Ventas, Inc.
Q3 2008 Earnings Call Transcript

Published: 5 Nov 2008

[Operator:]

Good day ladies and gentlemen and welcome to the Q3 2008 Ventas Earnings Conference Call. My name is Becky and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will 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 would now like to turn the presentation over to your host for today's call, Mr. David Smith. Please proceed.

[David Smith:]

Good morning and welcome to the Ventas Conference Call to review the company's announcement yesterday regarding its results for the quarter ended September 30, 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 Debra Cafaro, Chairman, President, and CEO of the company.

[Debra Cafaro:]

Thank you David. Good morning to all of our shareholders and other participants and welcome to Ventas' third quarter 2008 earnings call. I'm pleased to be joined this morning by my Ventas colleagues including Ray Lewis and Rick Schweinhart. In the third quarter, Ventas once again delivered growing earnings and demonstrated portfolio and balance sheet strength despite the unprecedented conditions in the financial, economic, and housing markets. Since mid-2007, we have prepared for a severe credit downturn. Our actions have been increasingly protective since then as we have opportunistically raised equity to reduce our debt balances, sold assets, expanded our revolving credit capacity, limited our forward commitments and investments, and even killed deals in progress. Yet all of our steps seem insignificant compared to the magnitude and speed of the recent meltdown in the global financial system. In October, we took the extraordinary step of drawing down our line of credit to create real liquidity at the company. Buying some of our outstanding bonds at a discount, fund near-term debt maturity, and meet other corporate obligations. Pending use of the fund were paid down of our line of credit, we invested excess amounts in safe US Treasury securities. Right now, we are holding a little over $100 million in these short-term treasury investments. We complete highly defensive actions to preserve and protect shareholder value. They are, however, a drag on near-term earnings. So, despite good performance in our portfolio and inline core earnings, we are adjusting our 2008 normalized FFO guidance to $2.71 to $2.74 per share to take into account the impacts of our actions and the negative forward economic environment. We believe that in this uncertain time, safety and liquidity thrust other goals. Ventas remains in an enviable position of safety with very attractive leverage of 31% debt-to-enterprise value at quarter end. Our debt maturities through the end of 2009 totaled only $219 million, and we already have funds earmarked to pay those maturities without additional draws on our revolver. So it is fair to say that we anticipate zero net debt maturities until 2010. You're probably thinking about it. Right now we have cash on hand of $106 million and we expect to receive over $100 million in proceeds under a pending loan application. Assuming this refinancing closes, the combination of cash on hand and refinancing proceeds will cover all of our debt maturities into 2010 without further draws on our revolver. That leaves additional liquidity of $623 million of undrawn borrowing capacity under our credit facility. These credit facilities don't mature until 2010 and that doesn't even take into account potential dispositions of between $100 million and $150 million in assets for a significant gain. The total amount of potential dispositions includes the previously announced sale of five senior housing assets to Emeritus for over $62 million. This sale transaction should close in the fourth quarter. We also expect to sell a handful of other assets aggregating between $35 million and $85 million in proceeds early next year. If completed, these dispositions will generate significant gains for Ventas and further increase our cash on hand. In addition to our excellent balance sheet and liquidity position, we have a high quality portfolio of diversified healthcare and senior housing assets. Our tenants such as Kindred and Brookdale are performing creditively during a very challenging time. Furthermore, our property manager, Sunrise Senior Living Inc., has increased to 92% the average occupancy in our 72 same-store stable pool of community it manages on our behalf. Today we will discuss our earnings, expected dispositions, balance sheet and liquidity positions, recent investments, portfolio performance, and our outlook. After Rich Schweinhart reports on our financial results we will be happy to take your questions. This quarter’s normalized FFO per diluted share was $0.69, a 4.5% increase over last year’s quarterly result. NAREIT-defined FFO per diluted share was significantly higher at $0.81 because we received a $17 million net benefit to earnings this quarter which we excluded from normalized FFO per share. But that $17 million net benefit is very real because it represents the cash liability that we will not have to pay. On the investment front, we have been extremely selective all year because our first priority has been to stay safe and liquid and increase financial flexibility. Big picture on the investment front, we are doing four things

[Richard Schweinhart:]

Thank you, Debbie. Third quarter 2008 normalized FFO per diluted share was $0.69 up 4.5% from $0.66 in last year’s third quarter and down from $0.71 in the second quarter of 2008. Triple-net lease revenues continue to grow sequentially due to contractual escalations. Sunrise-managed NOI was $35.2 million in the third quarter compared to $34.0 million in the third quarter of 2007 and $38.0 million in the second quarter of 2008. The third quarter, Sunrise NOI benefited from less than $2 million in expense true-ups. Medical office building NOI grew steadily due to acquisitions and was $4.8 million in the third quarter compared to $1.7 million in the third quarter of 2007 and $3.7 million in the second quarter of 2008. Interest income on loans and investments was $3.4 million in the third quarter reflecting a full quarter of income for mortgage and senior not investments purchased in the second quarter. Interest expense decreased from both the third quarter last year and the second quarter this year due to debt repayments. G&A increased in the third quarter of 2008 principally due to about $2 million of dead deal cost. The share account increased due to our August equity rates. Third quarter FAD per diluted share was $0.64 compared to $0.62 in last year’s third quarter and $0.68 in the second quarter of 2008. Normalized FFO this quarter totaled $97.2 million, compared to $88.7 million in the third quarter of last year and $98.7 million in the second quarter of this year. Normalized FFO and earnings are reported after deducting minority interest. Normalized FFO for the third quarter of 2008 excludes the benefit of $23 million representing a reversal of a previously reported contingent liability partially offset by valuation allowance of $6 million on $20 million of mortgage loans receivable. Normalized FFO increased $8 million from last year's third quarter principally due to acquisitions. Revenues increased $14 million. Of that, $5 million was due to triple-net rent increases and $5 million due to the Sunrise properties, resident rental, and services fees increases. The remaining increase of $4 million was due to interest income on loans and investments and other income. Our third quarter affective interest rate of 6.5% improved from 6.7% in the third quarter of 2007 and 6.6% in the second quarter of 2008. General, administrative and professional fees including stock-based compensation for the third quarter of 2008 totaled $11.6 million and included dead deal cost of approximately $2 million. Excluding dead deal cost, the third quarter SG&A of $9.9 million compared to $9.6 million from the second quarter and is approximately 4.1% of revenues. On August 15, 2008, we issued 4.75 million shares of common stock producing net proceeds to the company of $217 million. As a result, weighted average diluted shares grew to 141.1 million in the third quarter, up from 138.7 million shares in the second quarter of 2008. At September 30, 2008, we had $116 million of cash and $62 million outstanding on our $815 million revolving credit agreement and unused capacity of over $780 million. We currently have approximately $106 million of cash and $223 million outstanding on our revolving credit agreement and unused capacity of over $620 million. Our debt to total capitalization is excellent at31% at quarter end, and our net debt to pro forma EBITDA is 4.7 times. We have changed our guidance for 2008 to between $2.71 and $2.74 per share from between $2.75 and $2.82 per share. This change is primarily the result of the company's proactive steps to increase its liquidity and the negative forward economic environment that is likely to affect NOI and our Sunrise managed assets. Specifically, we had more weighted average diluted shares outstanding, dead deal cost, negative arbitrage, and borrowing on our line of credit and holding cash balances in safe, low-yielding US Treasury security bonds and the recent decline in the value of the Canadian dollar. Our key assumptions are that total Sunrise NOI from our 79 assets ranges from $137 million to $140 million and SG&A expense of approximately $38 million to $40 million. Our guidance does not include other unannounced acquisitions or divestiture activity. A word about liquidity. We've included additional debt maturity schedules in both our press release and our web site. Excluding normal amortization payments, we have no remaining maturities in 2008. 2009 maturities are $219 million, about half of which we anticipate funding with the pending refinancing. 2010 maturities total $547 million and include our revolver of $223 million, senior notes of approximately $160 million, and the balance or mortgages which are refinanceable. Our cash balance is presently approximately $106 million and our unused capacity on revolver is over $620 million. To recap, we have focused on our balance sheet which is strong. We have excellent liquidity. Our third quarter normalized FFO per share grew 4.5% over the comparable period last year. We've received a sizeable net benefit from the reversal and contingent liability and we look forward to continued stability the results for the balance of 2008. Operator, we will now take questions.

[Operator:]

(Operator Instructions) And your first question comes from the line of Michael Billerman of Citi. Please proceed.

[David Toti:]

Hi, this is David Toti here with Michael. A couple of questions. What are the terms on the $100 million refund?

[Debra Cafaro:]

They would range probably a thread under 300 over comparable treasuries.

[David Toti:]

Okay. And then my second question, relative to your debt repurchasing appetite, I know you've talked a little bit about how you weigh liquidity versus your spending power. Could you just sort of elaborate a little bit more on that relative to the spending that occurred in the third quarter?

[Debra Cafaro:]

Yes, absolutely. And that spending continued to—that so you know into the—it accelerated into fourth quarter in October, when the market really crashed. Here’s the way we think about it, we have significant make whole premiums on those bond issues. We are only looking at near-term maturities because we’re really trading cheaper debt for more expensive debt, and since we know that we have to pay those maturities in the near term, we view that as a very positive trade-out. What we have not been doing, and don’t intend to do, no matter what the rate is, to use our liquidity for the out maturity, because we don’t feel that that is really advancing the cause of near-term liquidity and balance sheet management.

[David Toti:]

Right, okay, thank you and then just moving over to your leasing. Is there any update, or progress you can provide relative to leases rolling in 2010?

[Debra Cafaro:]

Most of those leases are Kindred leases, and those are all in the pool of multi-facility master leases that are essentially all-or-nothing. So, just as Kindred renewed in 2008, we would expect them to do the same in 2010.

[David Toti:]

Given the pressures in the environment, do you expect any sort of significant downward revisions? Or attempts to renegotiate outside of the current terms?

[Debra Cafaro:]

We do not—and you notice, those assets are very, very profitable to Kindred, and they’re a significant portion of their business. Right now, we expect them to be getting about $2.1 in cash for every dollar in rent that they pay to us, and so we feel good about the renewals, as we did in 2008.

[David Toti:]

Great, thank you, and then my last question is just relative to—it’s kind of a general question relative to your tenant concentration. There’s been a lot of focus on that over recent periods. Can you just sort of elaborate on your thinking about tenant concentration? Any desire to further diversify? Do you have any concerns over your existing roster?

[Debra Cafaro:]

Well one thing is it’s kind of funny to us, because we believe that we have—and indeed we have significantly diversified lead portfolio in a number of different ways—if you recall, the portfolio was originally 100% Kindred and 100% Medicare reimbursed, and so now the portfolio is really significantly diversified by geography, by asset type, by payer source and by tenant. The way we have always thought about it, is that we think the most important driver is really asset class and payer source diversification, and we work very hard to generate that. The primary source of our rent or NOI is really the underlying cash flow with those assets, and so we’ll continue to try to do what we’ve always done, which is to grow earnings while systematically reducing risk in the portfolio. And so I think you’ll see us continue to do that, and our MOB initiative is one way that we’re continuing to do that. So it is a goal, but we do believe we have really improved and diversified our portfolio. From an asset-class standpoint, we think it is very balanced.

[David Toti:]

Okay. Thank you.

[Debra Cafaro:]

Thank you for listening.

[Operator:]

And your next question comes from the line of Karin Ford of Keybanc Capital Markets, please proceed.

[Karin Ford:]

Hi, good morning. My first question is on the Sun West assets, are those good assets? Do you plan to sell them or release them? Or I guess not release, but lease them and hold them in your portfolio after foreclosure?

[Debra Cafaro:]

They’re average assets, I would say, our basis in them is about 65,000 a unit. In any normalized environment, we would expect them to be worth between $75,000 and $100,000 a unit. What we intend to do is get the receiver in place, and secure the cash flows and make sure the operations are stabilized and improved. At that point, we would look to either put them out for management contract, lease them, or dispose of them.

[Karin Ford:]

Okay, that makes sense. Sorry if I missed this, did you say was there any gain in FFO from the repurchase of your debt at a discount?

[Debra Cafaro:]

We’ve excluded that from normalized FFO results.

[Karin Ford:]

But it’s in the nary FFO line item?

[Debra Cafaro:]

Yes, exactly.

[Karin Ford:]

How much was that in the quarter?

[Richard Schweinhart:]

This is Rich Schweinhart, and there was a small charge of about maybe $100,000 to $200,000 in the quarter. The bulk of the gains occurred in October when we started buying in higher levels, and at better prices.

[Karin Ford:]

And how much do you expect the gains to be in October?

[Debra Cafaro:]

Also small.

[Richard Schweinhart:]

Small.

[Karin Ford:]

Small? Okay. On Sunrise, the strategy there is that you guys are operating similar to apartments I guess in dialing back on rate in order to maintain occupancy in this environment? Is that correct?

[Raymond Lewis:]

Yeah Karin, this is Ray. Sunrise has been engaging in promotional pricing to move whatever vacant inventory exists, and to keep occupancies up.

[Karin Ford:]

Okay, and can you just talk about what happens to your management (inaudible) f something bad happens to Sunrise?

[Debra Cafaro:]

I’ll take that. Yes, and again, I want to emphasize that on these 79 communities, Sunrise is our property manager, and basically, the NOI is apartment like in that it comes essentially from the residents in the communities. So, in the event of a negative corporate event at sunrise, I think we would assess at that time, whether we would want to retain Sunrise as the manager or not, and we believe that they are generally good managers of the Sunrise Mansion’s product.

[Karin Ford:]

Do you think given your outlook for even more difficult economic environment, and given what you saw with Sun West, do you expect to see more bankruptcies on the operator’s side next year?

[Debra Cafaro:]

We don’t really expect to see bankruptcies on the operator’s side. I would say that given all of the distress that we see at the very—the very strongest companies in America, in this environment, you would never rule anything out, but that is not our expectation. Our expectation really is just that we do see some near-term pressure on NOI, and we believe that our assets will perform well, as and when the environment returns to some kind of normalcy.

[Karin Ford:]

Great. Last question; are you concerned at all about the operating environment for your sniff portfolio, given concern about state budgets and potential risk in Medicaid?

[Debra Cafaro:]

As long as I’ve been at Ventas, that question has been really an annual question. I think the way we think about the nursing home, and the LTACH business, is that those are businesses that those are businesses that are needed and ser an important part of the elderly population. Our cash-flow coverages, and our triple-net leases, which are very down-side protected, are intentionally structured to anticipate ups and downs in Medicare and Medicaid reimbursement, and have been building up a very significant cushion over the last years. And so we would expect some ups and downs, as we always have, over the years, in Medicare and Medicaid reimbursement, but still have really a lot of confidence in our Kindred cash flows in their operating proficiency and in our rent.

[Karin Ford:]

Thank you very much, very helpful.

[Operator:]

And your next question comes from the line of Dustin Pizzo of Banc Of America Securities, please proceed.

[Dustin Pizzo:]

Hey, thank you, good morning everyone. Debbie, just a follow up on one of David’s questions, as you’re thinking about your liquidity here versus the opportunities, specifically on the debt side, can you also just talk about how you view your stock as a potential investment here? Just given the 40% decline we’ve seen since the end of the quarter?

[Debra Cafaro:]

Thank you for asking. That’s a great question. I have never been a big stock buy-back proponent as the issue has come up from time-to-time. But as we look at it now, I think it is certainly something that is interesting, especially when you compare it to the yield on other potential investments. I think we do want to get a firm read on liquidity and balance sheet, which will remain paramount—I want to be clear on that—and we’re not going to really compromise on that, but certainly, as you look at capital allocation decisions, stock bye-backs are one thing that could make a lot of sense in this kind of environment.

[Dustin Pizzo:]

And is there currently any sort of repurchase plan that’s in place?

[Debra Cafaro:]

We have the ability to buy back some of our shares, but that’s really all I want to say at this moment.

[Dustin Pizzo:]

Okay, and then just looking at the property level on the acquisition side, yesterday one of your peers suggested that the Cap rates and the MOB space are “delusional.” And you guys continue to build out your platform there, albeit a pretty attractive yields to what we’ve seen elsewhere, but can you just talk more broadly as to one, what types of returns you need to see today before you put additional capital to work, and two, just sort of your thoughts on the asset class, and Cap rates today—I mean I know it’s tough, given there are very few transactions out there.

[Debra Cafaro:]

Yeah, I think that’s also an excellent question, and to answer it, I just want to talk a little bit about our strategy in the MOB states, which again, is a space that we really believe in, we think has a very large, fragmented space, we see hospital systems who are the owners of most of these assets, we think they’re going to accelerate monetization, or sale of those assets, and they have capital constraints, fewer sources of capital and more needs for capital. And we believe it’s just a good stable asset class that really plays to the baby-boomer demographics. So we very much like this space and we want to grow that part of our portfolio as part of our continued diversification efforts. So that’s an important backdrop. We’ve developed a strategy of really putting in place this network of partnership with quality MOB developer/owner/managers, and we have been willing to allocate limited amounts of capital, to basically put that infrastructure in place with six of those developer managers—again, five of whom are in the top 20 MOB developers in the United States. And the theory is, that we can then either quickly ramp up, that if indeed Cap rates turn out to be not delusional, and entirely appropriate, and as you mentioned, I think we are getting good returns on the assets that we have announced this quarter, and alternatively, if Cap rates really rise in the states, we are positioned to average in, through this network or relationships, as price discovery continues, and we see where Cap rates ultimately settle. So there is a method to the madness, and that is how we’re looking at those investments. Is that helpful in response to your question?

[Dustin Pizzo:]

Yeah, it is. And then just lastly, I mean as you look at the MOB side, and the platform, I mean I know in the past you had talked about potentially starting to build out the business through these varying relationships with the developer/operators, but at some point, bringing it, so that you have some type of in-house platform. Is that still the strategy? Or have you revisited that at all?

[Raymond Lewis:]

Dustin, this is Ray, yeah, I think that is the long-term strategy for the company, and consistent with what we’ve said in the past, we’re going to start by developing these relationships, and we’re not targeting any specific date by which we want to have that platform. It may turn out over time, that as we build out these relationships, that date continues to get pushed out into the future, because we’re getting what we’re looking for strategically out of the relationships in terms of deal flow and returns and portfolio growth and diversification. I think ultimately, it’s our belief that we want to have the integrated management, development and leasing platform, because it will give us more ways to make money in the medical office building space for our shareholders. So that’s the long-term goal, but we don’t have a timeline on it.

[Dustin Pizzo:]

Okay, thank you.

[Operator:]

And your next question comes from the line of Rich Anderson, of BMO Capital Markets, please proceed.

[Richard Anderson:]

Thanks, and good morning. Can you help me sort of connect the dots on the guidance reduction. You had the evaluation allowance, which is in the normalized FFO, right?

[Debra Cafaro:]

Well the 17 million-dollar net benefit of the contingent—the reversal, the contingent liability offset by the 6 million-dollar evaluation allowance, are both excluded from normalized FFO.

[Richard Anderson:]

Why do I see the 6 million-dollars in your normalized FFO, unless I’m reading it wrong?

[Debra Cafaro:]

Where are you reading?

[Richard Anderson:]

Maybe I’ll take it offline, but just looking at—oh, provision for loan losses.

[Debra Cafaro:]

I can assure you, that the 17 million-dollar net benefit, which is the contingent liability reversal, offset partially by the Sun loss allowance, are excluded from our normalized FFO results.

[Richard Anderson:]

Okay. I’ll double check on that; or double back. But can you go through the individual components to the guidance reduction? You mentioned the deal of $2 million, how would you quantify other factors? Like the liquidity protection and all that, the foreign currency, everything.

[Debra Cafaro:]

Yes, okay, so if you kind of look at the $0.69, third quarter, and you go to the—pull your guidance of 271 to 274, that would imply a $0.63 to $0.66 fourth quarter. So it’s sort of a $0.03 to $0.06 amount, which is, let’s call it between $4.5 and $8.5 million bucks, so there’s negative arbitrage, maybe a penny or so, no interest on Sun West, and negative movements in the Canadian dollar. Maybe a penny or so potential negative of more shares outstanding, and then maybe $2 to $4 million on Sunrise, and potential professional accounting fees and other. So that’s not a whole list, but it includes some of the major drivers.

[Richard Anderson:]

Can you talk about expenses worth Sunrise, same store stabilized portfolio? You have NOI growth on the stabilized portfolio of 1%, and rate growth of about 3%, so can you talk about the nature of the expense growth that you’re assuming in the Sunrise portfolio?

[Raymond Lewis:]

Yeah Rich, this is Ray Lewis. I think in general, the way that we’re looking at the portfolio as we’ve said, is the revenues are going to be flattish to down as occupancy is flat, and there’s continued promotional pricing. I think as we look at the fourth quarter, we were expecting expenses to increase pretty much across the board, but we were also hoping that the revenues would increase to offset and, in fact, more than cover that. In terms of the expenses themselves, I think there is a couple of things that you can think about, one is there continues to be a little bit of pressure on utilities, on the natural gas front in particular, and in addition to that, there are just, in our experience, some normal true-ups at the end of the year, that will add to your expenses as the year is finalized. And so we’re anticipating those again this year.

[Richard Anderson:]

What are the discounts? The promotional pricing? How would you quantify that? Is that just like concessions? Or what is that?

[Raymond Lewis:]

It’s mostly near-term concessions to move vacant units, so our hope is, that as those burn off, we will pick up revenue, but we may need to continue those short-term promotions to continue to move vacant units during the economic downturn.

[Richard Anderson:]

Okay. Just out of curiosity, why is there 72 properties in the same store pool now?

[Debra Cafaro:]

Well there are 72 in the same store stabilized, which are basically stabilized assets that we’ve owned the full—and that we’re stable—

[Richard Anderson:]

There’s 74 in the last quarter though.

[Debra Cafaro:]

Pardon me?

[Richard Anderson:]

There were 74 properties last quarter.

[Debra Cafaro:]

Well there’s 76 stabilized, and 72 same-store stabilized Rich. So, there were two leased-up assets that were re-classified to stable in 3Q of 08, so that gets you 74 to 76, and same-store stable at 72 are assets that were stabilized, and we own for the full third quarter of 2007 and 2008.

[Richard Anderson:]

Okay.

[Debra Cafaro:]

So we’re getting to a point now, where we finally have five quarters, so we’re able to make normal, year-over-year quarterly comparisons, which I think will be helpful to analysts and investors alike.

[Richard Anderson:]

Okay, last question is with your medical office business, why is it that you can’t name your partners? I mean it seems like such in a box. Is there a legal issue there? Or just a confidentiality? Or what is it? It’d be nice to know who you’re dealing with I guess.

[Raymond Lewis:]

Yeah Rich, this is Ray, I think that the real reason we don’t want to name the partners, is that they are the ones that are in front of the hospitals with the direct relationship, and we don’t want to be front-running those relationships with the hospital, so it’s really at the request of our partners that we’re doing that.

[Debra Cafaro:]

Again, some are more sensitive than others. For example, on our supplemental, we talk about Next Core, which is one of our—and Ann Greenfield, which are two of our important MOB relationships, and are well known and are well thought of national and regional MOB developers.

[Richard Anderson:]

So you’re saying that the hospital would have want—may have wanted this business? Is that what you’re saying? And they’re--?

[Raymond Lewis:]

No, all I’m saying is that the developer has a relationship and interaction with the hospital that they’re using to generate new business that we’ll both benefit from. What we don’t want to do is be in a three-way discussion, and relationship with that hospital. We want to be supporting our developer in that circumstance at their request.

[Richard Anderson:]

Got it. Understood, okay, thank you.

[Debra Cafaro:]

You’re welcome.

[Operator:]

And your next question comes from the line of Jerry Doctrow of Stifel Nicolaus. Please proceed.

[Jerry Doctrow:]

Alright, thanks. A lot of stuff has been covered; just one or two other things. I still don’t understand why we can’t get another decimal point on occupancy and stuff, because it really does create confusion when you report to senior housing. Is there some reason for that sort of lump?

[Debra Cafaro:]

There’s no real reason Jerry, other than that we had recently decided to do it basically, kind of rounded, and didn’t really—and don’t really believe that 10 basis points here or there really should make a giant difference in people’s perception of the performance of a large portfolio. But we will definitely take your comments, which we respect enormously, under advisement and think about whether we should change the presentation in 2009.

[Jerry Doctrow:]

Right and when we’re trying to do estimates, the truth is that 10 or 20 basis points does matter, particularly, and they could be as much as 40 or 50 basis points, so we’d love to have the alternative. Again, a lot of good stuff has been covered. If we’re just trying to think about 2009, and obviously there’s lots of uncertainty here—well, maybe one question before that—I think you said you had bought additional debt, or accelerated your debt repurchases in the 4th quarter 2008, so any just sense of the volume of that? Or if we read in the change in the line-draw or reduction in cash, is that a way to get a handle on how much you’ve repurchased?

[Debra Cafaro:]

Well, I mean we can be a little bit more specific with you. Rick, how much did we purchase after the end of the quarter?

[Richard Schweinhart:]

I’ll tell you what, Jerry there’s a table at the end of the press release, if you’ll notice, as of September 30, 2008, and then the table there is November 4, if you subtract those two it tells you exactly.

[Jerry Doctrow:]

Okay, sorry, just didn’t get to there yet. And then, when we think about next year, you obviously are maintaining investments on the MOB at some reasonable level, to keep that relationship alive, and otherwise being very selective and waiting for some opportunistic—should we—is there any order of magnitude at which you should make some assumption? Could the coalescence be—except for some MOB things be zero? Should the—I’m just trying to get any sense of where we’d be, or if there’s a threshold that you’re looking at for initial yields, maybe you could just give me a little better sense of what your thinking is that would make it a pretty clear number?

[Debra Cafaro:]

I would expect that on the property level, that you shouldn’t really assume any property-level MOB, or rather acquisitions for the balance of the year.

[Jerry Doctrow:]

I’m talking about 2009. Just any sense of how you think about acquisition volumes for 2009, are you happy at zero? Is there a minimum yield that you’re trying to get to?

[Raymond Lewis:]

Jerry, it’s Ray, I think if you looked at Debbie’s comments at the beginning of the call, I think basically what we’re trying to do is position ourselves for either outcome by having cash available on hand. So if the market continues as it is, liquidity is paramount as Debbie said, and that’s going to be our primary focus, but if the market recovers, we will have a good liquidity position to invest into that recovery. The challenge for us is, to sort of figure out when we think the market is recovering, and I’m not prepared to call that in 2009 as I sit here.

[Jerry Doctrow:]

And in terms of the way you think about that, the signs we would look for would be opening up better costs on bank credit lines, or long-term debt? Or what are some of the key metrics that you focus on in terms of say the capital market settling down?

[Debra Cafaro:]

We want to determine our long-term borrowing costs, which as you know, in real estate is going to really drive evaluations over time. And so we want to get a little more visibility on that because that should effect evaluations, it should affect our hurdle rate as we make investments, and as Dustin pointed out, if we make capital allocation decisions, we’ll be comparing those kinds of returns to allocating capital to buying in stock and other potential investments. We’ll be looking at potentially internalizing an MOB platform, and what that would mean for potential returns going forward. So there’s a lot to think about, and I agree with Ray that it’s a little early to project what we think those returns or acquisition volumes or type would likely be in 2009.

[Raymond Lewis:]

But Jerry you’re right, I mean a functioning debt market is going to be the condition precedent to a recovery.

[Jerry Doctrow:]

Okay, and preferably longer-term debt, not just credit lines or short-term stuff.

[Raymond Lewis:]

I think that’s right.

[Jerry Doctrow:]

Just one last question. In terms of your ability—I’m assuming what you’re doing is refinancing, putting mortgage debt on the refinancing—you’re talking about the $100 million or whatever it was, coming up here. So how much unencumbered real estate do you have? How much more mortgage debt capacity debt would you have beyond that refi?

[Debra Cafaro:]

Well, we have tons of unsecured assets of all types, including all of our Kindred assets and that’s because we have successfully become an investment great company, and we value that particularly in this kind of credit market, and we want to maintain a high level of unencumbered assets, and we will. On the senior housing front, alone, which is as you know, available for agency debt, which remains available and attractive, we’ve got about a billion and a half of unencumbered value at least, and so if we needed to, or wanted to tap that market, that would probably translate into borrowing capacity of about a billion or more.

[Jerry Doctrow:]

Okay. And how much secured debt do you have outstanding? Right now?

[Debra Cafaro:]

We’ll have to get back to you on that.

[Jerry Doctrow:]

Okay.

[Debra Cafaro:]

We have the numbers on the supplemental, as well.

[Jerry Doctrow:]

Oh, if it’s in the supplemental, I can look there. That’s fine.

[Debra Cafaro:]

Okay.

[Jerry Doctrow:]

Thanks.

[Debra Cafaro:]

Okay, you’re welcome. Thank you.

[Operator:]

And your next question comes from the line of Mark Afrasiabi of PIMCO. Please proceed.

[Mark Afrasiabi:]

Hey, there, how’re you doing?

[Debra Cafaro:]

Hi Mark.

[Mark Afrasiabi:]

Good. Hey, thanks . Just—could you maybe touch on Moody’s? Your rating there? You’re still high yield rated at Moody’s. I know they’re lagging S&P and Fitch and you guys got that investment grade a while ago at S&P and Fitch. But what’s going on there at Moody’s? Is there any traction? When do you think that you’re really going to get to BBB at Moody’s?

[Debra Cafaro:]

Well, I think that’s a question more appropriately for Moody’s than for us. We believe that all the efforts that we’ve made over the last years and our commitment to being an investment grade borrower have indeed put us in a position where we deserve investment grade ratings from all three agencies. As you know, we have investment grade ratings from two, and we continue to have a dialogue with Moody’s about upgrading us. And again, we think we have the leverage, credit stats and diversification that should merit such an upgrade. As you know being at the largest bondholder in the world, the rating agencies are a little risk-averse right now and are not rushing to upgrade people. So we continue to make the case and I think eventually these results in the balance sheet will in fact be persuasive.

[Mark Afrasiabi:]

Okay. And just a couple more. I mean that’s helpful. Yes, I know, we agree with that. And just on the 5.9 million loan loss reserve. Is that entirely on the property level operating expense line item?

[Debra Cafaro:]

It is.

[Mark Afrasiabi:]

Okay. And then you mentioned last quarter Manor Care and HCA were the bond—were the debt you were buying. It sounds like you’ve added some others into the fold, here, recently. What are the names of the credits you guys have been buying debt in, and have you also rolled in bank debt or you just buying bonds?

[Debra Cafaro:]

It’s three hospital companies, and we’re looking at those leveraged loans and bonds.

[Mark Afrasiabi:]

Okay. So the three hospital companies—did you say earlier they were all publicly traded?

[Debra Cafaro:]

They are; yes.

[Mark Afrasiabi:]

Okay. Great. And you won’t name them, but we can figure it out, I guess.

[Debra Cafaro:]

I’m sure PIMCO could figure it out, yes.

[Mark Afrasiabi:]

So basically three publicly traded plus HCA. That would wrap up your hospital holdings?

[Debra Cafaro:]

Exactly.

[Mark Afrasiabi:]

And then just on the—there’ve been a lot of notes out there on cyclicality concerns around the Sunrise assets given they’re high end out of pocket. Can you just elaborate a bit on that in terms of the company’s downside scenarios? I know it’s not your base case, but over the next year or so, if the economy continues to deteriorate, what do you think is a plausible potential occupancy level? Can you touch on occupancy in a macro of deterioration scenario and how you guys think about it?

[Debra Cafaro:]

You know, right now the store stable communities are 92% occupied, and that’s 72 of the 79 that we have. We really want to get some better visibility on the economy. Certainly the debt market has seemed to start improving and as we know that kind of led us in to where we are now, and hopefully will lead us out. And so we believe that we’ll continue to have relatively stable—again, I think the senior housing operators including our portfolio and Sunrise are actually performing very creditably and better than almost every other real estate asset class in a pretty challenging environment. And I think it’s important for investors to realize that. So—

[Raymond Lewis:]

Mark, this is Ray Lewis. I think our last quarter certainly brought us as challenging an economic environment as we’ve seen in a long long time. I think if you look at our portfolio and the occupancy of our portfolio during that time period we would hope that that is some indication of the resiliency of our assets. They’re need driven assets; they’re well located and I think what we’ve been able to do is use some promotional pricing to be able to get people to make that decision to move in rather than delay it. And that has been an effective strategy for us. And so we’re hoping that we’ll be able to continue to do that at the current economic challenges persist. But again, I think as Debbie said, it’s difficult as we sit here now to figure out what all the potential impacts of a persistent economic downturn could be,.

[Mark Afrasiabi:]

Yes. No. Okay. Well, that’s helpful. Do you have any—could you maybe touch on whether you have any incidence of people trading down to lower price point properties or—is that a phenomenon? Or is the potential for occupancy declining more from just new demand essentially not showing up to fill your vacancy?

[Debra Cafaro:]

Again, occupancy went up sequentially in the same store stable portfolio. So what we’re seeing is occupancies going up in the third quarter and we’re just trying to be realistic about the fourth and saying look, we see these macro forces and we believe there isn’t a business in America—maybe other than bourbon here in Kentucky—that is not going to feel some effects from that. But again, sequentially we saw occupancies in the Sunrise portfolio go up and we saw again, very strong rates, 5200 a month or something like that, for the portfolio. So I’ll be happy to discuss it in greater detail with you, but I think we need to take time with some of the other callers who are queued up.

[Mark Afrasiabi:]

Okay, great. Thanks a lot.

[Debra Cafaro:]

Thank you.

[Operator:]

And your next question comes from the line of Brian Sekino of Barclay’s Capital. Proceed.

[Brian Sekino:]

Good morning. This is Brian Sekino on behalf of Adam Feinstein. Thanks for taking my question. I actually just have one question left. It’s regarding your cash flow coverage. And looking at your supplementals, you have your senior housing at 1.3 times. Can you just give us some commentary on what kind of cushion you have there and where you maybe start getting concerned about the level of cash flow from the tenant?

[Debra Cafaro:]

Okay. Again, these coverages have been market level coverages and quite stable for a while. These senior housing investments are in pools, multi-facility master leases that are the senior obligation in the tenant capital structures. Almost all of them are guaranteed by the parent. And so we feel good about the reliability of those rents which are again supported both by cash flow at the asset, corporate credit and structural protection such as security deposits and other kinds of things. So we monitor this carefully but we feel comfortable, certainly, with where the coverages are.

[Brian Sekino:]

Okay. And do you have a level where you would start to get worried about the coverage?

[Debra Cafaro:]

You don't know me very well but I worry about everything, all the time. So at the present time, again, we feel good about the cash flows and the corporate commitment and the quality of the assets and the occupancies. So we expect that on a fairly stable basis to continue.

[Brian Sekino:]

Okay. Thanks a lot.

[Operator:]

And your next question comes from the line of [Harv Tinker] of Morgan Keegan. Please proceed.

[[Harv Tinker]:]

Oh, thank you, good morning. A question on Sunrise’s operations. Noticed that the daily rate declined sequentially slightly and same store margins were down year over year. Were those due to some of the factors you discussed earlier in the call, like promotional pricing, rise in operating expenses, decline in the Canadian dollar, or was there something else going on?

[Raymond Lewis:]

No I think those are the factors.

[[Harv Tinker]:]

Okay. Question on—the interest and other income line in Q3 more than doubled from Q1 and Q2. There’s some sort of one time item in that, or is this due to the debt investment income that you spoke about?

[Debra Cafaro:]

No, the debt investment income is in a separate line. And again you’ll see over time the other income line sort of going up and down.

[[Harv Tinker]:]

So, the 1.9 billion in Q3, we shouldn’t look at that as a trend then?

[Debra Cafaro:]

No, I mean, again, what I would do is look over time and you can see that kind of goes up and down. But, I would use maybe a Q2 run rate on that, something like that.

[[Harv Tinker]:]

Okay. And, last question, also kind of housekeeping. G&A, as a set of revenues, excluding stock option expense, has gone from 2.7% in Q1 up to 3.5% in the third quarter. Now, can you, maybe, discuss what’s going on there?

[Debra Cafaro:]

Yes we can. As Rick pointed out, there’s a couple million dollars of dead deal costs in the quarter. Which, as we mentioned, we’re keeping our investments very disciplined, and that was one outgrowth of those decisions.

[[Harv Tinker]:]

Okay. That’s all my questions. Thank you.

[Debra Cafaro:]

Thank you.

[Operator:]

And, your next question comes from line of Tayo Okusanya of UBS. Please proceed.

[Tayo Okusanya:]

Yes, good morning. A lot of my questions have been covered, but one property type we really haven’t talked about that much is hospitals and LTACHs. Debbie, could you give us a sense of how you’re thinking about these properties, especially in light of the tough results that quite a few of the public hospitals have had this quarter?

[Debra Cafaro:]

Okay, I’m happy to do that. The LTACHs, for those of you that don’t know, are long term acute care hospitals. They’re a specialty hospital that is essentially a freestanding sort of intensive care hospital that is part of the post acute continuum. And, we have always had very good results and coverages with our long term acute care hospitals, and we expect that to continue. The hospitals did great in the first and second quarter, and had some volume reductions in the third. But, as Kendra reported recently they’re already seeing increases in that and expect a better fourth quarter. So, those are assets we’ve gone for a long time they cover more than two and a half times, and we actually like them.

[Tayo Okusanya:]

Okay. Thank you very much.

[Debra Cafaro:]

Thank you. One more comment on that, just so you know some of the acute care hospitals also have things like bad debt issues and things like that, which, again, the long term acute care hospitals do not have. Because, they’ll have emergency room admittances and things like that. So, it’s important to sort of understand the asset class and where it fits into the post acute sector. And, perhaps, even to review Kendra’s earnings call so you can see where those expectations on the portfolio are going. We’ll take the next question now, Becky.

[Operator:]

Thank you, and your next question comes from the line of Chris Pike of Merrill Lynch. Please proceed.

[Chris Pike:]

Good morning everybody.

[Debra Cafaro:]

Hi Chris.

[Chris Pike:]

I think you guys answered my question. I just want to be square on, I guess this is just a follow-up to Rich’s question, I think, the PIMCO question. So, I see the contingent reversal in the P&L and I guess based upon one answer in the loan provision, being that it’s baked into property ops, that’s why you’re adding it back on the reconciliation to FFO?

[Debra Cafaro:]

No, we’re adding it back because essentially the reversal of the contingent liability and the loan loss allowance are essentially non-returning, effectively noncash items at this point.

[Chris Pike:]

But, the provision loss, it appears it’s baked into the property operating expenses?

[Debra Cafaro:]

Yes, it is.

[Chris Pike:]

Okay. So, then it is one time in nature. So, if we’re thinking about things from a sequential run rate perspective that has to be reversed in forward quarters?

[Debra Cafaro:]

Absolutely.

[Chris Pike:]

Okay, great. I guess, a follow-up to Karen’s earlier question regarding some type of negative corporate event at Sunrise. Ownership interest in the properties in which you are joint venture partners, can you just remind us how and what would happen there, to the extent there is a negative corporate event? Or, would that be more along the lines of court or procedural type issues?

[Debra Cafaro:]

Okay, well, yes, as Chris is pointing out, Sunrise has 20% interest in about 60 of our assets. And, those partnerships, in the event of a negative corporate Sunrise event would remain in place. And, we are the managing member of those partnerships, and so they should not be really affected by any kind of negative event. And, we control the partnerships and so on. So, I hope that answers your question.

[Chris Pike:]

Well, I guess I’m just wondering if, in the most dire situation, would you be able to buy out the percentage of the assets that you don’t already own? Or, once again, would that have to go to some type of court and it’s more of a function of procedure, rather then let’s say a right of first refusal or something along those lines?

[Debra Cafaro:]

Well, there are myriad contractual provisions that would apply to this. But, we could theoretically buy those consensually. There are normal partnership squeeze down provisions, for example, where we could become the owner of those 20% interests, if there was a Sunrise bankruptcy for example. And, again, I think it’s interesting because we believe that Sunrise has billable assets, they have very limited of near term debt maturities. And, these 20% minority interests they own in some of our assets could be a source of consensual liquidity for them that really could help them meet some of their near term liquidity needs.

[Chris Pike:]

Okay, and just a follow-up to one of your comments and respect to acid allocation. It sounds to me anyway, and tell me if I’m thinking about this and a fair way, that you, alongside your publicly traded peers, you’re going to be investing in what you think our top notch operators. So, from an acid allocation perspective, the systemic issues that may be impacting seniors housing or LTACHs, or ALFs or ILFs, or whatever segment we’re really thinking about, it’s really more of a systemic issue. And, from your perspective, diversification really starts across segment and then filters down to other areas. Is that fair?

[Debra Cafaro:]

Absolutely. I mean, I think, because what you find is if you have one nursing home tenant or 20 nursing home tenants when there’s a change in nursing home reimbursement up or down, that’s all correlated. So, what we’ve been seeking is balance in the portfolio that we think comes most significantly from asset class and payor type of diversification. And, we think that creates the greatest reliability in forward cash flow, and that has proven to be the case. I think what we’re talking about on this call is that in times of extreme stress on the economy, or in the financial system, you basically find across all investment pipes, across all sectors, you find high degrees of correlation, for that hasn’t existed before. And, so we’re in a somewhat unique environment, but we do believe, as you said, it’s the asset class diversification that provides the greatest reliability. That’s what we’ve worked on most significantly, and that’s why we’re continuing to expand our medical office building portfolio.

[Chris Pike:]

Okay, and just really quick because I know everyone’s got to hop here. But, with respect to margins, I know you have expectations for maybe a lower growth rate on the operating side with respect to your Sunrise assets expense expected to come in line, so hopefully those two assumptions are fair, can you kind of providers will your margin expectations are in this type of environment versus what you would consider a more normalized environment for both rate and occupancy?

[Raymond Lewis:]

Yeah, Chris, this is Ray. I think in a normalized environment we sort of book for margins that are between 30 and 35% on average. So, you could expect that in a more difficult environment you would tend towards the lower end of that range. It’s also important to remember when we talked about, the assets when we originally made the acquisition, that we had a very long view of the assets and that we said that there would be more variability in the performance. So, when you’re looking quarter to quarter you may see things move inside or outside of that range, you really need to look at multiple quarters and trend lines in order to sort of smooth out those quarterly effects.

[Chris Pike:]

Okay, and I guess there’s still seasonality within the 30 to 35 as we move through the year as well.

[Raymond Lewis:]

Sure.

[Chris Pike:]

Okay, great. Thanks a lot, folks, I appreciate it.

[Raymond Lewis:]

Thanks, Chris.

[Debra Cafaro:]

Thank you. We appreciate it. Just a follow-up to (01

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. (Operator Instructions). Good day.