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Healthcare Realty Trust Inc. (NYSE:HR)

Q4 2007 Earning Call

February 26, 2008 10:00 am ET

Executives

David Emery - Chairman and Chief Executive Officer

Scott Holmes - Senior Vice President, Chief Financial Officer

Doug Whitman - Senior Executive Vice President Healthcare Investments

Bethany Mancini - Associate Vice President, Corporate Communications

Gabrielle Andres - Corporate Communications

Analysts

Christian Brown - Deutsche Bank

Jerry Doctrow - Stifel Nicolaus

Rob Mains - Morgan Keegan

Rich Anderson - BMO Capital Market

Frank Morgan - Jefferies & Company

Jim Sullivan - Green Street Advisor

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions.).

I would now like to introduce your host for today's conference, Mr. David Emery, Chairman and CEO. Sir, you may begin.

David Emery - Chairman and Chief Executive Officer

Thank you. Good morning everyone. Joining us on the call today are Scott Holmes, CFO, Doug Whitman, Senior Executive Vice President of the Healthcare Investments and Bethany Mancini and Gabrielle Andres in the Communication. Ms. Andres will now read the disclaimer.

Gabrielle Andres - Corporate Communications

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve risks and uncertainties. These risks and uncertainties are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2007. These forward-looking statements represent the Company's judgment as of the date of the call. The company disclaims any obligation to update the forward-looking material.

The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO, or FFO per share, funds available for distribution, FAD, or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the Company's earning press release for the fourth quarter ended December 31, 2007. The Company's earnings press release, supplemental information, and Form 10-K are available on the company's website.

David Emery - Chairman and Chief Executive Officer

Thank you. During the quarter, we continue to focus on increasing development opportunities, pursuing meaningful acquisitions, and maintaining a stable portfolio growth.

I am pleased with the success we are having in identifying sites and increasing the pool of potential development. It appears that we can now expect to realize on an annual basis, a volume of starts and deliveries that will meet our long-term investment objectives.

A few comments regarding our views on the market and prospects for growth: We believe that Healthcare real estate is uniquely demand driven sector, as evidenced by medical office and outpatient properties, rarely if ever being over built. Despite their attractive tenanting, rent coverage, payer mix, and long-term attributes.

Even though plans for new outpatient facilities may sometime be several years overdue, health systems are often slow to commit to building. The typical deliberate approach to the development along with high barriers to entry, but exist from their control of on-campus space, limit supply, while at the same time demand for new outpatient facilities continues to rise.

We believe Healthcare Realty's business model creates long-term value by taking advantage of health systems ever expanding need. For new facilities, within sources with capital approximately 60% of healthcare construction projects completed in 2006 were outpatient related properties totalling almost 3 billion. And even with this influx each year, most facilities remain full, on average 91% nationwide.

Regarding cap rates, we have not seen much change in recent months. Some transactions pretend the expansion of cap rates but our current outlook is that there maybe some time before clear direction and the amount of change will emerge.

There is some thought that the attractiveness of medical office properties as defensive assets may in fact dampen cap rate expansion with a specter of a looming recession.

Our portfolio continued to perform well in the fourth quarter with consistent increases in renewal and turnover rents. And normalized same-store NOI 2.5% for mass releases, 2.8% for owned and managed, and 4% growth in renewal rates on existing leases, inline with recent quarters. We expect the growth in the portfolio to remain positive even with a downturn in the economy.

Finally, the company remains committed to maintaining a low risk growth profile. Given our relatively simple balance sheet, no near-term debt maturities, and availability of our credit line, we believe that the company is well positioned with a stable core portfolio and its expanding development pipeline.

Now, I'd like to turn it over to Ms. Mancini to give us an update trends in the healthcare market place. Bethany?

Bethany Mancini - Associate Vice President, Corporate Communications

Thank you, David. Hospital companies upheld revenue growth in 2007 largely from positive reimbursement in pricing despite the continued rise in bad debt expense and lower inpatient admission.

Volume growth to the sectors extend largely from their increased focus on providing more services in outpatient setting, a trend we believe will continue to benefit Healthcare Realty and provide opportunities for medical office and outpatient development.

For 2008, higher Medicare reimbursement and strong pricing trends favor a positive near-term outlook for providers. In October, hospitals and other providers received increases in Medicare reimbursement rates for 2008 with full inflationary update, DRG modifications for acute care hospitals, and modest offsets for coding adjustments.

Physicians also received a 0.5% increase as part of the Medicare Bill that passed Congress earlier this month and inpatient rehab providers were relieved on the admission front with the patient threshold lowered to 60% permanently, that must meet certain diagnosis criteria.

The Medicare legislation reprieved to physicians will expire in July. And it is largely expected that Congress will address this 10.6% cut again, hopefully with a longer term fix to the physician payment formula. However, until that time, negative headlines will likely surround this pending change as well as the outlook for payments for other providers which may see a decline in the growth of their payment rate to offset an increase to physicians.

Concern over provider payments has already been a source of news since the President released his proposed budget earlier this month calling for a freeze in a new update to healthcare providers and lowering the annual growth rate in Medicare and Medicaid to 5% from 7.2% over the next five years. However, these proposals are unlikely to show up in the congressional budget as much debate will occur between now and the final budget and election year politics will likely prevent any widespread changes to healthcare spending from occurring this year.

Most importantly, healthcare providers are benefited from uncommonly high renewal update in the past four years but should be able to manage profit margins if the trend were to reverse to lower inflationary update in keeping with past years.

Longer term, any change in government healthcare policy will likely depend on several factors including the growth in the economy, the rising cost of Medicare and Medicaid programs, and the political party that has the presidency in the majority in Congress.

We can expect continued discussion of various health policy proposals this year and a plethora of headlines surrounding the presidential election. It is expected that a democrat will look to implement universal coverage and individual mandates for health insurance rather the Republican will try to use market base and consumer directed initiatives to increase health coverage in lower costs. In either scenario such changes should improve hospital revenues and lower bad debt expense.

However wide spread reforms are likely several years out at best but implementation even further out. Either side facing significant opposition it is more probable that incremental change will occur over time and should allow the healthcare industry to adjust to whatever changes may come as it has throughout its 40 year history.

Earlier this year the CMS released the national healthcare expenditure data for 2006, reaffirming the significant role healthcare services play in our economy with spending increasing 6.5% from the prior year to $2.1 trillion or 16% of GDP.

The rate of growth in healthcare spending slowed slightly from '05 and its share of GDP remained relatively stable in 2006, up only 0.2%. This data should lessen near term pressure to cut government healthcare spending. It is important to note however that only 34% of healthcare spending is funded by medicare and medicate, making the primary force of growth and stability in healthcare services the private sector.

Spending growth rates for hospital and physician services decelerated somewhat in 2006, but continued to attract the majority of the nation's health dollar at 52%. Healthcare services are expected to continue to grow significantly over the next 20 years with the onset of new technology and services in aging population, higher consumer income and increasing health insurance coverage.

By 2017, healthcare spending is expected to reach $4.3 trillion and comprise 19.5% of GDP. Healthcare providers who are mindful of their capital resources and strategically restructure their services and facilities to remain competitive will benefit from this growth in healthcare service delivery. We believe healthcare realty will be well positioned to benefit from the rising need for out patient service facilities and the provision of capital related healthcare industry. David.

David Emery - Chairman and Chief Executive Officer

Thank you, Bethany. Now we'll turn it over to Mr. Holmes to give us an overview of the numbers and other finical activities. Scott.

Scott Holmes - Senior Vice President, Chief Financial Officer

Thank you, David and good morning. Before addressing operating results for the fourth quarter, I would like to point out that yesterday afternoon at the same time the company issued its earnings press release, the company also filed its primary disclosure document the 2007 Form 10-K for the year ended December 31, '07 complete with related footnotes to the finical statements and managements discussion and analysis of results of operations and other matters.

In addition to filing the Form 10-K, the company also furnished information on Form 8-K to supplement the disclosures in the form 10-K. Specifically regarding real estate investments, construction in progress and developments, leased maturities, joint venture investments, same facility growth and other pertinent corporate information.

Now a few comments on balance sheet matters: The sale of the remaining senior living assets was completed in the fourth quarter including the last of the variable interest entities or VIEs. The operations of the VIEs for 2007 were included in discontinued operations because the properties were classified as held for sale. Therefore, no operations related to the VIEs are included in continuing operations in our statements of income.

Additional information about VIEs can be found in Footnote1 to the audited finical statements included in the form 10-K. The company continues to maintain a simple capital structure and had no capital market transactions in the fourth quarter having completed at the end of the third quarter the issuance of 2,760,000 shares of common stock for net proceeds of 68.4 million. There are no near-term maturities of long-term debt and we intend to extend the unsecured credit facility to January of 2010, at the same rates to maintain our finical flexibility in today's volatile public debt markets.

As the yield curve has steepened, we expect lower interest costs in the near-term. Debt to gross assets was 42.7% at year end and in the last 2 months Moody's and Standard & Poor's has reaffirmed our investment grade ratings with stable outlooks. While the equity markets remain open, we expect with market volatility, real estate fund outflows and the stall credit markets will likely continue to impact REIT share prices.

Operating results produced an FFO per diluted share of $0.39 and FAD per diluted share of $0.43 in the fourth quarter of 2007. A thorough discussion of operating results for the year can be found in management's discussion and analysis of the results of operations included in our Form 10-K.

We do expect G&A in the near-term to run in the range of $5 million per quarter, consistent with the full year of '07. Development activity by its nature will create quarterly fluctuations in G&A, as does the timing of related expenses and pursuit costs.

For those who maybe interested information concerning the line item of other assets in the balance sheet can be found in Footnote 7 to the financial statements. Information about intangible assets and liabilities can be found in Footnote 8. The elements of other operating income can be found in Footnote 1 and details about joint ventures are provided in Footnote 7 to the financial statements.

And that concludes my prepared comments. David.

David Emery - Chairman and Chief Executive Officer

Thank you, Scott. Now, I want Mr. Whitman to give us some information regarding investments and development activities. Doug.

Doug Whitman - Senior Executive Vice President Healthcare Investments

Thank you, David. Our investment activity over the past quarter maintains our objective of developing medical office facilities on or adjacent to hospital campuses, as well as selective pursuing acquisition opportunities in markets, where we have an existing presence over the faster future developments.

Investor interest in the medical office sector remains strong with most acquisition opportunities still related to developers and intuitional owners selling assets to financial buyers. But the reason for fluctuations in the credit markets access too and pricing updates has made MOB evaluations more mixed. Sellers are still expecting the historically low cap rates seeing in early 2007, while buyers are pointing to the credit markets and lower their valuations.

Although the volume of transactions in the fourth quarter was at its lowest level for the sector since mid 2006, there were still nearly $1 billion of MOB sales in the quarter. The average sales price per square foot dipped to 6% from the prior year and perhaps showed some softening in the MOB market. The frenzy to acquire MOB's may occur slightly, but we are still aware of buyers either to get into the space recently purchasing portfolios at cap rates of 6.1%.

In the challenging acquisition environment, we continue to investigate opportunities and make offers on quality MOB's that would be accretive and result in future developments. We feel that the slowing economy in a volatile credit market conditions may result in a better acquisition environment for REITs in the months to come, as there will be fewer leveraged buyers competing and more sellers concerned about the ability of buyers to close.

While we are cautiously optimistic about the acquisition environment, we expect that the majority of our investments will come from development, which regards to our campus development we most recently opened a 140,000 square foot medical office building in Fort Worth, Texas. This $25 million facility was developed in conjunction with Baylor's construction of a women hospital on its Fort Worth campus.

Last quarter I had mentioned that we had entered into an agreement to develop, own and manage a medical office building on the campus of a hospital in the greater Seattle, Washington area. Although, a number of conditions must still be satisfied, we are on track to begin construction in the fourth quarter of 2008 with completion in May 2010. The approximately $85 million building will also include an underground parking garage with over 900 spaces.

In addition to these on-campus developments, where we are working in conjunction with the hospital, we have been actively pursuing unaffiliated development opportunities on land adjacent to hospitals.

In 2007, we secured through acquisition or grant lease 9 such sites. The most recent one being in Texas during the fourth quarter, six of these sites are currently included in CIP with projects expected to be completed in 2008 and 2009. All of these sites are adjacent to existing hospitals, hospitals that are currently under constructions or planned hospitals. In addition, the sites demographics, frontage of major roads and lack of clinical use restriction inherent to on-campus developments combined to create attractive investment opportunities.

Last quarter, I spoke about 13 acre parcel of land adjacent to the $26 million on-campus MOB, we recently purchased in Texas. Growth in the area and interest in the new MOB that we are developing have been so strong that we purchased another 12 acres adjacent to first MOB in parcel, with one new hospital across the streets, another new hospital only one mile away. We now have plans to develop the entire 25 acres with medical office buildings along with complementary retail services. We continue to work with a large Midwestern developer on an out patient medical campus that will be situated next to a new hospital campus in Iowa.

Healthcare Realty has provided initial construction financing and the project is underway. The two parties are finalizing the terms of a broader joint venture. Two investment opportunities referenced in our previous call have become inactive. We terminated the purchase contract for an $8 million building due to items discovered during due diligence and a hospital that selected us to develop a $20 million on campus MOB has decided to postpone the project.

We now have 10 properties in CIP representing nearly 1 million sq feet of out patient space and an investment of over $250 million. These projects will be completed over the next 24 months. Beyond the projects currently included in CIP our developing pipeline includes another 1.1 million sq feet of properties representing an investment of $225 million. We expect these projects which include the previously referenced Seattle project facilities to be built on our recent land purchases and the Iowa medical campus to be completed between 2009 and 2011.

As I had mentioned on previous calls we're very pleased with our progress and expanding the development pipeline but remain sober about the length of time that may actually be required, not only to start construction but also to fully lease the projects.

I think it's important to emphasis that everything from weather to the efficiency of municipal planing departments can impact development time lines, which maybe reflected in changes to the CIPs schedule. Despite the choppy nature of leasing development projects we are confident that our strategy of developing buildings on or adjacent to acute care hospitals in addition to selective acquisitions will provide stable long-term cash flows from the properties that sustain the companies low business risk profile. David.

David Emery – Chairman and Chief Executive Officer

Thank you, Dough. Operator, I guess we are ready for question-and-answer period.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). First question comes from Christian Brown from Deutsche Bank

Christian Brown

Hi. Good morning guys.

David Emery

Good morning.

Christian Brown

I just wanted to ask if you could, or ask about if you could talk about your funding strategy for your development pipeline. Is it mainly off the credit line?

David Emery

I think in the near term it is that. And I think over time from standpoint of delivery timing capital markets and those kinds of things will affect that. I think we also have mentioned that we feel that that we have a little bit of a cushion in that the, we have two large projects one in Honolulu and one in the Seattle area. That if we wanted to we could probably do project specific joint venture with some kind of (like) company or long term. But in general I would say yes, the credit facility in the near term. Scott.

Scott Holmes

No, I would agree with that. Nothing to add.

Christian Brown

Okay. And just in terms of your operating margins this quarter I kind of looked at them on as a percentage of revenue and they were down a bit from last quarter. Was there anything unusual or what's your sort of outlook for margins going forward?

David Emery

I think the margin was a little off one way in the third quarter and off the other way in the fourth. I guess my overall summation would be an average between the two is kind of where we would see it going forward.

Christian Brown

Okay that’s all, thank you.

David Emery

Thank you.

Operator

Our next question comes from Jerry Doctrow from Stifel Nicolaus.

Jerry Doctrow

Hi thanks. I guess, I just want to get a little bit more color, I mean it would be following up some on the same questions. Scott, there some to be a lot of little pluses and adds relative to kind of what some of our estimates are. I think some of the interest income and lease income is a little higher and the operating income was a little lower. Just can you give us anymore color than sort of you just do to the following questions, so what's going on in terms of the operating properties, assumptions about rent growth expenses that kind of thing?

Scott Holmes

Well, there's nothing particularly unusual in the quarter. There's always going to be a few nits and nats going either way in pretty much any line item. There were three or four items that I might mention that would affect the comparability of some lines. And I would like to kind of point out Jerry that we do have the classification of discontinued operations to our continuing operations for six properties that were in senior living portfolio and one other one that was in held for sale. So, those affect the comparability of the lines that were impacted during those operations are moved.

David Emery

And, that’s mainly would be the master lease income line.

Jerry Doctrow

Okay. But, what's in there for the quarter is sort of a good run rate go forward?

David Emery

Yes.

Jerry Doctrow

Okay.

David Emery

Now that’s should be good. Couple of other things I would mention and I won't go into a lot of detail. If you need to we'll cover some more off line. We could do that. But we did have legal fees reimbursement from an insurance carrier, which decreased property operating expense in the fourth quarter by about $930,000 and these are kind of the unusual one timer type credits. Depreciation was increased for the properties that were moved from held to sale to held for use in the fourth quarter because while those assets have been sitting in held for sale they're not depreciated.

Jerry Doctrow

Okay.

David Emery

So, the decision to move them required a catch up on the depreciation. And, there were two relatively small items in G&A. One was a pension accrual adjustment for the year of 230,000 which was an increased G&A, and the other was a kind of a strange. There was a change in the Michigan Gross Receipts Tax Law that resulted in a different tax expense for us is our best estimate of $215,000 which is a one time thing. That will sit there until some day.

Jerry Doctrow

Okay. And, then just the one other thing, how much straight line rent as your expectations go forward? As that was up, I think a little higher than we had expected, is that also just moving the stuff back on the balance, back into held for use?

David Emery

Straight line rent is really hard to predict because it's affected by just about everything. It's affected by what we buy and is affected by what we sell. Our expectation of going forward is that it will continue to reduce and turn negative with kind of that hump or the straight line rent receivables beginning to bleed off. So, I would expect going forward to see start to trend down.

Jerry Doctrow

Okay. And, then maybe just moving up from the Medusa, which were started, you know, David I think based on your comments and also to Doug's comments, you know, the development sounds like its chugging along the little ups and downs there, acquisitions, it sounded like you were a little bit more optimistic of winding the stuff that sort of satisfies your yield. If you can give me any more color just on the acquisitions?

David Emery

Well, I don't think that there is a marked increase. I think we just, you know, you get a sense of kind of the sentiment of the buyer on side of the street and the seller on the other side of the street. I think everybody is still kind of not meeting in the middle of all that, but I think we were surprised. I guess last week when the Doug -- we were working, we were responded or put on a short list by hospital on a group of MOBs of a very stellar campus location and the price that we had offered, we did not think we would make the cut. We were later notified that we were number 2 and somewhat favored. So, is that an indicator of what's the curve I don't know? It could have been just related to that particular transaction, but sentiment seems to be that just for the normal kind of medical office at Middle America is probably more in the 7 to 7.5 range now. When you say that, probably, I think there is an increase sale on the part of sellers that like all cash buyers who provide a surety and the ability to close. I think the closure thing Jerry is probably more of a specter with people now that it has been in the past. At least just in our discussions I think Doug would confirm just that little more inclination of working with the people they feel like can close even though it may not be the best price.

Jerry Doctrow

Okay.

David Emery

The developers you are trying to sell are perhaps more capital constraint and more of that certainty a close and then not for proper hospitals or generally a more cautious seller to begin with again like that certainty aspect.

Jerry Doctrow

Okay. And then obviously, the big news you know is the NHP transaction, does it radical to something, you looked at or if you want to comment on other way on just that deal?

David Emery

No. We were not involved in that. I think probably the pricing I would say is you know given our kind of experience with Southern California pricing that really surprised me that much. I have not had a chance to really kind of look at what the details are as far as the development pipeline and I understand that they are buying part of the management company or something like that. But the pricing probably doesn’t surprise me that much for a large portfolio in California. I can remember that the apogee of pricing we were having small 15 to 20,000 square feet MOBs in the Southern California trying to tie cap. So I think those type of properties, which I understand this is the very attractive portfolio and stellar type properties would not surprise me on the pricing.

Jerry Doctrow

Okay. Alright, thanks a lot.

Operator

Our next question comes from Rob Mains from Morgan Keegan.

Rob Mains

Good Morning.

David Emery

Good Morning.

Rob Mains

I want to followup on the – you alluded at this supplemental, the seven properties that were re-classified from held for sale, what was going on there? I mean where they once that you decided you want to keep or you could not sell or what kind of mitigating factors?

David Emery

You may remember Rob, we talked about six of those properties, which are still nursing facilities, where the alleged buyer, I should say decided to exit that sector and thus backed out of the sale. And we had said that we would continue with our attempts to sell those properties. The troubling factor there is that the lessee has a purchase option, walk out period expires in the third quarter of '09 at which time they could exercise the right to purchase the property, which sort of puts the damper on selling the properties now. So, we decided that since we cannot really predict when we would sell them, that they need to be moved back in held for sale on our portfolio and accordance with the accounting rules and we have done that. And they are nice yielding properties, return is around 13% on them. It is about $17 million dollars worth of investment. And EBITDA coverage is 1.87 times. So, they are good high quality assets, we are just going to hang on to them for the time being and we will see what happens in the future with those.

The one other the seventh property is one that we had received an offer on and we are considering selling during the third quarter. So, we classify it as held for sale and subsequently did not strike a deal on that and we are holding on to the property and so it is been re-classed out of held for sale.

Rob Mains

What type of assets that one, the seventh one?

David Emery

That was an MOB.

Rob Mains

Okay. For modeling purposes, should we assume that both the stuff, which you were able to sell and then on the re-class of these assets occurred at the beginning of the quarter or middle of the quarter?

David Emery

Say again Rob.

Rob Mains

For modeling purposes, that they both are re-class these assets and than the one that were held for sale that went away. Did those occur more or like towards the beginning of the quarter or middle of the quarter?

David Emery

While for the six properties that were re-classed, it is the income for the entire quarter was re-classed are out. So, it is the whole quarter worth it is gone. The one was moved out we think just a second. I guess we had the one moved out about mid quarter and we had another moved in, in mid quarter, so there was a purchase option exercise that will close in mid June, so that property was moved in to held for sale.

Rob Mains

Okay got it. For the most part the once that were moved back they removed out of held for sale, since there was the whole quarter then followup on Jerry's question that is why we can use the full quarters results is kind of run rate just started '08 with?

David Emery

Yes.

Rob Mains

Okay. Alright, I guess that’s all I have. Thanks.

David Emery

Thank you.

Operator

Your next question comes from Rich Anderson from BMO Capital Market.

Rich Anderson

Hey good morning everyone.

David Emery

Good morning.

Scott Holmes

Good morning Rich.

Rich Anderson

I was just zoning out, which I often do. Dave did you say it is like a shot at the end of year or you just, I heard what you said about the pricing, but I missed the first part of that?

David Emery

No, we did not.

Rich Anderson

Okay. Were you approached?

David Emery

No.

Rich Anderson

Okay. And Scott, you mentioned something about a one time event in operating expenses. Can you just quickly repeat that for me, I am sorry missed that as well?

Scott Holmes

You were late an hour.

Rich Anderson

Yeah, I mean too.

Scott Holmes

There was one item that decreased property operating expenses; it was a legal fee reimbursement from an insurance carrier on one of our law suits $930,000.

Rich Anderson

Okay, that is what I wanted. Okay. Now listen real question. Can you talk about CapEx in medical office? Are you seeing any changes in the environment, I know it is a small number. I am always curious why it so small for you and for others.

Scott Holmes

Well, a lot of the space Rich gets reused almost in its same format versus a typical office you may have an insurance agency that take up a whole floor and then you are going to have, you know some other kind of business come in and take the whole floor and you have to gut it and start over. Medical office tends to have a higher re-use component, so I would say that would probably be the largest reason why you do not see that much difference.

Rich Anderson

Okay. And then on the topic of cap rates the 7 to 7.5 that you mentioned. Where is that relative to say what it was prior to all this dislocation?

Scott Holmes

Well I would say in general, it is probably Doug I don’t know, mid 6s were kind of….

Doug Whitman

I would say may be 25, may be 50 basis points again, it is going to vary on a location of the assets on versus off, the age of the assets, the size of the portfolio being transacted. It is one up building or a larger transaction.

Scott Holmes

The more I guessed the middle America and more it gets to the 20-25 million and then you go to the upper range of 7 to 7.5 and like I said when you go to Southern California, where I understand the sun shine is all the time. It goes down more in the 6 to 6.5 range, I would say just even for individual properties. You want to say Doug something about that.

Rich Anderson

When you sort of look at the difference across different product types, let's say for now on versus off campus. Have you seen any widening of those spreads in the past, we seen no sort of investors had not been really making any distinction between quality of assets and other property types. Are you seeing now that that distinction is being made across considering location and quality?

David Emery

Right. I think anytime, you kind of have you know the capital markets to go, where you going to have highly leveraged buyer who may just be simply you know arbitraged you know the cash flow kind of a thing, I think the shall we say the real long-term owner borrowers, I think it is always kind of known the differentiation of those, so the least we do we recognize that an on campus facility, while it may have more you know inherent kind of protection of cash flow, usually has a lower growth component, while the out campus properties can go from not very fungible if it is across the stress to widely fungible if it is two miles away or three miles or four or five miles away. So we really look at it kind of in a concentric circle. So if you are 5 miles away and you have less ability to push the rents so on and so forth. And so, it is just a big matrix dependent upon on the lot of the factors that did mention earlier.

Rich Anderson

Okay. And you would say sort of if you have a same asset quality, but you are 5 miles away versus on campus as you spread there something like 50 basis points in this range?

David Emery

I'd say yeah, 25 to 50 yeah. And I would say from folks like us, who are the long-term kind of owner, and that doesn’t mean that some leverage person, someone is looking for a immediate yield may not have differentiate it like we would.

Rich Anderson

Okay. And then last question, obviously, we’ve had some investors exit the party. Have you seen any new entrance into the business of medical office in the outpatient facilities like foreign investment maybe…?

Doug Whitman

No. I mean, yes, it is really firm as we made some acquisitions over the past 12 to 18 months, I don’t see much of them recently. And, we started across in one long little random building in Suburban Chicago or German firm that was buying, but that will be anecdotal kind of thing of it. But in my life scale, I would say, no…

David Emery

I think usually just based on my 37 years involved in it that, due to when the music stops, the leverage, non-sector or leverage buyer is usually kind of disappear. So, I think that’s kind of bearing itself out this, we don’t see any real new entrance or all of a sudden names, we have never heard all of a sudden.

Rich Anderson

The user where it’s just in regardless of the weak dollar?

David Emery

Just in regardless of the weak dollars, you guys are very right.

Rich Anderson

Thank you.

Operator

Our next question comes from Frank Morgan from Jefferies & Company.

Frank Morgan

Good morning. One question you had mentioned on the shortlist for a MOB transaction, I was curious, if you could share with us the size of that, just terms of a dollar range of how bigger transaction that might be. And on that same note the ability, and if you become successful there, the ability to fund that transaction or to ask a even more global question to the extent the acquisition market, as the flood gate does open for acquisition again, how will do you feel you are position to take advantage of that when it does take place? Thanks.

Doug Whitman

Well with the caveat that we are just really going on a second date for this portfolio and know that for a long we have been selected. But size vise, I think about a quarter million square feet, and I would say its price range is in the $30 to $40 million range.

David Emery

And then I think as far as the global think, Frank, we don’t necessarily expect there to be a flood gate, but should be there a flood gate. We, as you know from a capital structure have very simple maturities in that situation, and from a standpoint of encumbered assets, its little bit more than 2%. So we think in the Maine, should we have a platform of opportunities, we probably have a careful structure that would allow us to participate in that.

Frank Morgan

Okay, thank you.

Doug Whitman

Sure.

Operator

Our next question comes from Jim Sullivan from Green Street Advisor.

Jim Sullivan

Thank you. I wanted to ask you about the G&A, the G&A was up almost 25% in ‘07 versus ‘06, and then growth surprises me a little bit that you sold a fairly sizable chunk of your portfolio, and I would assume a lot of your ramp up and development cost is gaining capitalize as oppose to run through G&A. I mean, on the growth rate, and I guess, I would expect that there would be some onetime items in there, but it sounds like your ‘08 expectation is similar to `07?

David Emery

I will start there; my expectation is that ‘08 will look a lot like ‘07. I would direct your attention Jim to the results of operations discussion in our 10-K. We have a whole section that’s dedicated to comparing ‘07 to ‘06 in the G&A line, and it will give you a pretty fair discussion of what all the items are in there, as opposed to trying to talk through all those details on this call.

Scott Holmes

But I think also Jim from the standpoint of development, you don’t have a 100% capitalization rate there, because you do have pursuit cost and we have a fairly disciplined capitalization scheme of classifying each project as A B and C range to where we are in the early stage as we are expense in all of it, until it reaches a certain stage than we go to 50%. And then, once we pretty much know that we are going then we switch to 100% capitalization. So just the development activity -- and that should go to have a higher level.

Jim Sullivan

Okay. And I will stay on that topic, on your GIP schedule, all the projects on there are under construction now or have you broken ground on all of what you show within the supplemental?

David Emery

We have broken ground in the advanced free developing, we are drawing and doing site work and so on, yes.

Jim Sullivan

Okay. And then on the asset that was held for sale that you moved into operations, so you mention a purchase option. Is that fair market value or how does that option work?

Doug Whitman

I believe at our gross investment and we have a net investment at this point of around $8 million less than our gross investment, so we would expect to have a gain of about that amount.

Jim Sullivan

Okay. Thank you.

Operator

Our next question comes from Rob Mains from Morgan Keegan.

Rob Mains

I remembered my other question. Scott, the table investment by type and geographic location where on that could you have the types of assets listed in columns there, where on that would I find the assets that came back in from this caps.

Scott Holmes

The majority of them would be in the other column, which would be the skilled nursing facilities.

Rob Mains

Okay.

Scott Holmes

And one would be an MOB, which would be in that first column to the left.

Rob Mains

Alright. That's all I needed. Thanks.

Scott Holmes

Thank you.

Operator

(Operator Instruction). I am showing no further question at this time, Sir.

David Emery

Alright. Well thank you. We appreciated everyone being on the call and we will all be around today, if you need for any follow up questions. And with that we bid you good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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