Ventas, Inc. Q3 2008 Earnings Call Transcript

Nov. 5.08 | About: Ventas Inc. (VTR)

Ventas, Inc. (NYSE:VTR)

Q3 2008 Earnings Call

November 5, 2008 10:00 am ET

Executives

David Smith

Debra Cafaro - Chairman, President, and Chief Executive Officer

Richard Schweinhart - Executive Vice President and Chief Financial Officer

Raymond Lewis - Chief Investment Officer and Executive Vice President

Analysts

David Toti - Citigroup

Michael Bilerman - Citigroup

David Toti - Citigroup

Karin Ford - Keybanc Capital Markets

Dustin Pizzo - Banc of America Securities

Richard Anderson - BMO Capital Markets

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

Mark Afrasiabi - PIMCO

Brian Sekino - Barclay’s Capital

[Harv Tinker] – Morgan Keegan & Co.

Tayo Okusanya - UBS

Chris Pike - Merrill Lynch

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: One, making selective investments in medical office buildings or MOBs; two, we are buying back our bonds due 2009 and 2010 at a discount; third, we are acquiring slivers of debt in healthcare operating company; and fourth, we are keeping our eyes open in our powder dry for exceptional opportunities that should arise as the consequences of the credit environment work their way through the real estate landscape.

Let me explain our rationale and our activity. First, MOBs. We are committed to being a leader in the MOB space. As a result of our strategy and activity, we now own 1.5 million square feet of MOB including those under development. More importantly, we are now doing business with six quality MOB developers including five of the top 20 MOB developers in the nation.

Regarding specific MOB acquisitions, we have invested in five MOBs since we last spoke. Two stabilized fully-occupied MOBs and three pre-leased MOBs under development. The assets are with three different developer partners, two of whom represent new MOB relationships for Ventas. Two MOB developments we began in the fourth quarter are the results of the option agreement we previously announced that gives Ventas the right but not the obligation to fund up to ten MOB developments.

Both of our new MOB developments are with not-for-profit hospital systems having an A-credit rating. These MOBs are 58% and 88% pre-leased and total cost to Ventas should be about $45 million. We expect our stabilized yield on those projects to approximate 8% on stabilization.

One other pre-leased development project represents a new partnership for Ventas with the national developer manager of MOB. That MOB development is within investment grade rated hospital systems and is 63% pre-leased. The expected project cost to Ventas is about $21 million and we expect the stabilized yield to be about 8.5%.

The two Atlanta stabilized MOBs we acquired in the third quarter also represent a new relationship with a prominent MOB owner-manager-developer in the Southeast. These two MOBs are fully-leased and are located on the campus of an HCA full-service acute care hospital. Our investment in these two MOBs totaled $40 million and we expect about a 7.25% initial NOI yield on our investment. We believe these MOB investments and relationships will create value for our shareholders. They advance our interest in a disciplined measured way and position us to become a leader in the MOB business.

Second, we have taken advantage of the disruption in the credit market to buy back a $139 million in principal amount of our own bonds at a net discount. These bonds would otherwise be due in 2009 and 2010. So we are essentially repaying those near-term maturities without a make-whole premium. Our return on investment is at or above 9% and we believe taking out these 2009 and 2010 maturities at attractive levels represent a great use of cash on hand.

Now third, let’s turn to debt investments we are making. Here we made total investments of under $20 million in the third quarter. We have said previously that we will acquire debt investments in limited amounts issued by quality borrowers in the healthcare space. We are looking for superior risk-adjusted returns and especially returns that may be higher than equity returns. We intend to invest in small principal amounts issued by multiple borrowers, purchase these slivers of debt at a discount and hold the debt to maturity or earlier payoff by the issuer.

With that backdrop in mind in the third quarter, we purchased debt in three publicly traded hospital companies in principal amounts between $5 million and $10 million per issuer. Our total investment was less than $20 million and the yield to maturity should be about 9.5%. We have been disciplined in our approach and we believe these investments will provide good cash flow and the return of principals to Ventas.

Finally, we are keeping our eyes open for those exceptional investment opportunities that should come along as a result of the credit crisis and constrained capital environment. We want to stay in a liquid position so we can take advantage of those opportunities when they arrive. Our strategy has been to keep our powder dry and work to stay active in our space so we can be ready to use our balance sheet and liquidity advantages for the benefit of our shareholders.

Turning to our diverse portfolio of healthcare and senior housing assets, it is performing well. First, our triple net lease assets. Consistent with industry practice, our reported portfolio numbers are through the end of the prior quarter or June 30, 2008. The Ventas portfolio is a stable, secure portfolio with solid occupancies and cash flow to rent coverages across the spectrum of independent living, assisted living, skilled nursing facilities, and hospitals. Our triple-net lease portfolio of 418 assets accounts for 76% of our NOI.

First, let’s look at our triple-net lease private-pay senior housing assets. You already know that Brookdale last night reported over 90% occupancy in its corporate portfolio at the end of the third quarter. In our senior living triple-net lease portfolio, without the benefit of the third quarter results, cash flow to rent coverages are stable at 1.3 times, an average occupancy with 87% reflecting trough Q2 occupancy.

Turning to our skilled nursing and hospital triple-net lease portfolio. Kindred leases 165 skilled nursing facilities and 38 long-term acute care hospitals from Ventas under pooled multi-facility triple-net master leases that are the super senior secured obligations in Kindred's capital structure. On a trailing 12-month basis through the second quarter of 2008, Kindred generated $2.20 in cash for each dollar of rent it paid to Ventas. Remember, these triple-net leases are designed to anticipate annual and quarterly changes in operator performance.

Following outstanding first and second quarter 2008 results, Kindred’s third quarter EPS was lower than expected due to soft volumes in its long-term acute care hospitals. Kindred still expects that the 2008 EBITDAR to approximate $563 million. Kindred’s $80-million swing in expected annual EBITDAR on a $4.2 billion business is well within the normal range of expectations from our landlord’s point of view. Most important for our constituents, Ventas’ rent from Kindred remains the same and is secure. Kindred cash flow to Ventas rent for 2008 should be about 2.1 times and operating cash flow at our Kindred hospitals should still cover our $86 million in hospital cash rent by over 2.5 times.

Our Kindred nursing home which received a 3.4% Medicare rate increase in October 2008 continues to perform well with two times cash flow to rent coverage. In sum, our Kindred assets are generating excellent cash flows. At the corporate level, Kindred’s 2008 expected EBITDAR of $563 million exceeds its total expected fixed charges by $200 million. We continue to have confidence in Kindred and our Kindred assets.

All in all then, we are pleased with our diversified triple-net lease portfolio which is delivering steady reliable growing rent from a variety of tenant operators and asset types.

Next, I want to discuss our operating portfolio. Our 79 assisted living community managed by Sunrise Senior Living and our medical office buildings provide a granular highly diversified revenue streams in our portfolio. We first want to review our assisted living operating portfolio. These high quality private-paid mansion-style communities are located in major metropolitan markets and serve a need-based senior population.

Our 79 Sunrise communities account for 19% of then passive total NOI. These 79 communities produce solid results in the third quarter. Total NOI for the portfolio was $35.2 million which is consistent with the $71 million NOI level we reported in the first half of 2008. For the 78 communities we owned in the full third quarter of 2008 and the full third quarter of 2007, total NOI stopped over 4%, average daily rate increased 3%, and occupancies are stable at 91%. This is very solid performance from our Sunrise portfolio. For the 72 same-store stabilized communities we owned and Sunrise manages, average occupancy increased sequentially in the third quarter of 2008 to 92%.

A year ago in the third quarter, these 72 assets showed occupancy of 93% versus last year's third quarter, average daily rate is up 3% in these 72 communities. We also have three Sunrise community that have been leased up including the large independent living asset in Toronto, known as Steeles.

These three leased-up communities we owned for the full second and third quarter of 2008 showed increasing occupancies and stable NOI this quarter. Specifically, our two Sunrise mansion assisted living communities that are in lease up increased sequential occupancy by 4 percentage points to 70% in the third quarter versus 66% in the second.

And our new Steeles independent living community in Toronto is showing steady progress averaging 52% average occupancy in the third quarter compared to 46% in the second. Steeles is currently home to almost 150 seniors.

So to sum up our 79 communities managed by Sunrise, the third quarter NOI and occupancy performance are generally tracking our expectations. Average occupancies at the 72 same-store stabilized communities grew sequentially and our three leased up assets show improving occupancy and stable NOI. We currently expect NOI from our 79 senior living communities managed by Sunrise to total $137 million to $140 million for the year, a downward revision of about 3% since we spoke in August. Our projections at that time were explicitly based upon a stable economic environment. In that environment, we expected second half growth and revenue to offset higher anticipated expenses.

Today’s change in 2008 NOI expectation is based instead upon the current recessionary climate which we believe will result in fourth quarter lapse to lower occupancy, continued promotional pricing, an increase in expenses, normal year-end true up, and the impact of the decline in the Canadian dollar.

In short, we believe revenues in our Sunrise portfolio are not ramping in the second half as we and Sunrise projected while extensive arising as expected. Therefore, fourth quarter revenues in the portfolio should show stability or modest decline rather than an increase because the whole world hunkered down in October and now we are heading into the holidays while property expenses are likely to be up pressuring fourth quarter NOI result. Perhaps our cautious outlooks were proven warranted, but we believe it is realistic and appropriate in the state of current economic headwind.

As always, we are committed as the management team to giving you are best read on what we see going forward whether we like it or not. We will be very happy if we are proven wrong. I want to remind you that our healthcare and senior housing assets are indeed recession resistant and performing generally well. But, as I said in February, no sector is immune from the very powerful downward forces affecting our economy. When the world returns to any semblance of normalcy, our high quality communities should show significant upside and growth.

Turning to the medical office building portion of our portfolio, we added two stabilized MOBs in the third quarter. In total, our MOBs contributed $4.8 million in NOI to Ventas this quarter. An average occupancy in our stabilized MOBs with 96%. Our MOB portfolio currently accounts for over 3% of our NOI.

The last item in our portfolio review is the $6 million valuation allowance we have taken respecting three first mortgage loans we have outstanding to affiliates of Sunrise management, a senior living operator in the Pacific Northwest. These loans totaled $20 million and are secured by lien and four senior housing assets and guaranteed by Sunwest in its principal.

Sunwest recently became delinquent in payments of principal and interest to us and we have initiated foreclosure actions on the assets and collection action on the guarantee. We will endeavor to collect all amounts owed to us but have recorded a $6 million allowance to reflect the current valuation and financing environment for these assets.

On the investment front, opportunities to invest are becoming plentiful and more interesting due to the capital constrained environment. This period should represent a great investment landscape for REIT. But for the time being, we are trying to get a better read on the long-term cost and availability of debt as well as where pricing will settle in the real estate market before making any meaningful investments.

We do believe excellent investment opportunities in our sector are beginning to present themselves and we are committed to being patient and disciplined with our capital allocation decisions because we believe that it is in the best interest of our shareholders to do so. Because we have liquidity and low leverage, we are well positioned to succeed whether we experience a prolonged downturn or we see a rapidly improving market.

Make no mistake, our top priority remains a quality balance sheet and we don’t intend to compromise that priority. We are in great shape there with no net debt maturities through the end of 2009 assuming the funding of our pending refinancing. Added to that, we have over $600 million available on our line of credit which doesn’t mature until 2010 and potential assets sales totaling between a $100 million and $150 million over the next several quarters. So we are well positioned to preserve and create shareholder value during a very challenging time. With that, I will turn it over to Rick who’ll review of our financial result and after Rick’s remarks, we’ll be happy to take your questions.

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.

Question-and-answer Session

Operator

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

David Toti - Citigroup

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 - Citigroup

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 - Citigroup

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 - Citigroup

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 - Citigroup

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 - Citigroup

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 - Keybanc Capital Markets

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 - Keybanc Capital Markets

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 - Keybanc Capital Markets

But it’s in the nary FFO line item?

Debra Cafaro

Yes, exactly.

Karin Ford - Keybanc Capital Markets

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 - Keybanc Capital Markets

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

Debra Cafaro

Also small.

Richard Schweinhart

Small.

Karin Ford - Keybanc Capital Markets

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 - Keybanc Capital Markets

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 - Keybanc Capital Markets

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 - Keybanc Capital Markets

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 - Keybanc Capital Markets

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 - Banc Of America Securities

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 - Banc Of America Securities

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 - Banc Of America Securities

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 - Banc Of America Securities

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 - Banc Of America Securities

Okay, thank you.

Operator

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

Richard Anderson - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

There’s 74 in the last quarter though.

Debra Cafaro

Pardon me?

Richard Anderson - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - BMO Capital Markets

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 - Stifel Nicolaus & Company, Inc.

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 - Stifel Nicolaus & Company, Inc.

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 - Stifel Nicolaus & Company, Inc.

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 - Stifel Nicolaus & Company, Inc.

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 - Stifel Nicolaus & Company, Inc.

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 - Stifel Nicolaus & Company, Inc.

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

Raymond Lewis

I think that’s right.

Jerry Doctrow - Stifel Nicolaus & Company, Inc.

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 - Stifel, Nicolaus & Company, Inc.

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 - Stifel, Nicolaus & Company, Inc.

Okay.

Debra Cafaro

We have the numbers on the supplemental, as well.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

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

Debra Cafaro

Okay.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

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 - PIMCO

Hey, there, how’re you doing?

Debra Cafaro

Hi Mark.

Mark Afrasiabi - PIMCO

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 - PIMCO

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 - PIMCO

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 - PIMCO

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

Debra Cafaro

They are; yes.

Mark Afrasiabi - PIMCO

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 - PIMCO

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

Debra Cafaro

Exactly.

Mark Afrasiabi - PIMCO

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 - PIMCO

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 - PIMCO

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 - Barclay’s Capital

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 - Barclay’s Capital

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 - Barclay’s Capital

Okay. Thanks a lot.

Operator

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

[Harv Tinker] - Morgan Keegan & Co.

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] - Morgan Keegan & Co.

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] - Morgan Keegan & Co.

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] - Morgan Keegan & Co.

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] - Morgan Keegan & Co.

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 - UBS

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 - UBS

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 - Merrill Lynch

Good morning everybody.

Debra Cafaro

Hi Chris.

Chris Pike - Merrill Lynch

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 - Merrill Lynch

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

Debra Cafaro

Yes, it is.

Chris Pike - Merrill Lynch

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 - Merrill Lynch

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 - Merrill Lynch

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 - Merrill Lynch

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 - Merrill Lynch

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 - Merrill Lynch

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 - Merrill Lynch

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 (01:25:52) question. In the fourth quarter we bought back $120 million of our senior notes.

So, since there aren’t any other questions I want to say thank you again to all of our investors and participants for joining today’s call. We, as always, sincerely appreciate your interest in the company and I really want to let you all know that you can continue to count on the Ventas management team to use all of our collective experience and balance sheet strength for your benefit, through the balance of 2008 and beyond.

For those of you that will be in California, we look forward to continuing our dialogue with you when we see you at the NARI (ph) conference later this month.

So, thanks again to all, and hope to see you soon.

Operator

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

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