Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Nationwide Health Properties, Inc. (NHP)

Q4 2008 Earnings Call Transcript

February 19, 2009 11:30 am ET

Executives

Ron Hubbard -- VP, Capital Markets & IR

Douglas Pasquale -- President & CEO

Brent Chappell -- VP, Portfolio Management

Abdo Khoury -- EVP, CFO & Chief Portfolio Officer

Don Bradley -- EVP & Chief Investment Officer

Bill Wagner -- VP & Controller

Analysts

David Toti -- Citigroup

Michael Lewis -- JPMorgan

Dan Bernstein -- Stifel Nicolaus

Rob Manis [ph] -- Morgan Keegan

Tayo Okusanya -- UBS

Karin Ford -- KeyBanc Capital

Rosemary Pugh -- Green Street Advisors

Young Ku -- Wachovia

Chris Haley -- Wachovia

Steve Swett -- KBW

Philip Martin -- Cantor Fitzgerald

Dave Aubuchon -- Robert W. Baird

Operator

Good morning. At this time I'd like to welcome everyone to the Nationwide Health Properties fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator instructions) Thank you.

I'll now turn the call over to Mr. Ron Hubbard, Vice President of Capital Markets and Investor Relations. Mr. Hubbard, you may begin your conference.

Ron Hubbard

Good morning and thank you for joining our Conference Call to discuss Nationwide Health Properties Fourth Quarter and full year 2008 earnings.

Certain statements made on this Conference Call are forward-looking in nature. These statements are based on reasonable expectations and information currently available. However actual results could differ materially from those projected in or contemplated by the forward-looking statements due to risks and uncertainties described from time to time in the SEC reports filed by the Company. As this call will be available on our website for some time, it is important to note that it includes time sensitive information that may only be accurate as of February 19, 2009.

The Company believes that funds from operations and funds available for distribution are an important supplemental measure of operating performance. The Company's definition of FFO and FAD, the reasons for their importance, certain of their limitations and reconciliations to net income are included in our Earnings Release dated February 18th. As a reminder NHP's complete Fourth Quarter 2008 Earnings Release package were filed February 18th, 2009, in separate form 8-K's and are available in the Investor Relations section of our website at www.nhp-reit.com.

I would now like to turn the call over to Mr. Doug Pasquale, President and CEO of Nationwide Health Properties.

Douglas Pasquale

Thank you, Ron. Good morning and thank you for your interest in Nationwide Health Properties. Joining me for today's call is NHP's Senior Management Team.

Despite significant market headwinds in 2008, NHP's performance was among the best in the entire REIT universe. Last year we completed nearly $600 million of investments which contributed to revenue growth of 21% and FFO and FAD per share increases of 8% and 4%, respectively.

We continued our diversification strategy by investing in over $300 million of medical office buildings and in so doing improved the overall risk profile and quality of our portfolio. The diversification strategy was primarily driven by the launch of our transformational medical office building platform with Pacific Medical Buildings which included co-ownership of PMB's property Management business, an exclusive development pipeline arrangement and the acquisition of 12 MOB's for about $265 million.

Absent a dramatically favorable change in the capital markets, we are not obligated and do not expect to acquire any of the other MOB's originally contemplated by our agreement with PMB. Instead we have turned our collective attention to addressing any resulting, near term liquidity concerns that PMB may have so that we can jointly maximize our property management and development opportunities going forward.

Facilitating the financing of the PMB transaction we completed the sale of 23 assisted living facilities to Emeritus for $305 million at an attractive 6.1% cap on 2008 in place rent, realizing a gain of $135 million. NHP's financial position remains strong with 41% leverage on an unappreciated book basis and favorable fixed charge and dividend coverage ratios of 3.1 and 1.3 times, respectively.

Our debt maturity schedule is quite manageable with about $100 million due in 2009 and approximately $75 million due in 2010. NHP's first significant debt maturity of $340 million doesn't occur until July 2011. Based on our strong performance and financial position, our Board of Directors was pleased to maintain our cash dividend.

During the Fourth Quarter, we retired about $50 million of unsecured notes, realizing a $5 million gain, converted about 300,000 shares of our Series B preferred stock into 1.4 million common shares and raised about $70 million by issuing 2.4 million common shares at an average price of about $29 per share. Each of these Fourth Quarter actions incrementally strengthened our financial position. Throughout 2008, we issued five million shares at an average price of $32 per share resulting in net proceeds of about $160 million. Opportunistically issuing equity throughout 2008 enhanced our already excellent liquidity and we ended the year with about $80 million of cash on hand and the full compliment of our $700 million credit facility available to us.

In 2008, all three of our primary asset classes, senior housing, long term care, and medical office buildings, weathered the storm relatively well. However, on the immediate horizon, we see more challenges than actionable opportunities. In response, we have intensified our focus on the performance of our significant existing asset in tenant base.

Given the state of the economy, we expect senior housing performance to be flat or deteriorate somewhat if unemployment continues to rise. While public company senior housing operators have generally reported fairly stable occupancy and rent growth, our view remains that it will be difficult for them to sustain current performance levels and we won't be surprised to see moderate decreases in both occupancies and rates in 2009.

The $800 billion stimulus bill passed by Congress and signed into law this week, provides for about $90 billion to be channeled through various State Medicaid programs. This should help long term care operators as states that were previously looking to cut various Medicaid programs will now receive some much needed relief.

Medical office buildings remain among the best protected asset class due to the expanding demand for healthcare from an aging population as well as tenant stability. However, given the current difficult environment we anticipate additional challenges to surface even for this recession-resistant (inaudible).

We continue to make solid progress with our Hearthstone portfolio aided by Cohen & Steers extensive financial and operational reviews and analysis. Their due diligence efforts have generally confirmed that our assets are in good condition and that the portfolio has experienced stable operating results over the past several months.

Our Hearthstone assets yield among the strongest operating margins in the assisted living industry due in significant part to efficiencies arising from Hearthstone's companion living operating model. Hearthstone remains current on their escalated rent obligation and overall rent coverage has improved modestly in recent months.

Cohen and Steers has worked closely with the Hearthstone management team as well as with several other seasoned operators who have expressed interest in operating the portfolio or in certain instances, smaller regional subsets.

Overall, we are generally encouraged with the results of their due diligence to-date and we continue to thoughtfully evaluate the advantages and disadvantage of each of our available alternatives.

Our plan for 2009 is largely defensive in nature, given that we expect asset prices will remain under pressure, risk aversion will dominate investor sentiment and capital will generally remain scarce and expensive. Until we are convinced that we can reliably replenish deployed capital, we have reoriented ourselves from an acquisitive growth oriented mindset to one of conserving capital and maximizing liquidity. This approach facilitates our ability to take full advantage of the recovery which will eventually come and positions NHP well for the substantial wealth creation opportunity that will emerge from the shadows of the current economic morass.

We are initiating our full-year 2009 FFO guidance between $2.20 and $2.25 per share and our FAD guidance between $2.18 and $2.23 per share. Due to the recent lack of inflation reflected by the consumer price index, our guidance anticipates reduced or no rent increases for leases with CPI based escalators.

To facilitate your analysis and understanding of various factors influencing our guidance relative to our 2008 performance, please see page eight of our comprehensive investor supplemental information.

We are now pleased to answer your questions. Barbara, please open the lines.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from Michael Billerman of Citi. Your line is open.

David Toti - Citigroup

Good morning, everyone. This is David Toti on the line.

Douglas Pasquale

Good morning.

David Toti - Citigroup

Couple of quick questions. Can you just talk about the current performance of some of your most recent PMB acquisitions as it stacks up relative to your initial expectations?

Brent Chappell

This is Brent Chappell. With regard to the most recent PMB acquisitions for the most part they are on target with what we anticipated going in and underwriting the deal. There haven't been meaningful variations from anticipated occupancy or performance. So in terms of what we anticipated going in we're essentially online.

David Toti - Citigroup

Okay, great. And then relative to your expected dispositions can you just talk a little bit about the type of demand strength that you're seeing as well as quantify some of your pricing expectations?

Brent Chappell

Really, in terms of dispositions the only thing that we anticipate at this point would be an exercise of certain purchase options. We're not really actually marketing any piece of our portfolio at this point for disposition so essentially it's limit the purchase options.

David Toti - Citigroup

Okay, great. And then my last question is relative to equity issuance expectations. What have you underwritten in your '09 guidance?

Abdo Khoury

Our '09 -- this is Abdo Khoury. Our '09 guidance excludes any capital transaction.

David Toti - Citigroup

Okay, great. I'll get back in the queue. Thank you.

Douglas Pasquale

Thank you.

Operator

Your next question comes from the line of Michael Lewis of JPMorgan. Your line is open.

Michael Lewis - JPMorgan

Hi. Regarding Hearthstone, just based on what you know today, how would rents be affected versus what you're getting if you were to bring in a new operator?

Douglas Pasquale

Well, what we know is that Hearthstone continues to pay its rent and so that's a terrific starting point. And as I mentioned, their coverage has improved a little bit over the last few months, so that's good as well. So the starting point from which we're operating is that unless there is meaningful reason to do something otherwise the full compliment of rent sans the supplemental rent which is something we've talked about in the past, we expect to continue to collect. But there are, as I mentioned, various alternatives we're evaluating and until we make a final decision on what to do, that's difficult to speculate. But for now, we intend to collect the full compliment of our escalated base rent.

Michael Lewis - JPMorgan

Okay. And then second, with the PMB acquisitions on hold I guess, and more of your liquidity focus, does that assume no acquisitions and are you guys still looking if something were attractive?

Don Bradley

Hi, it's Don Bradley. We're always looking for attractive opportunities. But as Doug said we're going to -- one of our guide posts will be to make sure that we can reliably replenish whatever capital we deploy, but we're definitely out in the market, we're definitely looking and we're looking for some very accretive opportunities should they present themselves.

Michael Lewis - JPMorgan

Okay. Thank you.

Operator

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

Dan Bernstein - Stifel Nicolaus

Good morning. It's actually Dan Bernstein filling in for Jerry.

Douglas Pasquale

Good morning.

Dan Bernstein - Stifel Nicolaus

Good morning. I was just looking at your supplement and there was note that you're going to lose $743,000 in revenue from the lease restructure, I presume that's not Hearthstone. And if not then you want to talk about if you have any other problems with any other operators?

Brent Chappell

To answer your question, this is Brent Chappell, no, that's not relative to Hearthstone. And those are some other leases we anticipate reviewing and perhaps renegotiating prior to year-end. So it's in the high probability category but we're still under negotiations with those folks.

Dan Bernstein - Stifel Nicolaus

Okay, I just wanted to make sure. And the occupancy trends in the EBITDA coverage trends that you have in your supplement those are 3Q numbers, right, not 4Q?

Brent Chappell

Those are trailing 12 numbers based upon November actuals.

Dan Bernstein - Stifel Nicolaus

November actuals.

Brent Chappell

That's correct.

Dan Bernstein - Stifel Nicolaus

Have you seen trends since November improving or getting worse, have you had any anecdotal evidence that trends have reversed itself since the markets gone down and the economy has gotten worse?

Brent Chappell

No. Not at this time.

Dan Bernstein - Stifel Nicolaus

Not at this time. And I just also want to understand the PMB relationship some more. You talked about focusing on their liquidity needs. Is it safe to presume that you'll be loaning them money for future development or otherwise since you won't be making acquisitions?

Douglas Pasquale

I wouldn't make that assumption. What we're trying to do is that PMB and we and it was just about a year ago when we announced our transaction with them. They and we expect or foresee what's happened in the marketplace. We expected the things would become more difficult and expect the substantial deterioration and the implosion of the capital markets. So what's transpired, I think we've responded to spot on in terms of reacting to the marketplace and anticipating it. It does leave the PMB development team less comfortable than the other one, understanding less proceeds from asset sale and frankly the hospitals like every other aspect of business throughout the country it is reevaluating and retrenching a bit. So imminent development opportunities may take a little longer than we were originally anticipated. We just want to work with them to relieve any angst that they may have that they can survive over the next couple of years because we want to keep the team in place.

What we liked about PMB more than anything was the prospect of being able to build the business with them. And when the sources of income have been eroded a bit, we just want them to not focus on that and keeping the team together and working with hospitals both current customers and future customers so that when we emerge from this economic downturn that they are strong and we're well positioned for the effective acquisition pipeline that we were intending to build over the next seven years to ten years and without missing any more time or opportunity because of what's been caused by the economic downturn.

Dan Bernstein - Stifel Nicolaus

Okay and I guess maybe a better way to ask is there a minimal level of funding or acquisition or something you need to do to keep the relationship going or is it just like you said sit and wait and keep them going – keep them surviving?

Douglas Pasquale

We want to proactively deal with it. It's not a lot of money and we're having conversations with them about it on an ongoing basis. So I think we have a meeting with them again tomorrow morning to continue the dialogue. Again, we just want them to be at peace that it's unfortunate that things didn't play out like we anticipated but the world is what it is, they have to deal with it, we have to deal with it and we want to facilitate them having access to capital so that they can remain strong in the future.

Dan Bernstein - Stifel Nicolaus

Okay. I'll jump back in the queue and maybe come back with some more questions, okay?

Douglas Pasquale

Sure. Thank you.

Operator

Your next question comes from the line of Rob Manis [ph] of Morgan Keegan. Your line is open.

Rob Manis - Morgan Keegan

Thanks. Good morning. Doug, in your guidance for what you expect from senior housing you suggested we could see flat occupancy and flatter down rates. You did have average monthly revenue same-store increases both quarterly and year-over-year this quarter. So what you're talking about prospectively, is that based on kind of your sense of what we might see in the market as the year progresses or is that kind of initial read on what -- how the year is starting? Just kind of want to see whether you see the deterioration from what you had in the fourth quarter.

Douglas Pasquale

It's really, Rob, my personal view having as you know been on the operator side both in assisted living and hotels, that there is a lag time to everything like this and there will be a lag time recovery finally gets here. And I just of the opinion and it will either be right or wrong but I'm of the opinion that things may get a bit worse before it gets better. I think the operators out there today are doing everything that they can to maintain performance levels. And to their credit, I think they are doing an admirable job. But I'm also of the opinion that they are probably doing some things in the short-term to facilitate things that may in the longer term cause some deterioration in performance. I also think that the economy is pretty tough out there.

And as I have said on a number of occasions, unemployment is a real adversary for senior housing because more time and less money means greater competition for family members to not put loved ones in assisted living facilities and I think that ultimately is going to play out. Now that's obviously a dynamic situation with a lot of factors playing into it, but my best opinion and experience is things are likely to get a bit worse before they get better. I hope I'm wrong, but I don't think I am.

Rob Manis - Morgan Keegan

Okay, then when we look at the assisted independent living portfolio since you got the skinniest coverages there, do you think your operators have an ability given what's going on in the labor market to control expenses so that even in a tough operating environment they can preserve some margins or do you think there would be margin deterioration as well?

Douglas Pasquale

Well, I think that again you have a much higher skill set and experience level that when assisted living went through its last set of trauma which was caused for different reasons. But I think really, you have some professional leaders and managers that have seen downturns. So I think the ability and there are better information technology and a lot of better things that should help them manage this more efficiently than they otherwise might have been able to. And labor costs going down and commodity costs going down, things are certainly going to help. And whether that's enough to maintain margins given what I think maybe some occupancy and rent declines, we'll have to see that, but I think that they will be able to at least meaningfully mitigate the margin loss through cost controls and efficient management.

Rob Manis - Morgan Keegan

Okay, great. That's very helpful. Thank you.

Douglas Pasquale

Welcome.

Operator

Your next question comes from the line of Tayo Okusanya from UBS. Your line is open.

Tayo Okusanya - UBS

Hi, yes, good morning. Just a couple of questions. First of all, in regards to guidance, fourth quarter you guys came in at $0.56, if you kind of annualize that you end up at $2.24. You get annual rent bumps tied to CPI, you're not doing any acquisitions, but yet the '09 guidance comes in between $2.20 to $2.25 and I'm just wondering if you kind of explain where you're losing some earnings power in '09?

Abdo Khoury

Good morning, Tayo. This is Abdo.

Tayo Okusanya - UBS

Hi, Abdo.

Abdo Khoury

Basically, we have dispositions that are in our guidance but there are no acquisitions. So you do see depending if we end up on what side of those dispositions we have the range from high -- certain to high, so that's a factor in there. The equity that we raised in the last quarter, obviously creates some dilution. And so these are the major factors. And also on the CPI increases that Doug mentioned in his opening remarks that inflation being negative, we don't anticipate significant increases in rent in 2009. Now, if inflation comes back up, we may be able to achieve higher rent increases.

Tayo Okusanya - UBS

Is there anything in those numbers in regards to getting lower rates on rents that may be coming due that you have to renegotiate?

Abdo Khoury

If you look at the linkage schedule, there is some asset recycling.

Tayo Okusanya - UBS

Right.

Abdo Khoury

There might be some renegotiations of leases coming due that the lease restructuring, sorry not asset recycling.

Tayo Okusanya - UBS

Okay. Could you give us a little bit more color on that? Is that mostly assisted living, independent living? Is what causing it adjust that the leases rolling over and market rates have come down or it's a tenant that's in trouble that needs to renegotiate to survive?

Brent Chappell

Tayo, this is Brent Chappell. It's kind of a mixed bag. It's not segment specific. There are a few leases that we're just chatting with folks about. This is anticipatory, that we do have to go down that road. Doesn't mean that we necessarily will, but under certain circumstances, given the age and performance of the facility it's something we need to be open to and that's reflected on the linkage.

Tayo Okusanya - UBS

So it's kind of across the board, it could be a sniff we're talking about, it could be an assisted living facility?

Brent Chappell

That's correct. It's not segment specific.

Tayo Okusanya - UBS

Okay. Great. Alright, I'll jump back in the queue. Thanks guys.

Brent Chappell

Sure.

Operator

Your next question comes from the line of Karin Ford of KeyBanc Capital.

Karin Ford - KeyBanc Capital

Hi, good morning.

Douglas Pasquale

Good morning.

Karin Ford - KeyBanc Capital

Can you just remind us what percentage of your revenues are subject to CPI-based escalators? Is it all of them?

Abdo Khoury

Hi, Karin, this is Abdo. It's the majority is CPI-based.

Karin Ford - KeyBanc Capital

Okay.

Abdo Khoury

The other factor even the ones that are revenue based considering what's happening in the economy and the anticipated flat or downward trends in occupancy and revenues, we don't anticipate significant increases in those leases as well.

Karin Ford - KeyBanc Capital

Okay. So none of your leases have fixed escalators that you would anticipate getting any increase in rent from at this point?

Abdo Khoury

Very small number, yes, we do.

Karin Ford - KeyBanc Capital

Okay. Just the other question, can you just give us a little more detail on the move in the Hearthstone coverage, just how much, how it's gone from last quarter to this quarter?

Brent Chappell

It's primarily -- as Doug mentioned it kind of tracks with the operators really focusing on operational efficiency, and that's the primary driver. We've seen a little bit of uptick in terms of occupancy in the Hearthstone portfolio and the management there is certainly focused on the margin side and cutting expenses, et cetera, so it's a combination of those two factors primarily.

Karin Ford - KeyBanc Capital

Okay, great. Thanks.

Operator

And your next question comes from the line of Rosemary Pugh of Green Street Advisors.

Douglas Pasquale

Good morning.

Rosemary Pugh - Green Street Advisors

Good morning. My first question is regarding the outlook for same property NOI growth from the skilled nursing portfolio. Are there any states where you're concerned about reimbursement and what are your projections for NOI growth for next year?

Brent Chappell

There are states – Rose, this is Brent, by the way, Rosemary. There are states that we certainly have more exposure than others to. I think that the stimulus package and some of the allocation of those funds, the various states and Medicaid programs there certainly going to mitigate some of the concern. But I think with respect to our current outlook for those states, no meaningful change. And again I'm referring to primarily the five largest states, how much we have Medicaid exposure. And I'm sorry, what was the second part of your question, Rosemary?

Rosemary Pugh - Green Street Advisors

Just whether you're concerned about reimbursement and I'm sorry, the second part of the question was same property NOI growth for '09 expected.

Douglas Pasquale

I don't think we expect much in the way of deterioration there, Rosemary based on the fact of what we've talked about Medicaid. And in skilled nursing, you really are very much need driven. And so unlike, it's our view that the economy should have less impact, the recessionary environment that we're in should have less impact on skilled nursing than it would on say assisted living or independent living where even though there is need driven elements certainly assisted living it's less so than for skilled nursing area. We're talking about much higher level of acuity so as long as the government reimbursement programs are functioning reasonably well you'd expect to not have the direct economic effects as pronounced.

Don Bradley

Rosemary, it's Don Bradley. I'd also just point out that ironically the conversation everybody was having about increases in rent also has a good side to it and that is to the extent there aren't significant increases in rent that's going to help bolster coverage because there would be that much less rent that has to be covered.

Rosemary Pugh - Green Street Advisors

Okay. And when you talk about your guidance assumes no rent increase with the CPI-based indicators, is that reflecting a few leases which end up being restructured or broader approach to not growing rents on your portfolio across the board?

Douglas Pasquale

First of all, it's not none across the board because it depends on when the measurement period is for the CPI thing. What we've tried to do is be conservative because it didn't seem as if folks were focusing on this from the investor side. So we wanted to just call out, hey, inflation is not here right now and it's probably going to come back and maybe with some fury down the road but today it's not here. And the fact that we have CPI-based leases is not terribly uncommon across the space and so this isn't unique to us but we just wanted to call out to you that that's something that we're taking into consideration.

We wanted you to be aware of it so you can make your own judgments about it. And we've tried to be conservative in saying as we look at it today and if you compare 12 month over 12 month the data suggests there's not much inflation. And so if you extrapolate that, for the ensuing next few quarters you aren't going to get much from same-store increase. So we're just calling it out and trying to be on the conservative end of things.

Rosemary Pugh - Green Street Advisors

Thank you. Appreciate it.

Operator

Your next question comes from Chris Haley of Wachovia. Your line is open.

Young Ku - Wachovia

Good morning, this is Young Ku here with Chris. My question is in regards to the PMB assets. Have you guys been getting any indications that PMB will market the assets that you don't plan on acquiring separately?

Douglas Pasquale

We have not. That's certainly a possibility. We hope to -- but it's not a strong possibility. Let me say it that way. They have that right under -- once we go through a formal process that was defined by our agreements. But look at the way we've structured this from beginning to end is we want to have a long term relationship. And it's in our mutual best interest that if they choose to dispose of the assets that it beat us. If somebody wants to pay more for the assets than we think is warranted then they can have them. It might be a little emotionally distressing, but we're not getting paid to manage our emotions. We're getting paid to create value for our shareholders. So if they can sell them to somebody else for much their prices under the terms of the agreement then they should do that. I think the probability of that is extraordinarily low. They're shareholders in NHP. The primary financial principal behind PMB sits on our board. He and all the principals have shares of our stock. They want NHP to be successful. We jointly own the management company.

And with respect to the development pipeline going forward, that's completely removed from the acquisition part of it. So we are linked at the hip, we're motivated to make this work going forward, but we are not going to overpay for assets under any circumstances. And while that was difficult for PMB at first, and it's difficult for us because again, this is something we worked a couple years on to get to, you still have to get to the right decision and they know what the right decision is in the long run. And so we're motivated to get to that point. It's why also we're trying to find ways to make sure that they feel comfortable that we can facilitate their ability to survive and thrive during this economic downturn when frankly a lot of the developers aren't going to make it. Developers make money by doing development. They don't do very well when they aren't doing development. And we just want PMB to know that we're in it for the long run and they are terribly talented in doing medical office building development and if they do no developments in 2009 or 2010, it's not the end of the world. And I frankly think that they're fortunate that they linked up with us that are willing to look out several years to say, “Hey, we'll help you get from here to there” because we believe in what you can do and what we can do jointly together. Did I address your question?

Young Ku - Wachovia

Yes, you did, thank you. And second question is in regards to your (inaudible) positions for '09, it looks like you're planning on selling about $130 million in assets at around a 9% cap. Could you just tell us what kind of assets you're planning on selling?

Brent Chappell

Yes, this is Brent Chappell. Again this is kind of cross all segments. These are again loan payoffs or purchase options primarily and they aren't segment specific. So it's just a function of whether the operator exercises the respective options or not.

Abdo Khoury

Yes, of the $134 million, there is $66 million that's loan payoff so half is really loan payoff rather than asset sales due to purchase options.

Young Ku - Wachovia

And the remaining 65 are spread across the board?

Abdo Khoury

That's correct.

Chris Haley - Wachovia

If I may follow-up on the PMB assets, how have you thought about the potential for lease up conflicts and management conflicts between the assets which will remain off of your balance sheet and those that are on?

Abdo Khoury

This is Abdo Khoury. I don't believe there is a conflict. These buildings are in different locations. The buildings that we have closed on already are in the 90% plus, 95% occupancy except for couple. The new buildings that they are leasing up were significantly pre-leased. I don't see any conflict of interest there.

Douglas Pasquale

And plus, I think, Abdo, they are on campus so you are not really competing with another building. I mean your customer base is pretty much locked in because of being affiliated with the hospital.

Young Ku - Wachovia

Thank you.

Douglas Pasquale

You're welcome.

Operator

Your next question comes from the line of Steve Swett of KBW. Your line is open.

Steve Swett - KBW

Thanks a lot. Hi, Doug, if you were to look at the PMB transaction today, what do you think the cap rate would be at in this current environment?

Douglas Pasquale

Higher than what we thought it was last year, but how much, it's really, I'm being evasive because I don't know the answer to that. And I'm being evasive because I wouldn't tell you even I was pretty sure. But really we don't know. There is not sufficient market data to that. We do think that in terms of cap rates being sticky -- I think all assets across the board are going to reprice somewhat before this is over. I think medical office buildings will reprice less than other assets because of the reason we found this asset class attractive. There is very strong consumer demand for the types of services that are provided through medical office buildings. There is really not a better alternative. Government ensures everybody is motivated for finding lower cost alternatives. Doctors tend not to move. Doctors remain affiliated with hospital systems, tenant turnover is low. You might have more TIs upfront, but because of the tenant stability, they amortize very nicely over the lease life. There are a lot of really good things about it. I think that investors recognize and appreciate that stability. And in times like this more so may be than others.

So I do think there is going to be some repricing. I frankly think that we'll acquire some of the PMB assets at repriced amounts at some point in time in the future. But I don't know what they are and they don't know what they are and we are not really scratching our heads much about it now because whatever it is we probably not going to hit to a price that we like now given what we think our cost of capital is at least what the marginal cost of capital is. And the fact that we're really not terribly prone to let capital out of the system right now for the reasons that I described in my prepared remarks. So I really don't mean to make light of your question but we don't know the answer and it's not terribly relevant to us at this particular point in time.

Steve Swett - KBW

Just to follow-up you decided not to go forward with a few of the transactions but you did closed two MOBs in the quarter at 6% cap rate I think. So the thought process on those versus the decision not to go ahead?

Abdo Khoury

This is Abdo, Steve. The two we closed on, these required very little cash. Actually, about no more than $2 million for both of them and they took OP units at 29 plus so for us it made sense to close on those.

Steve Swett - KBW

Okay, thanks a lot.

Douglas Pasquale

You're welcome.

Operator

(Operator instructions) Your next question is from the line of Jerry Doctrow of Stifel Nicolaus. Your line is again open.

Dan Bernstein - Stifel Nicolaus

Hi, it's again Dan here. I don't want to beat a dead horse but on the CPI, do you not have any floors in your leases for that and I just want to be clear also, is that core CPI ex-energy?

Brent Chappell

In terms of floors, you certainly can't go down, but if it's less or if there's not a positive CPI then it remains static.

Dan Bernstein - Stifel Nicolaus

Okay and that's the core CPI?

Brent Chappell

It's all urban consumers, yes.

Dan Bernstein - Stifel Nicolaus

Okay. And I guess also one more question on the asset dispositions and loan payoffs. Is that likely to be front loaded to the first half of '09 or second half '09 or you just don't have a sense of that yet?

Brent Chappell

It's timing sensitive so it could transfer between first and second half. I'd say probably a mid year convention in terms of looking at it.

Dan Bernstein - Stifel Nicolaus

Okay. Spread it out over the four quarters?

Brent Chappell

That's correct. With respect to loan payoff I think that's more towards the back end of the year, but with respect to the other portions of the linkage schedule pretty even distribution.

Dan Bernstein - Stifel Nicolaus

Okay. Thank you.

Operator

Your next question is from the line of Tayo Okusanya of UBS. Your line is open.

Tayo Okusanya - UBS

Hi, thank you. Just two quick follow-up questions. When I look at the lease expiration schedule in the supplemental you have about $701,000 of lease expirations in '09, but the lease restructuring number that you are forecasting is $743,000. Are you potentially looking at restructuring leases that are expiring beyond 2009?

Douglas Pasquale

That's correct, Tayo.

Tayo Okusanya - UBS

Okay. And then the second thing, I mean, Doug, you sound pretty cautious on the outlook for assisted living with your comments that things will get worse before they get better. But when I look at the coverage ratios and kind of looking at it on strictest terms of EBITDA less CapEx, it's barely above one at this point. I mean, if things do get worse and you start to see the coverage slip below one, do you have any concerns or what are the probabilities that that lease restructuring number of $743,000 becomes significantly higher?

Douglas Pasquale

That's a good question, and it's really an area that we need to watch very closely and carefully. The answer is if coverage slips below one, it's obviously not your preferred situation, but there is profit in management fees and operators can do things and will do things frankly to get from one point to another point. But you want to be careful about those situations and you really want to be proactive with your operators and really understand their business more thoroughly and more precisely than you might have wanted to in less challenging times. These are things I think that we can do as a REIT and as a provider of capital then to kind of facilitate where they are to where they are getting. I don't mean subsidizing their operating issues or cutting their rent, but there are things that can be done that for a capital constrained tenant. The smarter operators will manage their revenues as best they can. To a large degree that's both controllable and uncontrollable and there is things that they just can't do, cannot create demand. You can -- except by making concessions but those carry ramifications to it and you can only do it to a certain degree.

Costs on the other hand, you can do things to cut costs, but you have to pick the right costs to cut which we want to watch very closely. What operators tend to do is they cut CapEx in times like this, they cut sales and marketing program, they cut training programs, they cut things that people can't see. They do that for obvious reasons and they rationalize it to themselves for a whole variety of reasons but the results tend not to be good particularly if the downturn is pronounced and extensive. So what we want to do is recognize that issue. We can sweep it away and say doesn't exist but I think it does and again I hope I'm wrong. I will be gleeful in pronouncing to the world that I've been wrong about this for now approaching a year, and I really hope that I am, but I don't think so. So we're preparing ourselves and trying to prepare operators. “Look, it is here and it may last a while. What can we do together to protect our assets and your business?”

And if we can find ways to help them with CapEx and Abdo and I and others on our team have operating experience so there is things we can do to help them we're going to try and find ways to do that but we're going to manage it. If it falls off the charts where they can't cover now you got more significant problems, but again I'd rather be proactive in dealing with them than just pretending like they don't exist and when they get so severe you have to face the music. And so that's the approach we're taking. I think what will probably happen is you'll see some modest decreases in occupancies and revenues and we'll see some pressure on margins. If this turns out to go quickly you won't see it because the short-term measures that the operators are taking, they will be able to cover those up by an improving market. But if it runs a long time, over time you'll start to see those things and it shouldn't be, I think and hope, that dramatic and everything should be fine. Those that do the wrong things though and they start ignoring their assets and they start not taking care of their employees and they stop focusing on quality care, they are going to get hurt. And I just want to make sure it's a degree we can influence it, it's not our operators or if it is our operators it's not with respect to our portfolio.

Don Bradley

Can I add one thing, Doug? The other thing, Tayo, it's Don Bradley, we were just at ASHA, American Senior Housing Association, great panel discussion, and to an operator they were asked, what do you think of these times? And they go all they are tough but this is what I've been waiting for all my life. I just got to get through the next year or two and then I'm in the gravy train. There is no development going on, penetration rate is increasing. We got the baby boomers finally showing up here in a couple years so I'm going to fight like hell to hold on to what I got so that I can reap the benefits in the next couple years. So we view it the same way and this is really just a stretch where we are all just kind of hunkering down just like the REITs have hunkered down to stay liquid so they can take advantage of the opportunities. The operators are similarly hunkering down so they will be there when this passes and this will pass.

Tayo Okusanya - UBS

Well said. Thank you very much.

Douglas Pasquale

You're welcome.

Operator

Your next question comes from the line of Philip Martin of Cantor Fitzgerald. Your line is open.

Philip Martin - Cantor Fitzgerald

Good morning, everybody.

Douglas Pasquale

Good morning, Philip.

Philip Martin - Cantor Fitzgerald

A question and Don you just addressed part of this, but I know certainly Nationwide 2009 potential investment activity is lowered due to economic and credit concerns and uncertainty, et cetera. But it sounds like even if you were willing to or more willing to take advantage of some opportunities that there is really a lack of opportunities out there. And is it fair to say that the lack of opportunities -- and I don't want to put words in your mouth but that the lack of opportunities is due to the majority of operators not being significantly distressed, that they are in pretty good shape? I know coverages and occupancies in revenues are taking a hit, but are they positioned to weather the storm or are there no opportunities or a lack of opportunities because of unrealistic expectations?

Don Bradley

I wouldn't say there are no opportunities, Philip. There are a number of operators that we would love to add to our team, but the pricing expectations are still mirrored in where they were a year ago and the cost of capital really isn't where it was a year ago. That makes that problematic. Hopefully as we get out and meet with folks which is one of our focuses this year and educate them about the markets and the like which they are all pretty knowledgeable on anyway and they understand, maybe we'll come to some accommodation where they move a little, we move a little, we're able to get something done, because there is certainly some very high quality folks, we would love to start relationships with. But we can't do it based on 2007 pricing. It just doesn't work anymore. There are some distressed opportunities starting to make their way into the marketplace, whether they are going to be distressed enough to justify parting with liquidity will be something we have to evaluate and we'll do that on a case-by-case basis. But as Doug said at the very beginning we remain focused on the liquidity side until these capital markets settle a little bit because we want to be here to play when the days get better.

Douglas Pasquale

And Philip, Don summarized that very well. And we are seeing some distressed things and the question we have to ask ourselves is you really have to make some assumptions and make some decisions as to how long this mess that we're in not created by any of us or any of you is going to last. And if you are now just starting to see distressed things and we are, then if your assumption is okay, the distress isn't going to last very long then you ought to jump on the distressed projects or maybe ought to jump on them because there is some strategic reason in that they are very special. But if they are not very special or very strategic and it's just starting and you think it's not going to get terrific, and I just don't see us talking in the first and second quarter and say God, aren't we glad hats off. So what's our hurry?

Philip Martin - Cantor Fitzgerald

Yes.

Douglas Pasquale

And because it's going to get worse. It's not going to get better right away. So that's kind of how you have to think of it. That's how we think of it. And again it's hard for us because we're real estate people and we want to grow the business but sometimes no matter how hard it is you have to do the right thing and sometimes the right thing is doing nothing. And today, the right thing is doing nothing. The guys on the phone that are listening, that's are NHP guys, that doesn't mean you don't get to do stuff.

Brent Chappell

It goes without saying.

Douglas Pasquale

Just stuff without spending money.

Philip Martin - Cantor Fitzgerald

No, that answers my question. Thank you very much.

Douglas Pasquale

Welcome.

Operator

Your next question is from the line of Karin Ford of KeyBanc Capital. Your line is open.

Karin Ford - KeyBanc Capital

Hi, just one follow-up. On Trans Healthcare, I saw in the footnote on Page 38 that you guys are transferring four of their assets to another operator in November this year. Can you just talk about what we should expect on the rent that Trans Healthcare was paying versus what the new tenant will be paying?

Brent Chappell

Yes, actually, the new operator is already subleasing the four Ohio facilities from Trans Health so as of November this year transferred to a direct master lease with us. And in terms of the comparative rent structure, it's materially the same, the impact was already incorporated into our guidance for this year. So we've already taken to get on that one.

Karin Ford - KeyBanc Capital

Okay. Can you just tell us what that impact is? You said it's not really material?

Brent Chappell

It's actually part of the restructuring that's reflected on the linkage schedule.

Karin Ford - KeyBanc Capital

Oh, I see. I got you. That's the 743?

Brent Chappell

It's part of that.

Karin Ford - KeyBanc Capital

Got it. Okay. Thank you very much.

Douglas Pasquale

Welcome.

Operator

Your next question is from the line of Dave Aubuchon of Baird. Your line is open.

Dave Aubuchon -- Robert W. Baird

Thanks. Doug, can you quantify, I believe, you said you're going to be focus in on the PMB's liquidity. I'm just trying to understand what sort of commitment that you're implying it’s going to make to that company.

Douglas Pasquale

Well we really don't know, frankly we owe them some money any ways in terms of portfolio premium that's going to be due then based on the asset we close but we don't owe it to them today. So we may get it to them earlier than we're required to, I mean we're not talking a lot of money. We're just talking about a handful of people on the development side that we want to make sure that they have comfort that there is no reason to be alarmed that their development opportunities may not come to fruition as quickly as we think. So it's something we're talking, but we aren't talking a lot of money and I think it's safely under $10 million.

Dave Aubuchon -- Robert W. Baird

Okay. And then the assets that you have indefinitely postponed or at least the one that was terminated I'm assuming those assets have defined permanent financing, is that correct?

Abdo Khoury

Yes, they do have permanent financing on these assets.

Dave Aubuchon -- Robert W. Baird

Permanent financing is already there?

Abdo Khoury

It's already there. They have no debt problem on these assets.

Dave Aubuchon -- Robert W. Baird

Great. Okay. Second question relates to the controlled equity offering. Can you -- how much shares are left under that program?

Abdo Khoury

We just filed I think in December a new five million shares.

Dave Aubuchon -- Robert W. Baird

Five million shares, so just trying to understand how much capacity is left in that program, should we just deduct the 2.4 that you did in the quarter?

Abdo Khoury

No. The 2.4 were on the previous filing.

Dave Aubuchon -- Robert W. Baird

Okay. Was there significant activity thus far this year under that program?

Abdo Khoury

No, there wasn't any.

Dave Aubuchon -- Robert W. Baird

Okay. Thank you.

Operator

Your next question comes from the line of Chris Haley of Wachovia. Your line is open.

Chris Haley - Wachovia

Yes, thanks. Just a follow-up question. I noticed that you took the reserve related to Hearthstone in the fourth quarter which was a little over I believe $4 million, yet if I make that adjustment to the -- your receivables year to year, it looks like your receivable reserve or receivables actually declined which is a positive contrasting what you're saying regarding conservatism with some of your tenants. Is that accurate?

Bill Wagner

Hi, this is Bill Wagner. The reserve on the Hearthstone has been outstanding since -- has been in place since the second quarter of 2008.

Chris Haley - Wachovia

Okay, so if I strip out that reserve and look at your year end receivables or balances, actually then your receivables went down. So therefore obviously that's reserving. Is that a fair statement?

Bill Wagner

Yes.

Abdo Khoury

Are you talking about accounts receivable or straight line receivables? Sorry.

Chris Haley - Wachovia

Account receivables.

Abdo Khoury

The rent receivable?

Chris Haley - Wachovia

Yes.

Abdo Khoury

We have less reserved in the fourth quarter.

Chris Haley - Wachovia

Thank you.

Abdo Khoury

Yes, we don't have any major issues with tenants not paying their rent.

Chris Haley - Wachovia

That's what I just wanted to be clear looking at your year-over-year comparison, so you're not -- you have not made any balance sheet or cash flow adjustments related to receivable increases which is another metric to use above and beyond your EBITDAR coverages, et cetera?

Abdo Khoury

That's a very good point, Chris. Yes.

Chris Haley - Wachovia

Thank you.

Abdo Khoury

Okay.

Operator

(Operator instructions)

Douglas Pasquale

Okay, thanks very much. If you have any questions give us a call. Thanks for your participation. Have a good day.

Operator

This does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Nationwide Health Properties, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts