITDA. So that looks pretty good and has leverage capacity as well. So, I think we are in pretty good shape there.

[Richard C. Anderson:]

So.

[Debra A. Cafaro:]

I feel really good about the balance sheet and I continue to think that, it's going to be an important differentiator as we go through the rest of 2008.

[Richard C. Anderson:]

So, maybe over 1 billion of dry powder?

[Debra A. Cafaro:]

1 billion probably is a good estimate.

[Richard C. Anderson:]

Okay, thank you.

[Debra A. Cafaro:]

Thank you.

[Operator:]

And the next question comes from line of Jerry Doctrow from Stifel Nicolaus, you may proceed.

[Jerry L. Doctrow:]

Good morning. I just had a couple of things. A lot has been covered. I think, on the Sunrise relationship, I was curious how are you are feeling about development, whether we would expect you to buy any new deals in the second half?

[Debra A. Cafaro:]

Good question, Jerry. As you know we have an exclusive right of first offer to acquire everything Sunrise developed in Canada, and also in selected defined geographies around our U.S. assets. And we are thrilled about that. And we continue to believe that Sunrise is a great developer, particularly of the mansion product. It was interesting, Mark Ordan said on Sunrise's call that capital is really in this environment asking for robust yields on development. And we are looking at things with them, and we'd be happy to do developments that meet our return expectations and that we think will be good development. So it is possible we will do some with Sunrise, going forward. And I think highly likely, although not necessarily within a specific narrow time period. But I think it's highly likely over time that we will partner with them on transaction.

[Jerry L. Doctrow:]

Okay. And you're right. It's not, a certain fixed deal. It just depends somewhat on market condition are.

[Debra A. Cafaro:]

Right. We think that they'll develop some good asset over time and that we'll be able to participate in that for the benefit of our shareholders.

[Jerry L. Doctrow:]

Okay. And then just TRS, sort of coming back to that, I mean you talked about restructuring the existing deal. Just any thoughts about how it my used, go forward, kind of things you would think about think about doing.

[Debra A. Cafaro:]

Well, I mean yes. The most important thing say though is that right here makes the healthcare REIT just like lodging REIT and neither healthcare REIT nor lodging REITs will be able to operate asset, healthcare assets, except through an independent eligible contract or as we do now with our Sunrise relationship. So we see this is as structuring advantage in deals were we might want to have the REIT through the TRS center into a management contract under the right circumstances, but we believe in the model that we have as a healthcare REIT and has offered investors and great risk reward proposition over the past ten years. And so I don't expect RIET exchanges really to result in material changes and how we operate our business. But it does give us a little bit of structuring, flexibility, cap sufficiency which we would hope to use to good advantage over time.

[Jerry L. Doctrow:]

And the results didn't change I think in the international figments too. And we definitely make something like Chartwell, potentially an easier acquisition both because of TRS and some of the other things.

[Debra A. Cafaro:]

We will let you study that one.

[Jerry L. Doctrow:]

But it makes REIT operator deals potentially more likely, is that fair to say?

[Raymond J. Lewis:]

What you mean by that Jerry? I just want to make sure.

[Jerry L. Doctrow:]

Well, you could acquire somebody's spin-off may be the manager in a private subsidy and capture upside.

[Debra A. Cafaro:]

I mean we could sort of do that now. I mean it's a sort of a classic prob so up, so cost structure is sort of for Ventas.

[Jerry L. Doctrow:]

Right.

[Raymond J. Lewis:]

Which is where the assets are held.

[Debra A. Cafaro:]

It's where the assets are held and how the relationship between the two is structured, is it a lease, is it a... how is it structured and...

[Jerry L. Doctrow:]

But using a line interest better, because you can both share an income now, which you couldn't really do before, your share in bottom line.

[Debra A. Cafaro:]

In appropriate circumstances.

[Jerry L. Doctrow:]

Okay, that's fine. Thanks.

[Debra A. Cafaro:]

Thank you.

[Operator:]

And you next question comes from the line of Adam Feinstein from Lehman Brothers. You may proceed.

[Adam Feinstein:]

Okay, thank you good morning.

[Debra A. Cafaro:]

Hey, Adam.

[Adam Feinstein:]

Just a few questions here; I guess just in terms of future assets sales, just in terms of your thoughts there. I know you guys haven't put an official number out for the year in terms of the asset sales. But just, what are your thoughts, you just talked a little about your though process on buying assets, but just curious in terms of selling off additional assets and then I've got a couple of follow-up questions.

[Debra A. Cafaro:]

Well, we have been opportunistic in our asset sales program overtime. And many of the sales, not all, but many of them have been to operators in sort of win-win arrangements with them. And, we're not planning any kind of mass disposition over the balance of 2008. But we'll continue to prove and improve the portfolio and hopefully do some opportunistic things. But I don't think you should pencil in a huge amount or anything like that.

[Adam Feinstein:]

Okay, all right. And then just, I just wanted to get your thoughts in terms of senior housing. Obviously a lot of noise out there with respect to occupancy rates and just the impact that the economy is having on the senior housing sector. It sounds like your operators are still doing pretty well, but just curious to get your thoughts there in terms of how you think about that and would you have an interest in taking down your exposure to senior housing in the future, meaning to the extent you are going to put capital work would you be inclined to invest being away from senior housing, could you do a big concentration there?

[Debra A. Cafaro:]

Well, we believe in senior housing and we have... most of our senior housing is in the triple-net leases. And we've seen good solid continued performance in that portfolio with some impact from the economy in the housing market really at the margin. But again in the triple-net lease structure is set up to expect operating changes. And then on the Sunrise front, we have seen, again good solid occupancies, the higher acuity product is really need based and we do believe in the business and in the growth of the business over a long period of time. I am going to turn it over to Ray; I think you'll see us continue to grow in other areas as well as senior housing.

[Raymond J. Lewis:]

Yes, I mean, I think just to add to what Debbie is saying. I think the senior housing space has by enlarge exhibited pretty good resiliency in this economy. And as Debbie particularly in the need driven assisted living area. Medical office continues to be attractive from an operating fundamental standpoint. We are continuing to make investments there and allocate capital there when we find deals that are priced appropriately. I think if we look at some of the other areas certainly skilled nursing has looked attractive recently and given the fact that re-imbursements have been stable and improving over the near term and the fact that we still have a relatively modest exposure to that space. That's attractive area for us. And then you know on the hospital front, we still think that over the long run, there is going to be a need for a tremendous amount of capital there to upgrade the real estate and technology infrastructure and re-financing can be a source of capital to help the hospital space to do that. So I wouldn't say there is any decrease in the appetite to senior's housing. And we continue to be interactive in the other areas as well.

[Adam Feinstein:]

Okay. Thank you for the details, great quarter.

[Debra A. Cafaro:]

Thank you.

[Operator:]

And the next question comes from the line of Tayo Okusanya from UBS. You may proceed.

[Tayo Okusanya:]

Yes, good morning. Well between Bob, Jerry, and Rich, all my questions have been answered. But congratulations on a great quarter.

[Raymond J. Lewis:]

Thanks, Tayo.

[Debra A. Cafaro:]

Thank you for joining, Tayo.

[Operator:]

And the next question comes from the line of Rosemary Pugh from Green Street Advisors. You may proceed.

[Rosemary Pugh:]

Thank you. Yes, Rosemary Pugh speaking. My first question is related to the triple-net senior housing portfolio. I am particularly interested in how the independent living properties are performing in recent months and what your outlook is and I know you have talked about the portfolio in general, but how much would you... in your sensitivity analysis, how much would occupancy need to drop before your cash flow coverage covenants are crossed?

[Debra A. Cafaro:]

Well, the IO is a small portion of our triple-net portfolio. And we've seen, again like relatively steady occupancies across AO and IO and the triple-net, maybe going down a percentage point over the last year or so. And remember that in most of these cases and actually all of the cases, all of the assets are combined in master leases with guarantees and so on. And so we feel really good about the reliability of our cash flow, rents in the triple-net portfolio going forward.

[Rosemary Pugh:]

Okay. And then related to the Sunrise portfolio, how are incentives such as free rents or waving of move in and community fees that counted for in the monthly rent numbers. So when you calculate average daily rate on a same store basis, is that including these sorts of concessions net of these?

[Raymond J. Lewis:]

Hi Rosemary, this Ray. There is a number of factors that go into average daily rate, one of which is equity of the residence mix. Obviously if you have people receiving more and higher levels of services on your average daily rate will vary upwards on that. But with regards to targeted move in incentives, we do have some of that in our portfolio to in selected communities to fill some vacant units. It's really geared around optimizing NOI, and making sure that we are leveraging the fixed overhead in the communities. So there is some of that going on I wouldn't say it's widespread.

[Rosemary Pugh:]

Great, thank you very much.

[Operator:]

And the next question comes from the line of Chris Pike from Merrill Lynch. You may proceed.

[Christopher Pike:]

Good morning everybody.

[Debra A. Cafaro:]

Hi Chris.

[Christopher Pike:]

Hi, good morning. I guess you said you saw an uptick in the operating portfolio in July. Was that broad based or did you see any geographic focus? I guess I am just trying to get a further read across occupancy and the relationship to housing and the economy?

[Debra A. Cafaro:]

Good, I mean I think... I will comment on that broadly and it does seem to be a relatively widespread phenomenon. Again it's something that we are waiting to see whether it's going to be a trend that's going to hold through the balance of the year. But across operators really and across product types, I think what we are seeing is the second quarter was softer than expected on occupancies, and still trending down. But then you did see in July some steady pickup. And I think HCP said on its call yesterday that they had talked to a wide variety of operators and that that all of them had seen the same trend. And so it doesn't appear to be in pockets. It appears to be a broader base trend.

[Christopher Pike:]

Okay, but...

[Debra A. Cafaro:]

And the question is, will it continue as we look through the balance of '08.

[Christopher Pike:]

Okay. But then once again with respect to your portfolio, the sequential changes in 2Q are really with respect to just the operating assets and like or similar to some of your peers, any other, say out trends or in off trends are really based upon 1Q data, because... yes.

[Debra A. Cafaro:]

The triple-net is always... yes, the triple-net always lags a quarter.

[Christopher Pike:]

Okay.

[Debra A. Cafaro:]

But some other senior housing operators to our public had started to report. And I think they are... to the extent they are reporting... they've been saying similar things.

[Christopher Pike:]

Okay. I guess following to Rich's question with respect to increase in merger costs relating to certain litigation efforts I guess... and just from a reporting prospective because of you definition of normalized and the white paper version of FFO, so if you were to be fruitful at any proceeds from your litigations efforts, would that be stripped out of your defined normalized FFO being you are not including them at this point?

[Debra A. Cafaro:]

Well,I would consider that as a high class problem, and so I don't have any answer for you yet. That will be yet to be determined.

[Christopher Pike:]

Okay.

[Debra A. Cafaro:]

But it's a good question; we will give it some thought.

[Christopher Pike:]

Okay. And I guess just lastly with respect to Steeles, and I don't know if you can really use this as a witness across lease up in general. But I guess the way that I calculated maybe its like nine units or nine residents per month, per quarter of lease up and that's pretty consistent Q1 and Q2. Are there any attributes of those residents, who are coming in that are either surprising or that are worth noting whether it be the age, the equity, maybe the time in terms of shopping and then finally signing? Is there anything there to draw conclusions from?

[Debra A. Cafaro:]

A couple of comments I want to remind everyone Steeles is independent living, a very large asset. It's in Toronto. So we are happy to answer your questions, but it may have limited applicability to other situations either in our portfolio or across the industry. We had projected sort of nine or ten move ins as you point each month during the first year and then have that start leveling to a lower level over the next couple of years as we look towards stabilization in late 2010. We did see with the... with the regional head of Canada. Recently the residents who are moving in are consistent with I think the Sunrise, a profile which is a higher income residence in the case of Steeles healthier and interested in some of the programs that Sunrise has there for healthy ageing and so on. So again, it's kind of a unique situation that may not be... we may not be able to have broad lessons to derive.

[Christopher Pike:]

Okay, thanks a lot guys.

[Debra A. Cafaro:]

Thank you, Chris.

[Raymond J. Lewis:]

Thanks, Chris.

[Operator:]

And the next question comes from the line of Hank Farris [ph] from Liberty Mutual. You may proceed.

[Unidentified Analyst:]

Hi, thanks for taking my question. You indicated as you talked about the investments unlevered returns, so you are using leverage beyond the balance sheet on those investments.

[Debra A. Cafaro:]

There is no balance sheet leverage.

[Unidentified Analyst:]

Okay, and how are sourcing those ideas?

[Debra A. Cafaro:]

We have lots of relationship built up in healthcare and in finance over a very long periods of time. And so many of them are just coming to us and we are fairly now a few.

[Unidentified Analyst:]

Is there any intention or desire to use some of these investments strategically beyond sort of the debt of the companies you are investing in?

[Debra A. Cafaro:]

This is not a loan to own strategy; I want to be clear about that. This is a desire to make safe investments with what we believe to be superior risk adjusted returns arising out of a dislocated debt market. So hopefully that answers your question.

[Unidentified Analyst:]

Okay and the piece of Manor Care that you bought, that's the CMBS piece?

[Debra A. Cafaro:]

It's the first mortgage piece at about 38% loan to value.

[Unidentified Analyst:]

Okay.

[Debra A. Cafaro:]

It matures in January 2012, I think.

[Unidentified Analyst:]

Okay, because there is operating company piece as well that's sort of much more distant from the assets.

[Raymond J. Lewis:]

That's right.

[Debra A. Cafaro:]

Right, this is defiantly the mortgage... first mortgage piece.

[Unidentified Analyst:]

Okay, great. Thank you.

[Debra A. Cafaro:]

Thank you.

[Operator:]

[Operator Instructions]. Our question is a follow-up question from Michael Bilerman from Citi. You may proceed.

[David Toti:]

Hi, it's David again. Debbie, this question is for you, and I am not sure how far you want to sort of jump into this. But could you talk a little bit about your thoughts on the potential 2009 impact of shift towards Democratic control?

[Debra A. Cafaro:]

Yes, Dave. That's a good question. We have found after doing fairly exhausted research that a change in administration has had little impact on the performance of the operators over time. So, Republican or Democratic, it really hasn't had a major impact there are positives and negatives of both. And so, it's hard to draw any macro conclusions if indeed there is a Democratic administration.

[David Toti:]

Great. That's helpful. Thank you.

[Debra A. Cafaro:]

All right. We are glad to have you on board, David. And I want to thank everyone who joined today's call. I know it's been a long earning season, and we really appreciate your interest in our company. We hope you enjoy the rest of your summer. And we look forward to seeing you when the fall conferences pick in. Thank you very much.

[Operator:]

Thank you for your participation in today's conference. You may now disconnect.