Welltower Inc.
Q4 2008 Earnings Call Transcript

Published: 25 Feb 2009

[Operator:]

Good morning ladies and gentlemen and welcome to the Fourth Quarter and Year End 2008 Health Care REIT Earnings Conference Call. My name is Ashley and I will be your conference operator today. (Operator Instructions) Now I would like to turn the call over to Mr. Jim Bow, Vice President of Communications of Health Care REIT.

[Jim Bow:]

Thank you Ashley, good morning everyone and thank you for joining us today for Health Care REIT’s Fourth Quarter 2008 Conference Call. In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the company’s website at www.hctreit.com. I would like to remind everyone that we are holding a live webcast on today’s call which may be accessed on the company’s website as well. Certain statements made during the conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that the projected results will be obtained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and from time to time in the company’s filings with the SEC. I would not like to turn the call over to George Chapman, Chairman, CEO and President of Health Care REIT for his opening remarks. Please go ahead George.

[George Chapman:]

Thank you, Jim. I will spend the first portion of my comments briefly reviewing our 2008 highlights and then address how we are positioned to weather the storm that unfortunately we are all facing. Finally I will discuss our plans for the future once the markets reopen. First I would like to tell you that in one of the toughest years on record for rates in the broader equity markets we’re very proud of generating a positive 0.5% total return for our stockholders. Hopefully we’ll be much greater in ensuing years, but given the trials that we all suffered in 2008, we’re very pleased with the performance. On the investment side we generated gross investments of $1.2 billion, of which 85% related to our preferred investments which are a combination of senior housing and customer focused medical facilities. At year-end payment coverage stood at 1.96

[Scott Estes:]

Thanks George and good morning everybody. In my comments this morning I will discuss recent investment activity and portfolio. Next I will highlight the strength of our year-end balance sheet, which currently reflects low leverage and adequate liquidity to meet our obligations beyond year-end 2010 and finally I will discuss our recent financial results in 2009 guidance, which reflects our emphasis on maintaining adequate liquidity in the current environment. First regarding 2008 investment activity, we completed $1.2 billion of gross investments offset by dispositions of $194 million resulting in net investments in excess of $1 billion. A $215 million of gross investments in the fourth quarter were primarily related to ongoing development projects. We did complete one acquisition during the quarter of a newly developed LTAC in Ohio with an existing operator at an initial yield of 11%. Our portfolio which now includes over 600 properties with an investment balance of $5.9 billion remains among the most diverse and secure in our industry. As George mentioned, our senior housing and specialty care portfolio continues to generate strong rent payment coverage. Our same store revenue for the senior housing and specialty care portfolio increased 2.9% in the fourth quarter versus last year. Regarding our medical office-building portfolio, I will talk generally in terms of our core medical office building portfolio, which excludes assets held for sale, and is detailed on page 30 of our supplement. The core medical office portfolio generated $21.4 million in NOI for the fourth quarter with an occupancy rate of 90.4%. Of the 188,000 square feet in expirations in the fourth quarter we retained 145,000 square feet for a renewal rate of 77%. Our same store core medical office building NOI declined 2% in the fourth quarter versus last year, primarily as a result of a 1.8% year-over-year decline in occupancy. As George mentioned, we are facing a challenging operating environment and we have seen a couple areas of our portfolio that have been more impacted than others. The first is in the senior housing area. Within senior housing our independent living properties have been impacted by the economy and the housing market, yet all of our IO occupancy and coverage remain quite strong. More specifically, during the third quarter same store IO occupancy declined 140 basis points year-over-year to 91.8%. We have also seen slight additional declines into the fourth quarter based on data received through November. Importantly, a third quarter occupancy of 91.8% stands 140 basis points above the NIC industry average. In our assisted living portfolio we have actually seen some firming of trends over the last several quarters. The same store assisted living occupancy rose 110 basis points year-over-year in the third quarter to 88.9% and has remained flat during the first two months of the fourth quarter. Despite these fluctuations our independent living/assisted living portfolios continue to generate strong payment coverage of 1.31x and 1.55x respectively. We have also seen the economy impact our entrance fee communities a bit. We currently have 15 entrance fee properties that are managed by five different operators, with an investment balance of $591 million representing approximately 10% of the portfolio. It is important to note that not all of the units within these communities require a buy-in or entrance fee. We’ve done the calculation and it’s approximately 40% of the units in our entrance fee communities are actually rental in nature. They would generally include the assisted living, skilled nursing, and dementia care service components. The rental components of our entrance fees are generally filling in line with our budget expectations. Of the remaining 60% entrance fee component, which generally consists of cottages, or independent living apartments, saw a general slow down in activity during the first three quarters of 2008. The fourth quarter saw even less activity when the economy worsened considerably. We spent some time working with our operators to reforecast 2009 budgets and what we have done is we have decreased our sales forecasts by roughly 20% for existing campuses and 33% for new campuses. Assuming our operators are able to meet our revised budgets, we believe there should be sufficient liquidity and little to no impact on our forecasted yields. At this point, we believe the next 12 to 24 months are really a crucial period for sales and deposits at our entrance fee facilities. Turning now to our development portfolio, we continue to build out existing projects, but have generally restricted new development and chosen not to proceed with projects where practical. We continue to ramp up deliveries with $295 million in conversions in 2008 and over $500 million of conversions are projected in both 2009 and 2010. With less construction activity across the country we believe these new assets should be well positioned in their respective markets and should really benefit from strong pricing power once stabilized. I think this particularly applies to many of our CCRCs that will be some of the newest, most modern state of the art properties once they’re completed. Now I will turn to liquidity. As many of you know we had $137 million in restricted cash that was tied up in the bankruptcy proceedings for Land America Exchange Services, our qualified 10-31 intermediary. We have some good news to report on this front, in that we reached a settlement last week and the settlement was approved by the bankruptcy court on Monday. At this time we have been wired our entire $137 million in exchange funds. As consideration for the immediate return of our funds we made a $2 million settlement payment to the debtors’ estate and we also incurred about $500,000 in expenses associated with the proceedings. Although we were confident that we would prevail based on the merits of our case, the certainty of receiving the cash and avoiding further court proceedings substantially out weighed the minor settlement costs. By the end of 2009 we have approximately $950 million in available cash and line availability compared to $691 million in unfunded development from projects underway and only $55 million in debt maturity through year-end 2010. Our $950 million in availability is comprised of $580 million available on our line of credit as of December 31; cash and cash equivalents of $23 million and formerly restricted cash that’s now available to invest of $135 million. In addition, as George mentioned, we received $211 million in net proceeds through our January equity offering in connection with our inclusion in the S&P 500 index. We continue to evaluate additional capital raising options that I’ll touch on in greater detail during our guidance section. Turning now to the financial results, fourth quarter normalized FFO of $0.83 per share was up 4% versus the previous year, while normalized FAD of $0.77 per share represented a 3% increase. For the full year normalized FFO rose a strong 8% to $3.38, while normalized FAD increased 9% to $3.16 per share. We did have a number of one-time items for the quarter and full year, which I would like to highlight. First are our gains on the $194 million of full year dispositions were $164 million. Our average yield on sales averaged 6.6 % for the full year 2008. The Land America Settlement and expenses of an aggregate $2.5 million were netted against the gains on sales during the fourth quarter. In addition, we also recognized $2.5 million of income in the fourth quarter related to the release of a personal guarantee associated with the lease termination and that number is included in our other income line. Fourth quarter G&A was $213.5 million, but it did include $2.3 million in terminated transaction costs primarily associated with the termination of the Arcapita/Sunrise deal. As part of our medical office portfolio upgrade program we have identified 14 buildings for disposition that have been classified as held for sale at December 31. These buildings have very low occupancy, are much smaller in size, at an average 20,000 square feet, and generally not affiliated with a health system or hospital. In addition these facilities had negative NOI in the most recent quarter and are not a good strategic fit within our portfolio. I would also point out that by removing these assets from our core medical office building portfolio our occupancy increased from 87% to over 90% this quarter. We did recognize $32.6 million in impairment charges related to these assets. The last item is due to the severe dislocation in the debt market; we terminated $250 million in swaps during November of 2008 and did record a $23.4 million loss for the full year. Next, regarding our dividend, we recently paid the 151st consecutive quarterly cash dividend for the quarter ended December 31 of $0.68 per share. The board of directors also approved a 2009 quarterly cash dividend rate of $0.68 per share, or $2.72 annually, commencing with the May dividend. In addition to the $211 million raised through our January equity offering, during the fourth quarter we raised a total of $44.7 million in net proceeds from equity transactions at an average price of $38.00 per share. T his is comprised of some activity under our dividend reinvestment plan where we issued approximately 381,000 shares for $14.4 million in net proceeds, while under our equity shelf program we issued approximately 794,00 shares for $30.3 million. Looking now at our credit profile, our debt to undepreciated book capitalization was only 42.9% at the end of the year and our interest and fixed charge coverage were 3.8x and 3.2x respectively. Pro forma for the January offering, our debt to undepreciated book capitalization was further reduced to 40%, its lowest level since 2002. In addition, our secured debt currently stands at only 7% of total assets providing additional flexibility as we evaluate additional means of raising capital going forward. The last item I would like to discuss today is 2009 guidance. As detailed in the release, we expect to report net income available to common stockholders in a range of $1.59 to $1.68 per diluted share. Normalized FFO in a range of $3.20 to $3.30 per diluted share, and normalized FAD in a range of $3.08 to $3.18 per diluted share. FFO guidance should be compared to the normalized $3.33 per diluted share actual 2008 results as restated for the convertible debt accounting change. Our assumptions are discussed in detail on our earnings release, but I would like to point out a few items in particular. I think first is that our normalized FFO per share guidance of $3.20 to $3.30 does reflect a projected 1% to 4% decline compared to our $3.33 restated 2008 results. Generally speaking I think this decline is a result of moving to more conservative assumptions, which place a greater emphasis on liquidity than the last several years. In particular, 2009 FFO will be impacted by the significant equity offerings we completed in July 2008, September 2008, as well as January 2009; also by the planned dispositions of $200 to $300 million at 10% to 11% yields; and by the assumption of zero acquisitions in our 2009 forecast. We have also assumed that we will receive no increasers on any leases tied to CPI in 2009. I would also note that we have already completed one disposition of a surgical hospital in January for proceeds of $41 million which resulted in the $13.5 million gain and represented a yield on sale of 9.8%. We are forecasting same store NOIs for the senior housing and specialty care portfolios, which represent approximately ¾ of our investment balance, to increase 1% during 2009. This includes our assumption of zero rent growth related to the approximate 70% of senior housing and specialty care portfolio increasers based on CPI. It is important to note that we do have cath up provisions, in most all of these leases, which would allow us to recover the majority of lost rent if CPI increases at a greater rate in the future. Regarding our core medical office building portfolio, which represents the remaining ¼ of our investment balance, we’re forecasting NOI to decline approximately 1% this year. This is primarily a function of our assumption of flat occupancy combined with lower rents on our renewing and new leases using more conservative rent assumptions to appropriately reflect market rents in the current economy. Only 8% of our medical office building contractual rents are subject to CTI increasers and have also been assumed at 0%. Our G&A forecast is approximately $46 million for 2009. This forecast includes $2.9 million in accelerated expensing with stock and options for certain officers and directors, but excludes the $3.9 million expected charge associated with the departure of Ray Braun. Both of these items will be included in first quarter G&A. Excluding these items, we would expect a quarterly G&A run rate of $10.5 to $11 million entering 2009. As I mentioned previously, we will continue to place a significant premium on maintaining adequate liquidity. At this point we anticipate evaluating additional capital sources including secured debt, additional equity, and incremental asset sales, beyond the $200 to $300 million in our current forecast. We are also evaluating buying back a small portion of our debt with near term maturities. Again, none of these potential incremental capital sources and their uses are included in our current guidance. With that, George, I will wrap it up and turn it back over to you.

[George Chapman:]

Thank you, Scott. Our message is pretty clear. We are very well positioned to weather the current economic storm and secondly, we’re prepared to move very quickly and effectively once the markets reopen and pricing is stabilized to further strengthen an already strong, diverse, portfolio. With that we are now open for questions.

[Operator:]

(Operator Instructions) Your first question comes from Jerry Doctrow with Stifel Nicolaus.

[Jerry Doctrow:]

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

[George Chapman:]

Well we’re working pretty hard on it, Jerry. Jay Morgan is running that program and he should feel free to comment further on it and Chris [Dizel] is working with him and we’ve enlisted our origination team and I think we’re making headway. But, if the pricing is not sufficient we really don’t have to complete those sales this year. If there is not enough money, or not enough liquidity in certain cases, again, we’re not going to be compelled to go forward. But, we think we’re making some progress. Jay, do you want to add anything to that?

[Jay Morgan:]

Sure. Given the profile of the asset we think the likely buyer is probably a user or an occupant. What we’ve seen out there is that those types of buyers still have access to local financing. We have received a tremendous amount of activity. There are a lot of people looking at the assets, so we’re pretty optimistic, given the efforts that are in place, that we would be able to move the assets over the next 12 months.

[Jerry Doctrow:]

Okay and you talked some about more sales. Would that be more MOBs or senior housing, or just what other kinds of stuff are in the potential pipeline?

[George Chapman:]

It could be any particular category. It could be freestanding senior housing and there are some real possibilities there that we’ve discussed with existing operators who appear to have some financing, or it could be additional MOBs. It’s just going to be opportunistic, but it’s definitely going to be within the profile of those assets that we wish to dispose of.

[Jerry Doctrow:]

Okay and then just shifting to the secured debt market. Obviously a number of your peers have done that already. Somebody was on a call yesterday, one of the operators, talking about Freddie Mac sort of tightening up some criteria and stuff. So, would we likely see debt on senior housing and a sense of what kind of terms and stuff are out there at this point?

[Scott Estes:]

I think, as you would suspect we are pursuing all of the typical suspects including the government-sponsored entities. I still feel like the market is fairly robust. I don’t think the terms have changed that much. It all depends on term, but if you talk a general five to ten year type term, typical 60% to 65% leverage, again, we’ve been evaluating probably more of the senior housing assets as the more likely candidates, IL/AL type properties; I think you could potentially get something done in the 6.5% to 7% type range.

[Jerry Doctrow:]

On the development stuff, I just wanted to clarify. I think the yields you put out are the cash or GAAP yields. I wanted to clarify that issue for straight line going forward.

[George Chapman:]

They’re cash yields, Jerry.

[Jerry Doctrow:]

Is there straight line on a lot of that development? Is it going to move the number just in terms of FAD for next year materially? I think you’re running about $15 million this year. Is that kind of the right range, or is straight line going to move as you’re moving on a fair amount of development. I’m just trying to figure out what’s going to happen to the impact on straight lines.

[Scott Estes:]

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

[Operator:]

Your next question comes from Karin Ford with Keybanc Capital Markets.

[Karin Ford:]

I want to ask a question on your development pipeline. You said that you’re going to not be looking to add to that development pipeline unless you have identified specific financing for that. Can you just talk about what potential financing is for, you know, what secured debt and construction debt is available potentially that would cause you to maybe add a development down the line?

[George Chapman:]

The sources of capital are excess cash at the moment. Two of the governments that we were just talking to Jerry about, as well as disposition on proceeds primarily. They could be used for either further acquisitions or development, as we see appropriate investments. But, we are going to be very, very circumspect about making new investments, because we have a methodology, really, that looks out at least two years to ensure that we have adequate capital, not only to invest in development in any agreed upon acquisitions, but also to cover any note maturities. That’s sort of a moving target, so we have to be very, very careful about that, but those are generally the sources of capital. Frankly, we’re much more inclined for the remainder of these very tough economic times to do acquisitions of modern facilities than do development.

[Karin Ford:]

Okay that makes sense. Are there any tenants that you’re worried about today?

[George Chapman:]

You know, I keep telling people I’m a fully recovered lawyer, but I guess I never will be. We always worry about things. Chris Simon, who runs our Asset Management group, is sitting in the room and we’re always looking at people or companies that fall back from projected returns or construction. But, I would say that even with the stress of these economic times, we feel that any problem children, any folks that are off target, are relatively minor. We’re dealing with a couple of them right now. We’re probably going to move one portfolio in the Midwest to two operators who seem to be a little bit more liquid and are handling the marketing better, but I frankly find this to be just typical. It is what we do. It is just portfolio management.

[Karin Ford:]

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

[George Chapman:]

In part and we think very little, if any. On, I think, two of the development projects there we might have at least a preliminarily 100 or 200 basis points hit to our returns, but we haven’t finalized that at the moment. Generally as you look back over our history, and you’ve followed us for years now as well, we generate out about even or just down a bit. The reality is that when we move properties it’s not just what our absolute return is; it is how the operator performs, so that we have good coverages and therefore can make the most compelling case to the waiting agencies.

[Karin Ford:]

That’s helpful. My last question is on the medical office portfolio. You said you’re expecting rents down this year. Can you just put an order of magnitude on that?

[Scott Estes:]

I think it is really the best we can do on all the moving parts of our portfolio. You have about 80% of the medical office leases are just normally rolling over; 10% of the portfolio is vacant and as you can see in the supplement about 10% is up for renewal. I think where the only variability is on our assumptions for how we’re going to fill new space; we’re forecasting a retention rate of approximately 70% next year. Again, with occupancies flat, I think it’s really a market-by-market basis. They have all went into our combined estimate of -1% core medical office building, NOI decline forecast next year.

[Karin Ford:]

So maybe on the 10% that’s rolling, the 70% that you retain will rents be flat on those and then the remaining 30% will be down, call it, 5%. Does that sound right to you or?

[Scott Estes:]

It’s too different. Actually if you look through every single asset you could be filling some space that was currently vacant as well. Again, we have really done a detailed assessment. Mike, John Thomas, and the team are very much on top of leasing activity. It’s a big focus for us. I think we needed to more appropriately reflect the market rents as well as the state of the economy and that’s really how we put our forecast together.

[Karin Ford:]

Okay, thanks very much.

[Operator:]

Your next question comes from Robert Mains at Morgan, Keegan & Company.

[Robert Mains:]

I have a follow up on the MOB question. You parceled your portfolio into the hospital on campus, hospital affiliated, and non-hospital affiliated. In your projections are you seeing any difference in renewal rates between those three asset types?

[John Thomas:]

The on campus space is stronger. There is a move in what we’ve seen recently from larger physician groups moving into new space on campus, but fro a total NOI perspective it’s not a material distinction between the two. So again, as we talked about the dispositions being smaller, facilities not really associated with the hospital system, or healthcare system, and really over time improving the portfolio to be hospital affiliated on campus, or off campus, but with physician groups tied to those strong hospital affiliations.

[Robert Mains:]

If you got any sense of the sense of the ceiling with these, you’ve got the hospital affiliation then there wouldn’t be a big difference between you ability to renew rents?

[John Thomas:]

Correct.

[George Chapman:]

In fact Rob, I would like to just address that as well. What we’re really finding as a trend is the outreach by really good hospital systems to the suburbs, to extend their brand. That move means that many times they’re leading with a larger MOB with more medical services. That change is something that John and I are looking at right now and we’re very comfortable with the affiliation off campus. That seems to be the way the healthcare systems are evolving.

[Robert Mains:]

Okay, thanks. That’s a good explanation. Scott, I have two number questions for you. One is in prior quarters you’ve broken out your loan expense. Do I assume that that’s folded into interest expense now?

[Scott Estes:]

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

[Robert Mains:]

Okay and then in your FAD guidance, you had a straight line down a good chunk from the fourth quarter run rate. Do I surmise that a lot of this stuff that you’re selling has straight-line rents or is [interposing].

[Scott Estes:]

It was actually a lot of the Ameritas sales that we had in the fourth quarter had straight-line rents, so that’s kind of a rebasing after those sales were done.

[Robert Mains:]

Okay that makes sense. That’s all I had, thanks a lot.

[Operator:]

Your next question comes from Stephen Mead at Anchor Capital Advisors.

[Stephen Mead, Jr.,:]

Just philosophically, how do you guys view the issue that has kind of gone through the REIT world in terms of the payment of the dividend in stock versus cash? I wanted to get your feeling and your attitude towards the continued payment in cash versus stock.

[George Chapman:]

Steve, as I mentioned in my remarks, the board agreed to $0.68 of quarterly payments. My own philosophy and I think this management teams philosophy is that to the extent that we’re capable of paying in cash, that’s a bargain we’ve made with our shareholders and we intend to continue that unless the economic times become so bad that we have to consider doing otherwise. Right now, though, and given our situation in terms of liquidity, we’re very much committed to paying cash dividends.

[Stephen Mead, Jr.,:]

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

[George Chapman:]

I’m sorry did you say flexibility or?

[Stephen Mead, Jr.,:]

Just flexibility in terms of pushing out the delivery date or the discontinuance of some of the development sides of what you said you were going to develop in 2009 and finish up in 2010.

[George Chapman:]

Steve, virtually everything in development right now are projects already underway and they were just going to finish them. Frankly, we’d rather finish them early if at all possible and start recognizing higher income. We think they are terrific projects. But, I would say, too, that we did kill a number of development projects as the economy got worse. We picked the best ones and I think ones that are going to stand the test of time, be very, very sustainable, wonderful assets. For what you are seeing and perceiving on our books, those are going to proceed. They’re going to be very, very good assets.

[Stephen Mead, Jr.,:]

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

[Scott Estes:]

I think if you look at our aggregate development pipeline, the projected average initial yield, when they convert to full yielding assets, is about 9%. So, you obviously have somewhat of an earnings benefit as we move those from only capitalizing interest at our average cost of debt of about 5.7% to those higher yields. George and I have talked, obviously inherently these projects were priced, and stuff began construction generally one to two years ago. Also, they have actually been financed using capital at cost a couple of years ago in part. I think you can never perfectly time the yields of ultimately when these assets open, but we feel like we’re getting very good assets at a reasonable yield in light of the current capital markets environment.

[Stephen Mead, Jr.,:]

Okay, thanks.

[Operator:]

Your next question comes from Rosemary Pugh at Green Street Advisors.

[Rosemary Pugh:]

You spoke about for CCRCs and the entrance fee communities, that there was less activity in the fourth quarter in terms of lease up. I wonder if you can provide a little bit more detail. It looks like your communities assume about 20 to 30 move ins per quarter and I was wondering how the lease up was in the fourth quarter.

[Scott Estes:]

The activity was very nominal in the fourth quarter. If you think about the magnitude of what was going on in the economy, I think we have to view that as an aberration. In several of our communities that are open you did start to see a bit of a rebound in January. So, again, we did see very little activity just specifically in the fourth quarter. We are watching it very closely. We watch it really every week. Again, as we said, we’ve made what we think are appropriately conservative assumptions and again, just have to really be watching them over the next one to two years and hope that they continue to lease up based on our revised projections.

[George Chapman:]

Our experience, Rosemary, was that throughout our portfolio there was just a slamming into the wall for virtually all of the senior housing operators that had a housing component and we’re closer to having a housing component. So far, and about the time, I think, we met out in California in January; we were seeing people who were like a deer in the headlight who were starting to see some increasing optimism. We do think that the fourth quarter was an aberration, as Scott indicated. We are seeing more optimism and we’ll be reporting to you in virtually every call the momentum that we hopefully will see coming back into senior housing, Chattaroy and specifically on the CCRCs which have the largest housing components. I should add something that we have said before, and that is, we’re certainly watching these. On the other hand if and when there is some rebound in the economy, we think that these assets in particular are going to be the best positioned to take advantage of pricing power given what they give the consumer; given what they do for the customer. So, we’re cautiously optimistic about what’s going to happen with respect to this part of our portfolio.

[Rosemary Pugh:]

Thank you.

[Operator:]

Your next question comes from Omotayo Okusanya at UBS.

[Omotayo Okusanya:]

I would like to follow up on Rosemary’s question in regards to CCRCs and development. Scott, I know you talked about this earlier on, but I happened to miss it. The revised assumptions you guys are making in regards to those assets. Could you just run us through them again?

[Scott Estes:]

Sure. Again, it’s a work in progress and the work we’ve done to reforecast our aggregate 2009 budgets, as a company, we’ve decreased our sales forecast by roughly 20% for our existing campuses and it’s about by 1/3 for the new campuses. Again, this isn’t that large of a universe. You remember that this is only 10% of the portfolio. Many of these are just very recently opened, so again, it’s appropriate to revise the budgets as we have. But, again, as George said, it’s really in the next year or two of leasing activity will tell the tale.

[George Chapman:]

Omotayo, just to be clear, even with a 20%, for existing, reduction in sales or 33% for new, this does not necessarily mean we will take a lower yield. That’s the next step if the economy stays down for another year or two years, I suppose. Built into our structure is a lot of flexibility in terms of return to us, so we’re still cautiously optimistic that we’re going to have the same returns on these assets over time.

[Scott Estes:]

Particularly rental coverage George is, in part, referencing too, Omotayo. We underwrite the CCRCs to an approximate, depending upon the asset, 1.3 to 1.4 times rent payment coverage in mix as well.

[Omotayo Okusanya:]

But if it is still down 20% you wouldn’t expect the operator, at that point, so kind of raise a red flag and save some help in regards to rent relief?

[George Chapman:]

No. Right now it would not have an affect on the rent, okay. It depends on the duration of the economy downturn, the housing problems; at some point, as we get out another year or so we will have more color on it. Right now we would not take a rental hit.

[Omotayo Okusanya:]

Generally you are repositioning your portfolio that being the same things; Jay’s doing the same thing. I guess everyone is talking about what a tough market it is to sell assets, but across the entire universe in seems like $1 billion of repositioning everyone wants to do and I just kind of wonder, who is buying this stuff? You guys are not buying, so they’re all trying to sell. Who exactly is out there buying this stuff?

[Scott Estes:]

It is interesting, if you look at our assumptions on our dispositions this year, we are actually very confident that we will get a very good percentage, if not all of them, completed. Generally speaking it is operators looking to repurchase the assets from us. Banks, a bridge to HUD is still available, in smaller size. Generally speaking none of our single dispositions are greater than really $30 to $40 million. So, smaller sizing gets deals done and those are really the ones we included in our assumptions this year.

[Omotayo Okusanya:]

Then one last question, the catch up on the CCI, could you explain that again to me?

[Scott Estes:]

Sure. They basically have two different structures. If you have a CCI based increase, say in a year your rent was supposed to be 8% moving to 8 ¼% in that second year CPI was zero, so 8% stated 8.0% in the second year. During the third year if CCI were significantly large, say increased 5% or more; in that third year we would actually bump back our rent up to the 8.5%. So instead of going 8.0, 8 ¼, 8.5 you would catch up that factor and some could even go up more to catch the lost year of rent as well. That is generally how the CCI catch up features work.

[Operator:]

Your next question comes from [Sevina Patia] at [Faso] Capital.

[[Sevina Patia]:]

As far as buying back short-term debt, as you mentioned in the conference call, what part of the capital structure would you be looking at? I presume it would be the converts because it is a 2011 maturity unless you have some other parts on that?

[Scott Estes:]

I think we basically have been looking more closely at our 2012 unsecured notes as probably one of the more likely candidates in terms of repurchase. We’re not talking about anything too large at this point. We’re evaluating maybe $25 to $50 million type numbers that could make some sense. I mean we obviously have some capital available.

[[Sevina Patia]:]

What would the time frame for that be? Is it something that you guys would do immediately or next…?

[Scott Estes:]

We don’t know. We’re still evaluating it. It depends what the price of the bonds are, other uses of capital, all of the factors you would typically expect us to look at. I think we just wanted to make the point that we’re evaluating it.

[[Sevina Patia]:]

Okay and as far as your credit facility is concerned, the credit line, you have a one year extension options, so I guess it can be extended to August 2012, is that correct?

[Scott Estes:]

That is correct.

[[Sevina Patia]:]

Now is that the company’s option and under what conditions might this not be extended?

[Scott Estes:]

It is at the company’s option.

[[Sevina Patia]:]

Okay, so you are basically just saying [interposing].

[Scott Estes:]

As long as we’re in compliance, so we can extend it at our option.

[[Sevina Patia]:]

And the term is definitely a one year extension option as the term is defined?

[Scott Estes:]

Yes.

[[Sevina Patia]:]

Okay, great. Thank you.

[Operator:]

Your next question comes from Dustin Pizzo with Banc of America Securities.

[Dustin Pizzo:]

Scott, I have a follow up question on the Fannie/Freddie stuff. What percentages of the senior housing assets are unencumbered today? Then also, how much capacity do you guys have to go out and do debt with the agencies before some of the covenants will become an issue?

[Scott Estes:]

Our encumbered assets are about $850 million this quarter; about 80% of those are medical office buildings. So, only about, again, 20% of our encumbered assets are related to senior housing. We’re in good shape, with secured debt at only 7% of total assets and our covenants in the line and the notes are basically not a practical stopping point. They are 30% and 40% respectively and we are more concerned with at what point the rating agencies may start to be concerned with our level of secured debt. I think that would be more in the 15% to 18% range. We’ve always kind of thought that would be more of a realistic cap on where we would ever want secured to go. Again, a lot of our secured debt we have recycled over time. As soon as we can pay it off we do and in many cases roll releases into mass releases. I think there is a reasonable flexibility there.

[Dustin Pizzo:]

Okay, thank you.

[Operator:]

There are not more questions. I will turn the call back to Mr. Chapman.

[George Chapman:]

We thank all of you for participating in the call and Scott and Mike and others will be available for any follow up questions. Thank you.

[Operator:]

This concluded today’s conference call.