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Health Care REIT, Inc. (NYSE:HCN)

Q3 2008 Earnings Call

November 4, 2008 10:00 am ET

Executives

Kathy Price - Financial Relations Board

George Chapman - Chairman, Chief Executive Officer

Ray Braun - President, Director

Scott Estes - Chief Financial Officer, Senior Vice President

Frederick L. Farrar - Executive Vice President and President of Windrose Division

Analysts

Lou Taylor - Deutsche Bank Group

[Ellen Sim] - Credit Suisse Group

Jerry Doctrow - Stifel Nicolaus

RichardC. Anderson - BMO Capital Markets

Philip Martin - Cantor Fitzgerald

Robert Mains - Morgan, Keegan & Company, Inc.

Rosemary Pugh - Green Street Advisors, Inc.

Chris Pike -Merrill Lynch

Charles Place - Kennedy Capital Management.

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Health Care REIT third quarter 2008 conference call (Operator Instructions). I would now like to turn the conference over to Kathy Price of the Financial Relations Board, please go ahead ma’am.

Kathy Price

Thank you, operator. Good morning and thank you for joining us today for the Health Care REIT third 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 web site at www.hcreit.com.

I would like to remind everyone that we are holding a live webcast of today’s call, which may be accessed through the company’s web site as well. At this time, management would like me to inform of you that certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and from time to time, in the company’s filings with the SEC.

Having said that, I would now like to turn the call over to George Chapman, Chairman and CEO of Health Care REIT for his opening remarks. Please go ahead, sir.

George Chapman

Thank you, Kathy. I’ll be in the presentation by making a few brief comments regarding the Sunrise Transaction. We disclosed a potential deal on September 2nd, at the time the purchase and sale agreement was executed. During the due diligence period, the general economy, the capital markets and the cost and availability of capital all changed dramatically and so, as we approach the end of the diligence period, through an analysis of all of the relevant factors, we determined that the deal under the original terms is no longer in the best interest of our stock holders and we’re unable to modify the terms in a way that made sense for all parties involved.

There was no termination or break-up fee associated with the deal and our initial $5 million deposit has been returned. We currently estimate that we’ll have approximately $1.5 to $2.5 in abandoned deal costs, which will be expensed in the fourth quarter.

We continue to think highly of Paul Klaassen and Mark Ordan and their team, but at this time, we’re still subject to a confidentiality agreement with Sunrise and ask everyone to respect the fact that we cannot provide more than these prepared remarks today regarding the termination of this transaction.

When we review or portfolio generally, as we near the end of 2008, we’re pleased with what we have accomplished. Our goal of re-focusing our portfolio on combination senior housing and care properties and medical facilities, has largely been met. And by year end, we expect to have approximately 70% of the committed balanced of our portfolio in combination properties and medical facilities. Moreover, two-thirds of our tenant revenues will be private pay.

In the next year, stand-alone facilities will be below 25% and the facilities that remain will tend to be newer and more customer-focused. We are reaching our goals due to our targeted investment and disposition programs. For the full year, we expect 82% of our new investments to be in combination senior housing and medical facilities and 86% of our dispositions will be stand-alone properties.

Before turning to other topics, let me comment on the general nature of our portfolio. While senior housing and care as well as even the acute care space can be adversely affected by a down economy, we believe that the health care sector is much demand in elastic than other sectors and moreover, senior housing and health care, for that matter, all benefit from a very strong demographic wave.

To the extent there could be some dislocation in the senior housing and health care sectors, we believe we are in a unique position to address property or operator issues.

Our underwriting is excellent and once we close a deal, our asset management function, i.e., portfolio monitoring, allows us to detect warning signs at a very early stage. And by addressing these problems early, we’re able to work through with the operator to address issues when they are manageable. In the worst case, as we’ve shown in the past, we were able to move properties to other high-quality operators with experience in the same geographic area.

Our deal structures also offer a great deal of comfort to us as substantially all of our properties, excluding MOB’s, medical office buildings, have corporate or personal guarantees. Two-thirds have letters of credit, security deposits or escrow accounts. And in addition, nearly 90% of the senior housing and care portfolio are in master lease structures.

But, one of the most important protections relates to our proactive re-positioning of the portfolio over time. We began our move to combination properties years ago. The results are quite gratifying. We expect to continue the disposition program during the next three to five years with emphasis on older, stand-alone, skilled nursing assets.

And in the acute care space, real estate platforms have been changing dramatically, as technological and pharmacological changes have driven non-invasive and minimally-invasive procedures, generally on an outpatient basis. All of our health systems are increasingly and appropriately focusing on the customer experience. Accordingly we have already positioned the acute care portfolio to focus on the newer, customer-friendly platforms.

Finally, we believe we are in good shape to benefit from a changing cap-rate environment. We can fund all of our capital commitments and debt maturities through 2010 without raising additional capital. And as you know, we’ve raised 685 million through equity issuance to date in 2008. And our $1.15 billion line matures in 2011 and can be extended, at our option, into 2012.

Debt maturities total only 60 million through 2010 and we’ll also continue to recognize some level of proceeds from dispositions and alternative liquidity options also exist, including debt either on existing assets or as part of a transaction. Equity issuances and joint ventures.

We believe that HCN will be one of the first companies that will be able to issue equity or debt at attractive prices once the markets begin to clear. As we look back at 1999 and 2000, the markets were also royal. We took that opportunity to stay close to our operators and begin lining up investments in late 2000 and early 2001.

We completed the first equity race in the space in second quarter of ’01 and made great investments in second half of 2001 as well as 2002 and 2003. We do recognize that today’s environment is quite different than that of the previous period, but we do believe that preparation for future improved market and economic conditions will result in a period of excellent opportunity and that we will be positioned to take advantage of these opportunities when the capital markets open back up.

And at this point, I’d like Ray Braun and Scott Estes to make some comments relative to the portfolio and the senior housing and health care sectors as well as our financial results; first, Ray.

Ray Braun

Good morning, everyone. I’ll cover investments to market our portfolio and reimbursement. During the third quarter, we completed 349 million of gross investments, including 125 million of acquisitions, an average initial yield of 8.2%. For the full year, we’ve completed a billion dollars of gross investments, including (missing audio 00:19:09) million of acquisitions that average initial yield of 8.5%.

We funded 210 million in development during the quarter. We currently have 32 properties and seven expansion projects under way, with a total commitment of 1.5 billion. There were $54 million of conversions during the quarter at an average initial yield of 9.3% and we also had 18 million of dispositions during the quarter.

We expect transaction volume to slow in the fourth quarter. Our relationship investment strategy continues to generate opportunity, but we are limiting new commitments until the credit market’s stabilized to ensure our liquidity. We will maintain our commitment to select development projects and acquisitions already in the pipeline.

Regarding prices, cap-rates are increasing across all sectors. Cap rates for senior housing are eight to nine, skilled nursing, 12% to 13%, MOB, 7.5% to 8%, and hospitals in the 14% to 16% range.

Turning to the portfolio, we have 483 properties in our senior’s housing and care portfolio with 56 operators in 37 states. Stable payment coverage is 1.4 timeframe, dependent living and CCRC’s, 1.6 times for assisted living and 2.3 times for skilled nursing.

On a same-store basis, payment coverage increased 18 basis points in our skilled nursing portfolio and 6 basis points in our independent living CCRC portfolio, while declining 6 basis points in the assisted living portfolio.

Notably, same-store independent living and CCRC occupancy increased 70 basis points year-over-year and remain strong at 92%.

Medical facilities include 128 medical office buildings with 5.8 million square feet and 30 specialty care facilities in 27 states with 1,869 beds.

Stable payment coverage for specialty care facilities was 2.4 times and we currently have five specialty care properties and fill up with an investment balance of 87 million.

Medical office building had operating income was 22 million in the third quarter and occupancy declined 60 basis points to 88.5%. We currently expect MOB portfolio occupancy to be approximately 90% by year end.

Turning now to reimbursement, last quarter, we reported average Medicaid rates in our skilled nursing portfolio will increase by 1.7%, participle near 2009. According to data provided by BDO Seidman, the average national Medicaid rate federally increased from 2000 to 2007 at roughly 5% a year or total increase of 41%.

Looking at our top five skilled nursing states, Medicaid rates have increased at an average between 4% and 6% per year of each of these states. While we believe rates may increase at a lower rate during challenging economic times, we do not expect a long-term reduction of Medicaid rate growth for skilled nursing facilities.

As we mentioned last quarter, CMF provided a 3.4% market basket increase to skilled nursing rates for fiscal 2009, hand delayed the recalibration of the rough payment categories. With that, I’ll turn it over to Scott for a financial update.

Scott Estes

Thanks, Ray. Good morning, everybody. We had another strong quarter from an earnings perspective as third quarter normalized FFO for fully diluted share increased 9% to $0.86 from $0.79 last year.

Normalized FAD per fully diluted share increased 7% to $0.80 from $0.75 in the comparable quarter of 2007. Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income per common share.

We recently declared the dividend for the quarter ended September 30th of $0.68 or $2.72 annually, representing a 3% increase above last year’s rates. The payment represents the company’s 150th consecutive quarterly dividend.

Turning to operation results, gross revenues, excluding discontinued operations totaled 145 million for the third quarter, up 22% versus the same quarter last year, with 91% of gross revenues coming from rental income.

Our interest expense was essentially flat versus last year at 33.5 million, despite higher borrowing under our line of credit, primarily due to lower line costs and an increase in capitalized interest as we build out our development pipeline.

Third quarter G&A came in at 10.8 million, in line with our expectations. We believe this run rate of approximately 10.5 to 11 million is appropriate for the fourth quarter of 2008.

There were several other items of note during the quarter. During the quarter, we did have pay-offs with an aggregate book value of 18 million and the most significant disposition was the sale of an under-performing hospital to Kindred Health Care. All the assets were sold at a 6.15% cap rate, based on in-place rent and we recognized a $12.6 million gain on sale as a result of the third quarter disposition.

We also had 41 million of assets held for sale on our September 30th balance sheet, which represents the second tranche of Emeritus assets that were sold on October 20th for 77 million. These assets were sold at an attractive 6.1% cap rate based on in-place rent.

I’m moving now to the balance sheet. We ended the quarter with net real estate investments of 5.8 billion. We improved our credit profile significantly during the quarter through our July and September equity offerings, which reduced our leverage to 41.6% on a debt to un-depreciated book cap basis, versus 49.1% the previous quarter.

Importantly, our debt to un-depreciated book cap ratio is now at its lowest level in the last four years. Our trailing 12-months suggested interest coverage of 3.9 times and fixed charge coverage of 3.3 times were impacted by the large gains on assets sales during the second and third quarters. But excluding these gains are interest and fixed charge coverage were strong at 3.0 times and 2.5 times respectively.

I now would like to take a minute to walk through our liquidity position and access to capital. I think most importantly we have nearly 925 million in cash and line availability and only 60 million in debt maturities to the end of 2010.

As of September 30th, we have 763 million available on our line of credit, cash and cash equivalent of 18 million and restricted cash available to invest of 66 million. These amounts combined with the additional 77 million of proceeds from our October Emeritus asset sale resulting the approximate 925 million in availability providing considerable liquidity heading into the final quarter of 2008.

I’d also like to take another minute to walk through our development commitments. As of September 30th we have 1.4 billion of development commitment with 878 million unfunded. We expected to fund an additional 167 million in the fourth quarter of this year and 545 million in 2009, reducing our unfunded commitments to 166 million by the end of next year.

As I noted previously, we have adequate liquidity to meet our development obligations with current cash available before considering additional capital sources. We’re confident in our development commitment and reiterate these assets would be best in class, with 96% either combination senior housing or medical facilities.

Furthermore by the end of 2009, we expect to convert over 40% of our committed balance to full yielding assets. I did also mention our new term that we have limited debt maturities, again only 60 million in debt maturing through year end 2010.

Turning the capital raised during the quarter, we raised nearly 580 million in net proceeds form equity transactions in the third quarter at an average net price of $44.56. Most recently we completed an 8.05 million share offering in September for net proceeds of 370 million, which were used to pay down our line of credit.

We saw strong demand in the transaction with up sized from 6 million to 7 million shares and note that the overall allotment was fully exercised. Under our dividend reinvestment plan, we issued approximately 353,000 shares or 17.2 million in proceeds during the quarter.

Now I would like to take a minute to turn to our supplemental information package, which we’ve expanded a bit again this quarter. First I just point out on page 11, we’ve added footnotes to the NOI disclosure for the non-cash items and discontinued ops to allow for calculations of in placed cash NOI.

Also on page 20 of the supplement, we’ve added a new chart with the breakdown of revenues by asset type and our top ten states. And we’ve also added revenue concentration by operator. You can see the overall portfolio is very well diversified as no state represents more than 14% of revenues and our top five operators represent only 28% of revenues.

Also on page 32, we’ve expanded disclosure for unstabilized properties. New charts now track how many properties have been added and how many stabilized both by occupancy category and by property type. We did of eight properties convert to stable status during the third quarter.

Finally on page 33, we added portfolio trend charts that highlight our tenant concentration, payor mix, and asset concentration over the last three years. These charts illustrate our portfolio diversity with only 39% of our investment balance with our top ten operators and 65% of revenues from private pay.

Our last quarter, we also did add our construction portfolio books to our website with details on each of our current development project. If you haven’t had a chance to review the book, it is available at www.health carereit.com/construction. And we do expect to get this quarter’s version posted on to the web site later today.

Lastly, I’ll discuss our 2008 guidance. We refined our investment guidance to 1.2 billion from the previous range of 1.1 to 1.4 billion including acquisition of 600 million and development funding of 600 million.

Net investment guidance has been revised to 950 million from the previous range of 700 million to 1.1 billion including dispositions of 250 million.

Regarding earnings, we’ve increased our normalized FFO guidance to 3.34 to 3.39 per share representing 7% to 9% year-over-year growth. And we’ve also increased our normalized FAD guidance to 3.10 to 3.15 per share representing 68% growth over the previous year.

I would point out that our current outlook does not include any abandoned deal cost related to the Sunrise Arcapita transaction.

And that concludes my remarks, George. Turn back to you.

George Chapman

Thank you, Scott. We’re now open for questions.

Question-and-Answer Session

Operator

Okay, thank you. Ladies and gentlemen, we now begin the question and answer session. (Operator Instructions). And our first question comes from Lou Taylor from Deutsche Bank Group. Go ahead please.

Lou Taylor - Deutsche Bank Group

Hi, thanks. Good morning, guys. George, can you talk a little about your disinvestment kind of philosophy and outlook. I mean, can you give me your viability given your development spending needs. I mean, do you think you’re going to be active either acquiring or disposing assets in the next, say, couple of quarters or so?

George Chapman

Lou, it sort of imponderable, but you know we’re going to be extremely selective in taking advantage of any opportunities and it’s incumbent upon us as well to let the cap rate suggest totally adjusting in the various sectors.

We do hope that we complete some additional dispositions, however. And some of the methods are still available to some of the folks who want to take us out of some of the stand-alones assets through the agencies. We’ve been pretty good the last quarter or something.

So, we’re going to be probably slower a little until the markets really opening giving us a cost effective capital. But we’re going to find probably some very good, selected assets that we can put our money into. But it clearly in these times, we’re going to be very, very careful.

Lou Taylor - Deutsche Bank Group

Okay. Can you comment just on the occupancy trends at the assisted living and the independent living, I mean, it seems to be eroding steadily to the first half. Can you give us an update in terms on how much further they’ve eroded since June 30, and what your expectations are in terms of the pace of erosion now going forward or pace in improvement?

George Chapman

Well, let me make a couple of general comments from Ray and Scott, you should step in here.

One is not surprising that they would be under some pressure, given the closeness to the housing market especially with the IL overtime. And even as the assisted living. You know, we found Lou, that even in the acute care space, you know, there are some weakness that comes about when the economy is down for several quarters, you know. Whether it’s the increase in bad debts or it’s a delay in an even pursuing elective surgeries.

So it’s not at all surprising in IL and AL with their softness. But you know, as you look at each one of our operators, I know one of them is down because they refuse to cut rates. So, they decided to keep the revenue line per unit high. Another one did actually decrease rates, did some discounting and so the occupancy stayed high, but the revenue was a little lower. Scott? Ray? You want to add anything.

Ray Braun

I just thought over year it doesn’t impact our earnings. We do not have—with the structure as you saw, there’s no impact there and additionally our coverages are very strong, so, we don’t anticipate any increase in payment risk.

Scott Estes

Everyone finds that I did raise it all (inaudible) actually in excess under any standards. I think that’s important. And I would say one factor leads in assisted living this quarter, I know that overall occupancy was also impacted a bit by some of the dispositions we had.

George Chapman

And Lou, I go back to one of my initial comments and that is that, you know, you can see some softness from, here and there in health care and senior housing, but I’d much rather be there than almost every other, any other sector in the economy. So, we’re pretty comfortable right now.

Lou Taylor - Deutsche Bank Group

Okay, thank you.

Operator

Thank you and our next question comes from [Ellen Sim] with Credit Suisse Group. Go ahead please.

[Ellen Sim] - Credit Suisse Group

Hi , good morning. For your investment, what is the target that versus equity percentage and does that change in light of the difficult capital market? And then, second question, can you talk a bit about the NOI decline or the occupancy decline of the different segments in the last recessions?

Scott Estes

This is Scott. I have to tell you, I think the first stage is coming in general on our leverage matrix, I think we are committed to maintaining our investment grade ratings and as we said in the past we consistently managed the balance sheet over the longer term for better undepreciated both cap in the 40% to 45% type range. Could you repeat your question again about the NOI for us?

[Ellen Sim] - Credit Suisse Group

Yes, actually my first question was not about that equity as a whole company but for your investments. What is the percent of dept versus equity and has it changed as of the difficult capital market?

George Chapman

Own and lease versus mortgages? If the question is will we be making investments to own real estate lease it to operators versus extending mortgage financing, we will be primarily owning and reaping assets.

[Ellen Sim] - Credit Suisse Group

Okay. Okay and my second question was—can you talk a bit about the NOI growth of the different segments in the last recession, like which segments did better than others?

Scott Estes

Yes, in bigger picture, of course in the last recession which inspectors did better than others. I think, for our structure generally, it’s nice that you can see in our same store senior housing portfolio. We generally have increasers that you know, average. In this quarter you can see 2.8%.

So I think the vast majority of our portfolio is—we’re fortunate enough to have a weak structure that one of the operators can pay us rent we actually get reasonable 2.5% to 3% type increases in majority of our senior housing portfolio.

[Ellen Sim] - Credit Suisse Group

Okay, thank you.

Operator

Okay, thank you and our next question comes from Jerry Doctrow with Stifel Nicolaus. Go ahead please.

Jerry Doctrow - Stifel Nicolaus

Hi, good morning. A couple of these has been covered, but I just want to kind of re-do a little bit. I mean, obviously a lot of uncertainty in the market, so you can’t be specific. If we’re trying to think through this sort of ’09, you know at this point maybe even 2010. Directionally we should be assuming obviously the construction stuff gets funded, lower acquisition volumes, higher yields, and this have sort of what you would kind of expect, just a broad brush.

George Chapman

Yes.

Jerry Doctrow - Stifel Nicolaus

Okay, and are we seeing any in terms of some of the newer acquisitions or anything, I mean, I think Ray may have talked about cap rates, but in terms in just yield and stuff, are you just trying to see movements on pricing, I know with some of your relationship investments, yes, you’ve got the ability to reset prices based on various indices or whatever, so, you know. At this point in time, you obviously didn’t do Sunrise at say, a six-six cap, is there some sense about, or any deals out there, that are kind of confirming work cap rates like these?

George Chapman

Oh, I think its clear Jerry, given the transactions that are being offered to us that people are looking for capital and their understanding that cap rates are going up. I’d to say that the sector that is most resistant to that reality is in the medical office building space where people are still talking about 6.5% to 7% cap rates or thought it’s higher, and we frankly feel that that’s delusional.

Jerry Doctrow - Stifel Nicolaus

Okay.

Ray Braun

But, I think it’s changing in a way. I think it’s up to us to be patient and to make sure that we’ve seen as much as possible the move to the new stabilized cap rates before we perhaps double in some really attractive investments. So, again, we’d look at this as a period of opportunity going forward.

Jerry Doctrow - Stifel Nicolaus

Right. Then, I think where my last question rates, it looked to us like some of the yields on some of the new investments, I think you’re putting on in 2010 on the construction site, actually come down a little bit, so I guess, I was trying to understand on the development pipeline, you know, what sort of a yield expectation there and you have any flexibility to sort of move those rates or you kind of lock-in at a rate that maybe you committed to, you know six months ago on a project that’s coming on line in ’09?

George Chapman

Well, like a general comment, I’ll turn then to Scott on a much more precise data. You know, what happens in every period of changing cap rates is that we feel that we can only move certain cap rates so much for projects that have been in the works for a quarter or two. And one of those is a part of what you’re saying in the right set for the third quarter, excellent property.

We did move up some of the rates and we kick away some other deals. But there is some obligation at times to fund those. On the other end, when cap rates are down we’re pretty, pretty good at being able to grab some very high rates before rates plummeted as well. So, that’s just part of the transition. Scott?

Scott Estes

I would add that we generally, we always have a floor in terms of the initial yield that’s determined at the start of the project and again we generally set the initial yield at the time of certificate of occupancy generally set and is spread over a comfortable treasury at that time. I think your specific question about the 2010 projected initial yield, we’re actually impacted slightly by a couple of the new development starts we had in the third quarter.

And specifically we actually started to really phenomenal medical office building project that will converse in 2010 and they are approximately 7.5% yield, but really premium show case assets. So, these numbers if you look in quarter-over-quarter are sometimes impacted by what is coming into the development bucket.

Jerry Doctrow - Stifel Nicolaus

Okay, I guess I would just expect on development for the yield to be higher than that on MOB. Is it?. You know, this is the development risk, but these are lease assets that you’re building so you got a guaranteed income stream or you taking least of risk of any of these?

Ray Braun

In a particular one that was a imbedded in the development pipeline in last quarter. It’s a very, very solid state-of-the-art medical office building and as part of being funded in part. It may be a little lower than we’d like it to be in due deference to the developer partner of ours who brought it to us.

Jerry Doctrow - Stifel Nicolaus

Okay.

Scott Estes

I was just going to point out that it is a very strong tenant and it’s actually a 100% pre-leased secure.

George Chapman

Okay, alright. Thanks. I’ll jab-off. Let’s somebody else answer that.

Jerry Doctrow - Stifel Nicolaus

Thanks.

Operator

Okay, thank you. And our next question comes from Richard Anderson with BMO Capital Markets. Go ahead please.

Richard Anderson - BMO Capital Markets

Thanks and good morning everyone. I want to talk to you about cap rates. I guess a little further you mentioned, George, you know and everyone on the call, you know talking about rise in cap rates and that’s of course understood. But, one of the few weeks that at least based on the average and the estimates out there, are trading at a premium to your NAV so, are you saying that any of the estimates is sale in your view is a good point.

Ray Braun

George is looking at me, Rich. I don’t think that’s the way to look at it. We really talk a lot about our cost of capital and we see a lot of good investment opportunities out there. And the biggest disconnect is the incremental capital we can raise. And I would actually argue, as we look to continue to maintain our liquidity and look at our assessment of where deals can be priced and our cost of capital and in your terms, you know, thinking about either a FAD deals or an NOI yield that I think our equity is actually an excellent source of new investment.

And I think it’s actually priced appropriately. I think it’s too early to say really where cap rates is ultimately will turn. I think our comment is really the market is trying to feel so far and like more for the capital difficulties as opposed to a lot of transactions being done at significantly different, different that they have.

What are talking about, NAV or you talking about other multiples and other ways to value us, which we think that the market has began to recognize quality of the new development and some of the acquisitions were doing. And that will play out very favorable for us in the capital markets one.

Richard Anderson - BMO Capital Markets

Okay, and is there a way that you look at— or monitoring the environment and you know, or headed into jumping the acquisitions as cap rates rise. Is there a number in mind, maybe, that’s simplifying it too much, but in terms of, you know, a rise in cap rates that we’ll start to get you interested at the 50-basis point. Is it more than that or is it tough to say?

George Chapman

I’d rather not speculate on that. It really would depend on the relationship, would depend on the quality of the project and type of project and as well as our assessment at that time of the environment on where it’s going. It’s just really impossible to do, I’m—

Richard Anderson - BMO Capital Markets

Sure. Come on I understand. A couple more of quick ones. Just looking at your guidance and fourth quarter implies $0.80 to $0.85 cents, and if we put in your abandoned deal cost and your equity, we still don’t really get near the low end of the range, and I just wondering if you can comment on what could get you to $0.80 in this environment or that’s just pure conservatism?

Scott Estes

We would have it’s pretty conservative, Rich. I think though, we tend to be conservative too in our LIBOR forecasting. I know that it generally, you know we forecast 4% in terms of LIBOR, at this point for this year and obviously today they’re 2.4% when I looked this morning. So I think that’s clearly an area of conservatism. We hope we don’t end up towards the lower end of the range.

Richard Anderson - BMO Capital Markets

Okay, so like if you’re interest expense still stays where that you should be at least the middle to the upwards, to the higher end of the range.

Scott Estes

I’ll comment on specific numbers and you guys know how to model. And we obviously had a sizeable equity offering on September 3rd as well.

Richard Anderson - BMO Capital Markets

Okay, understood. MOB retention rate dropped to 61%, anything to read into that?

Scott Estes

Fred, you want to comment on the retention and MOB portfolio first.

Fred Farrar

Sure. Hi Rich, how are you?

Richard Anderson - BMO Capital Markets

Hi, Fred.

Fred Farrar

You know, we have 227,000 square feet expiring in the third quarter. We got another 186,000 expiring in the fourth quarter. We think our yearly retention rate will be around 65%, it’s a little bit down. A lot of that has to do with some of the dynamics in the building where we had 10-year leases, all expiring and some master leases. We expect that to give back up above 70% next year. I will plan out, we only have about 390,000 square feet rolling next year or about 60% on what we had this year, Rich.

Richard Anderson - BMO Capital Markets

Okay, good stuff. And then lastly, maybe for Ray or George or anyone, how things change in terms of joint ventures and how the terms and the structure that change in this environment?

Ray Braun

I don’t know if they’ve necessarily changed. They’re all very specific to the potential joint venture partner. There’s still people who think they can get 15% and 20% returns and some of the more conservative folks have their own policies about entering the joint ventures. So this really very sporadic. It is very much a product of specific negotiations with the specific potential joint venture partner. I think we probably had discussions with probably eight or nine of them and so I think we have the right product and the right opportunity, we can probably pick the right joint venture partner.

Richard Anderson - BMO Capital Markets

It’s just much of an opportunity to you today as it was three months ago?

Ray Braun

I think its an opportunity like it was six months ago. I think it might be possibly more important to us at some point in the next quarter or two because we’re seeing some pretty attractive investments and if we can work a little harder on the joint venture, possibility now, I think that’d be good use of our time. So, we’re looking at it very hard.

Richard Anderson - BMO Capital Markets

Okay, great. Thank you very much.

Operator

Okay, thank you. And our next question comes from Philip Martin with Cantor Fitzgerald. Go ahead please.

Philip Martin - Cantor Fitzgerald

Good morning. I guess this is a question for all of you. Can you give us a bit of a perspective from the operators and the health care systems, and tenants, etcetera. How are they adjusting to this new environment? I would have to think your relationships are leaning on health care a little bit more. I mean as a financial source, you obviously bring a lot of experience in many skill sets, but as a financial source you have to be a beacon of light in this environment. So can you give us a prospective from the operator on health care systems standpoint?

Fred Farrar

Well to the extent that all of us in the Health Care REIT public sector, you know are having problems. There are a lot of operators having even greater problems, so we have calls everyday for it, and we just have to tell them that unless we can get the right kind of opportunity and with ownership, so that we do not take any undue risk. We can’t just do anything for them at this point.

For the really good ones, it have been a long-term relationship, we’ll stretch as far as we can. We’re not going to put the company in jeopardy to do that, but I would say this, that it’s really hard work out there for all to serve . They’re bucking a down economy and while it might be more resistant to the down take in the economy than other sectors. It’s still a lot of hard work.

It’s slower fields and the more of the housing component of senior housing, and I will tell you that even in the hospital area. As I’ve said earlier, in my remarks that bad debts are tending to fill-off like the surgeries are going down, so everybody is working really hard. And it’s not a fun time to be an operator than the senior housing or health care side. Ray, you want to add anything?

Ray Braun

You know, I think operationally George has covered it. The economy is affecting occupancy level, procedure level, etcetera and on the financial side, the good news for most of the senior housing operators is that a lot of debts was refinanced over the last couple of years when rates were very low. So there’s not a lot of pressure from debt maturities.

Philip Martin - Cantor Fitzgerald

Are the operators or tenants leaning on the Health Care REIT any differently than they have in the recent past? Are they asking for more help or more assistance or different structures or different ideas?

Fred Farrar

All of the above.

Philip Martin - Cantor Fitzgerald

Okay, okay. Is that the same on the MOB side Fred, as you talk to health care systems and doctors and potential tenants for the MOB space?

Fred Farrar

Well, you know in the 1.4 million square feet that we have leased directly to systems, that’s primarily why we talk to the systems. You know, they’re looking for a little more assistance in terms of TIs, but, although they matter, we’re not seeing a whole lot of.

Philip Martin - Cantor Fitzgerald

Are the system seeing a, you know, I would have to think that given the demand in the health care space, over the next five to ten years, that many of these health care systems are forecasting. Are they willing to be a little more flexible on price? Are they adjusting their return expectations because, you know, that’s a small price to pay in the face of the increasing demand and the competitiveness over the next five to ten years? Is that a fair statement?

George Chapman

I can start, Philip. I think that its been amazing to see the last couple of years just how open health systems have been to alternative financing generally. And that trend is only continuing in becoming stronger due to the dislocation in the bond markets in their more traditionally sources.

So, we find them to be interested in talking to us and they’re beginning to understand what the pricing has to be. It’s probably the last point, the latter point though the pricing, at least as compared to the old days of bond financing that probably creates a biggest gag reflex and we’re getting over that. If this trend, if the economy stays down for another couple of quarters, as its likely to do, you know, I think we’re going to see some really good opportunity.

Philip Martin - Cantor Fitzgerald

Okay, all right, perfect. Thank you.

Operator

Okay, thank you. Our next question comes from Robert Mains with Morgan, Keegan. Go ahead please.

Robert Mains - Morgan, Keegan

Thanks, good morning. Just a couple of detail things left. Scott, I looked at the reconciliation of your outlook, it seems that you’re talking about gross straight lines kind of bump it up at significant amount in the fourth quarter. Is there a reason for that? I assume there’s a reason, I guess, I’m asking what it is?

Scott Estes

I don’t think it should, Rob. I think, I’m trying to look at we’re at for year-to-date.

Robert Mains - Morgan, Keegan & Company, Inc

I got a 15 range and you saying 22 for the full year.

Scott Estes

Not, it’s—should be about, or whatever that implies with the 6 million or so?

Robert Mains - Morgan, Keegan & Company, Inc

Right, okay. Alright, just getting back the question about what’s going on MOBs. Can I kind of assume from your comments Fred that this is in terms of lease expiration and service structure. How they’re going? That this is kind of a hump year and the next couple of years, were not going to see some of the challenges that we’re seeing this year?

George Chapman

Yes. I think that is a pretty safe assumption.

Robert Mains - Morgan, Keegan & Company, Inc

Okay. And in terms of investment opportunities, you touched that there is some blood being shed among the operators, have you considered mezzanine debt or other types of transactions like that? Not what some of the other folks have done about existing debt but operators out there who might have short-term liquidity issue where profitably Health Care REIT could help out? Is that something that could be on the table or plate?

George Chapman

We have looked at that, Rob, and we are being asked to look at that. The danger here is with the liquidity part, hitting the operators harder than it is hitting us. One has to be very concerned about protecting ourselves from a potential bankruptcy or the like where we could get hurt by having that kind of debt outstanding. So, it will be done not terribly frequently and it will be done after a lot of teeth gnashing before we would do that right now. Even if you can get $13, $15 return, I am not sure that's worth it given the potential risk of about operator bankruptcy or some other liquidity problem.

Robert Mains - Morgan, Keegan & Company, Inc

Okay. And this is to clarify, in the case of an operator bankruptcy, if you have got a lease that's covering amply, essentially, there is no immediate harm to you?

George Chapman

Well, there should not be. I mean once you can make a decision to reject a lease. Most of them are on master leases anyway, so, I do not why they do it when recovering pretty well. So, we are feeling pretty good about it.

Robert Mains - Morgan, Keegan & Company, Inc

Right. Okay, thanks a lot.

Operator

Okay. Thank you. Our next question comes from Jim Sullivan with Green Street Advisors. Go ahead please.

Rosemary Pugh - Green Street Advisors, Inc.

Hi. It's Rosemary Pugh here with Jim Sullivan.

George Chapman

Hi, Rosemary.

Rosemary Pugh - Green Street Advisors, Inc.

Brookdale stock has dropped dramatically in recent weeks, what do you as the outlook for that operator and do you have any concerns about your portfolio?

George Chapman

I will just speak generally and Scott, you might to comment again more specifically on any downside you see but I think that Brookdale has made a lot of progress in terms of growing its operating culture again. And I think [Bill Sharup] and the team is doing a very excellent job in terms of adding a good operating structure in procedures. So, we are very high on that management.

But there are liquidity considerations that Bill and his team have to face just like every other operator and we are very hopeful that the equity markets in particular will begin to recognize the progress they are making and to give them some capital that is cost effective for them and on the line side, I think that they are doing all they can to preserve that availability.

I think as Ray said earlier, they are like a few of our other operators but a fairly good line in place at the right time. But these are very heavy times or these are very tough times for operators and we just wish them well. Scott, do you have any additional -

Scott Estes

I would add, Rosemary, that Brookdale's coverage, they do not give a specific number, but their coverage is at above our portfolio average. I think that is important. Our portfolio with them is about $293 million book value today. About $231 million of that is in three different master leases and the $62 million or so of individual leases are all cross deposited to the other master leases. So, we are generally pretty comfortable with how Brookdale is doing at this point.

George Chapman

And the reason why that is outside the master lease structure is that there is underlying debt.

Scott Estes

That is right.

George Chapman

That required SP kind of treatment and then overtime, it would be moved into the master lease as underlying debt grows up.

Rosemary Pugh - Green Street Advisors, Inc.

Thanks.

Operator

Okay. Thank you. (Operator instructions). Our next question comes from Chris Pike from Merrill Lynch. Go ahead please.

Chris Pike - Merrill Lynch

Good morning. Thanks. I guess the question with respect to lease-term for you Scott, are there any lease-term that you see during the reported numbers or your expectations going forward?

Scott Estes

No.

Chris Pike - Merrill Lynch

Okay. And then I guess back to an earlier question on yields. While the development yields may have come in, Scott that does not include any kind of escalators so the yields that you provide are just simply the initial yields, correct?

Scott Estes

That is correct. That is just the initial yields to give an indication where it would flip to once it get that of CIC?

Chris Pike - Merrill Lynch

And so, historically, those have been like 25 debt ups per year on your in place? Correct?

Scott Estes

That's correct.

Chris Pike -Merrill Lynch

Okay, good. I guess just looking in acquisitions and dispositions, to be clear, I guess, given your guidance, there is another $100 million baked in of sales but I guess based on your comments, you still have some on your balance sheet that are held for sale?

Scott Estes

The ones that were held for sale as of 09-30 would be emeritus in October

Chris Pike -Merrill Lynch

So, that's $100 million. So, Scott, if I'm thinking about it right, basically, in your guidance or your outlook, your calling for the remainder year another $100 million but you still have $ 40 million held for sale. So, net, you still are expecting or hoping to dispose of an additional $60 million of assets?

Scott Estes

That is about correct, Chris, yes.

Chris Pike -Merrill Lynch

Okay. And is there any particular, I guess, segment that you guys are focused on given, I guess, your views on Caps and on your views of value at this point?

George Chapman

Are you talking about new investments or—

Chris Pike -Merrill Lynch

No. Actually, net investments in general. I mean you also need to acquire another $150 million for the remainder of the year. So, I guess, the question is how do you see that mix occurring? Do you see yourself buying more of one type of asset versus another given some of the dislocations that you are seeing and subsequently, do you see yourself selling out of one particular segment over another given some more types of dislocations?

George Chapman

I really think that you want to go back to what we told earlier and that is our favored groupings include combination facilities including CCRC's and the senior housing space and we'd really like to do a lot more in the acute care arena especially as it relates to maybe suburban outreach satellite hospitals for really excellent systems as we have done with attached MOBs and I would hope that we would maintain that discipline for us going forward.

I mean 86% of our dispositions are fit into the stand alone category and over 80% by your annual in those favored classes. Now, I cannot tell that I'd walk away from a really unique opportunity and these are the kind of royal times where you will run into them. So, it is a little bit opportunistic as well.

Chris Pike -Merrill Lynch

And I guess that is what I was getting at because I know that you have always said that you have no problem selling an asset that is filled up from a value perspective. So, I was just trying to better understand to the extent that you are seeing some of those opportunistic dispositions and/or acquisitions outside your basic strategy emerged. But, okay, guys, thanks a lot.

George Chapman

We are and we expect to and stay tuned.

Chris Pike -Merrill Lynch

Okay. Thanks a lot.

Operator

Okay, thank you. And our next question comes from Charles Place with Kennedy Capital Management. Go ahead please.

Charles Place - Kennedy Capital Management.

Hi. Good morning.

George Chapman

Hi.

Charles Place - Kennedy Capital Management.

A really quick question here as it relates to the loan receivable on the balance sheets. Your loans, you talked about and you mentioned in your press release about how your guidance excludes an anticipated additions to the loan-loss reserve, just to refresh my memory, with the types of loans that you are making, are there are any unsecured loans in there and what prompted the loan-loss reserve that is on the balance sheet as it is $7.4 million and just may be talk a little bit more about the type of operator or group that is receiving these loans.

Scott Estes

Sure. I think the vast majority of our loans are either first, second, or third mortgages or loans where we have a little mortgage interest. The loan loss reserve, we make an assessment every quarter of the adequacy of that reserve based on our pool of at-risk loans and based on where we have been at.

We have actually been comfortable with where the reserve has been actually for as long as the two and a half or so years to three years and I think, generally, we are focused on making equity investments and view the loan option as something we do with our longer term relationships generally a part of a larger financing program where we would may be provide some loans to an operator where we also have leases with.

Charles Place - Kennedy Capital Management.

I guess as this year has progressed here, have you seen or any increase concern in any of the loans out there that you are worried about?

Scott Estes

Honestly, I would say, marginally, yes, but I think, obviously, the principal balance is intact and I think we always look at potential loans for putting them in non-accrue and that number has been between roughly $20 million and $40 million over the last, probably, two to four years and right now, I think it sort of, it got $39 million at the end of the third quarter. They were not recognizing interests on the small pool of the loans.

Charles Place - Kennedy Capital Management.

And that has increased kind of as across through the year here?

Scott Estes

Very slightly.

Charles Place - Kennedy Capital Management.

Okay.

Operator

Okay, thank you. (Operator instructions) One moment please for our next question. Okay. And we have no further audio questions this time. I would now like to turn the conference back over to the management for any closing statements.

George Chapman

We would just like to thank everybody for their participation and make sure they understand that Scott and Mike and others will be available for some follow-up questions later. Thank you.

Operator

Ladies and gentlemen, this concludes the Health Care REIT third quarter 2008 conference call. (Operator instructions) And we would like to thank you for your participation. You may now disconnect.

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