Nationwide Health Properties, Inc. Q4 2007 Earnings Call Transcript

Nationwide Health Properties, Inc. (NHP)

4Q FY07 Earnings Call

February 26, 2008, 11:30 AM ET

Executives

Ron Hubbard - VP IR & Capital Markets

Douglas M. Pasquale - President and CEO

Mark D. Toothacre - President, Pacific Medical Buildings

Donald D. Bradley - Sr. VP, Chief Investment Officer

Robert A. Rosenthal - Executive Chairman, Pacific Medical Buildings

Brent Chappell - VP Portfolio Management

Analysts

Craig Melcher - Citigroup

Kristin Brown - Deutsche Bank

Dustin Pizzo - Banc of America Securities

Michael Mueller - JP Morgan

Jerry L. Doctrow - Stifel Nicolaus

Robert Mains - Morgan Keegan

Karin A. Ford - KeyBanc Capital Markets

Omotayo Okusanya - UBS Securities LLC

Phil Martin - Cantor Fitzgerald

Rich Anderson - BMO Capital Markets

Jim Sullivan - Green Street Advisors

Chris Pike - Merrill Lynch

Presentation

Operator

Good morning. At this time, I would like to welcome everyone to the Nationwide Health Properties fourth-quarter earnings release conference call. Thank you. I will 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 - Vice President Investor Relations & Capital Markets

Good morning and thank you for joining our conference call to discuss Nationwide Health Properties’ fourth quarter and full-year 2007 earnings, as well as information related to our multi-year transaction with the Pacific Medical Buildings.

Certain statements made in 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 and 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. 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 26, 2008. The Company believes that funds from operations and funds available for distribution are an important supplemental measure of operating performance. Company's definition of FFO and FAD the reasons for their importance, certain of their limitations and reconciliation to net income are included in our earnings release dated February 25, 2008.

As a reminder, NHP's complete 2007 earnings release package as well as information related to our multi-year transaction with Pacific Medical were filed yesterday in separate Form 8-Ks and are available on 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 Chief Executive Officer of Nationwide Health Properties.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning and thank you for your interest in Nationwide Health Properties. Today, along with our fourth quarter and full-year 2007 operating results and investment activity, we are pleased to be talking with you about a truly transformational event as Nationwide Health Properties and Pacific Medical Buildings joining forces in a multi-year transaction worth up to $2 billion.

Joining me for today's call is NHP's senior management team. In addition, we are pleased to have Mark Toothacre, President of Pacific Medical Buildings and members of the PMB senior management. Mark and his colleagues, which he will introduce to you during the Q&A session, were happy to address any questions you might have about PMB and Medical Office Building sector.

Today's call features four parts. First, we will review our fourth-quarter and full-year 2007 results, which reflects another year of outstanding growth. Second, we will provide an overview of the PMB transaction in the medical office building sector. Third, we will discuss the financial aspects of the PMB transaction and provide our 2008 guidance. And finally, we will address your questions.

Since our earnings release and supplemental information was thorough, I will focus on what we believe are the key headlines. Let's start with a brief review of 2007. Major accomplishments include, completing $1.1 billion of accretive investments, including strong fourth quarter investment activity totaling $376 million. We issued approximately 7.8 million common shares through our controlled equity-offering program during 2007 at an average price of $31.52 per share resulting in net proceeds of approximately $243 million. We also issued $300 million, five-year, 6.25% unsecured debt and redeemed the outstanding $9 million, 7.7 million Series A preferred stock.

As part of our proactive portfolio management program, we sold a 35-year-old skilled nursing portfolio located mostly in rural Texas for $128 million, resulting in a gain of $60 million. On the financial performance front, we increased revenue by $84 million or 34% and normalized FFO by $40 million or 25%. This resulted in increases in 2007 normalized FFO per share and dividends per share of $0.15 and $0.10 per share respectively. As you know from our announcement number late January, this year we further increased our annual dividend per share by an additional $0.12 to $1.76 per share.

Now I will shift to what is truly a transformational event for NHP, a multi-year transaction with Pacific Medical Buildings that we announced yesterday. This transaction firmly establishes NHP's commitment to the medical office building sector and provides us a dynamic long-term growth platform.

For some time, we have outlined to you what we believe were important attributes for our medical office building platform. First, we sought a company with a sizable portfolio of Class A buildings in high barrier-to-entry growth markets. Second, we desired substantial development opportunities with a time tested proven developer that has established relationships with large and growing hospital systems.

And third, we required... a company with seasoned property management capabilities to ensure we maximize the return on our investments. We are confidant PMB satisfies or exceeds all of our stated platform objectives. Let’s test that statement for just a moment. If you’ve had a chance to view our Class A portfolio, you will see these are really terrific assets, and we have acquired them at market, and they're accretive to us in 2008.

I know you have some questions about what market is, but just as Manhattan real estate is different with Atlanta real estate and Denver real estate, so is medical office building real estate in California as compared to the medical office building real estate in the Southeast and Midwest parts of the United States.

With respect to development, we have a substantial opportunity to participate in development of some terrific assets in the future, and this is done at de minimis risk to NHP and not on our balance sheet. With respect to property management, we’re going to do a 50/50 with PMB and we have perfect alignment of interest. PMB is an excellent group to work with and became apparent to us very quickly, why they became the largest and most highly regarded MOB developer and operator on the West Coast.

In the fourth quarter of 2007, NHP, in association with PMB, acquired seven medical office buildings located in the state of Washington for $120 million. That transaction demonstrated the strong cultural fit between our organizations and highlighted our joint focus on growth oriented health care systems.

We are excited about the opportunities we share to drive growth, and we anticipate a long and mutually beneficial partnership. For those of you not familiar with PMB, they have been involved in the development and management of MOBs for more than 35 years. We produced a brochure DVD to help you become better informed about PMB and our acquired portfolios. You have or will soon receive this information. In the meantime, please visit our web site where you can see the assets we are acquiring and interviews with PMB's executives. You can also learn more about PMB at their web site, www. pacificmedicalbuildings.com. PMB has completed over 65 medical buildings and were pioneers in the formulation of the developer owned medical office building model having developed over 2 million square feet of MOB space all in the West.

In addition, they are highly regarded as property managers and have a successful track record working with large institutional clients. A number of compelling factors make MOBs an attractive component of the health care real estate market. Baby boomers who are now beginning to enter their early 60s already are seeking and will continue to be seeking increased medical care for many decades to come. This generation more so than any prior generation is focused on living longer and healthier lives. Our increased MOB presence allows us to get ahead of the curve with respect to the healthcare needs of this important demographic group.

Importantly, the services provided in MOBs are recession resistant due to its needs-driven nature. As a result, MOBs represent a stable and predictable source of cash flow enjoying higher tenant retention rates than just about any commercial real estate class. The value of MOBs are enhanced when they are affiliated with leading hospital systems and the PMB portfolio includes more than a dozen premiere investment-grade systems such as [inaudible], St. Josephs and Providence Health.

The PMB transaction is just one more demonstration of our ability and commitment to grow and diversify our company. To that point, following the completion of our acquisition of PMB's existing portfolio and assets currently under construction, our MOB portfolio will increase to 4.2 million square feet with MOBs representing approximately 30% of our total investment based on our year-end 2007 portfolio composition. This series of acquisitions, which began in the fourth quarter of 2007, and concludes in 2010, will result in our ownership of 28 facilities with an average age of 7 years, 14 of which are located in Southern California, 7 in Washington, 3 in Nevada and one each in Northern California, Arizona, Oregon and Hawaii.

This portfolio represents approximately 2.2 million square feet and an occupancy rate of about 94%. The blended NOI cap rate for the $915 million portfolio is 6.1% and equates to a price per square foot of about $420. The 2008 PMB acquisitions are expected to be financed through the assumption of $201 million of debt during an average interest rate of 5.9%. At least $100 million in partnership units and the balance from proceeds derived from the recently announced sale of Emeritus portfolio for $305 million. The sales price for the Emeritus portfolio represents a 6.1% cap rate on 2008 in-place rent.

In this time of capital market instability, it is important to know that the financing for the 2008 acquisitions are already in place. Now, most of you on this call know me, and know that for six years with Abdo, we ran a large... one of the largest assisted living companies in the United States. I think you know that I really like good assisted living assets. And I don't much like selling good assets. But when you can trade good assets for terrific assets at the same cap rate, that is terrific. And because of Emeritus and Dan Baty's recent success and our objectives, we were able to accomplish this. This [inaudible] at 6.1% cap rate and frankly I don't see how NHP shareholders aren't winners for the effort.

On the development front, NHP has the exclusive right to acquire up to an additional $1 billion of MOBs over seven years at an expected meaningful discount to fair market value. We estimate the value of this discount to range from about $70 million to about $160 million. PMB currently has approximately 1 million square feet in its development pipeline through existing hospital relationships. NHP will add property management to its MOB platform through joint ownership and control of PMB real estate services, PMB’s well-regarded full service property management subsidiary.

NHP is acquiring a 50% stake in this entity for 1 million plus possible incremental payments based on this entity's performance in 2009 and 2010. The PMB transaction significantly improves NHP's risk profile by generating a substantial increase in NHP's overall portfolio size, creating asset class, tenant, geographic and pay source diversification within NHP's growing portfolio of healthcare assets, providing new Class A high occupancy assets, creating new strategic relationships with significant investment grade hospital systems and offering stable recession resistant cash flows.

The PMB transactions are accretive to NHP and should add approximately $0.01 to $0.02 to FFO per share in 2008. Beginning this year, we are providing guidance for both FFO and funds available for distribution. Our diluted FFO per share range is from $2.17 to $2.22 per share and our diluted FAD per share is from $2.08 to $2.12. This range includes the anticipated effects of the PMB and Emeritus transactions in 2008.

And while we expect to continue to make accretive acquisitions during 2008, both our FFO and FAD guidance ranges are before any additional acquisitions, impairments or capital transactions. However, this guidance assumes mortgage loan receivable prepayments and expected dispositions during 2008 as described in our supplemental information package.

We are now pleased to answer your questions. Operator, please open the line?

Question and Answer

Operator

[Operator Instructions] Your first question comes from Craig Melcher.

Craig Melcher - Citigroup

Can you give a little bit of the history and how this deal came about and the process that went on?

Douglas M. Pasquale - President and Chief Executive Officer

Sure. We first were introduced to the principles of PMB about three years ago, I think it was and it started out with a friendly get together at lunch and it took a while frankly to have our second get together. But we kept in contact and then about a year ago things started to pick up a little bit in case as PMB explored its opportunities that we made known, our platform objectives, and we took the time to get to know each other and really explore what opportunities we could have together and how we could enhance each other's positions. Then we had the opportunity to do a transaction in late 2007 up in the State of Washington and that just solidified our feelings about them and I believe their feelings about us, which led us to get to the point where we are today.

Unidentified Company Representative

And what really developed here overtime that it became very apparent there were some folks at PMB who were ready to move on in their life towards retirement and some folks who were younger that were really running the show that were looking to have their day in the sun in doing their development and making their fortune and it really fit in with our intergenerational transfer type situation where we helped to monetize the folks who were looking to sit on the sidelines a little bit more and provide the capital for those looking to grow the business. So it became a perfect fit in that regard especially when they were very interested in the concept of taking a lot of their profit in the form of OP units essentially NHP common stock, really representing that they liked what the combination was providing for them as well.

Craig Melcher - Citigroup

Was there ever an opportunity to buy the whole company including the whole development business and whole management company or is that not on the table?

Douglas M. Pasquale - President and Chief Executive Officer

That really wasn't consistent with the PMB’s principal objectives at this time and so we didn't push the point and frankly we see some real advantages just structuring it this way. They are taking some meaningful development risk and they'll have the opportunity to reap the rewards from that and it just was a nice balance for… covered the walls over the passage of time who knows.

Unidentified Company Representative

Actually Doug when, and I don't if you were in those conversations, but when we were first talking, we were talking about acquiring everything and as we talked through it we had the PMB folks say, are you sure you really want to be doing development on your balance sheet and we started to thinking about it, maybe not. Okay let's do something little different on the development side, that's good idea. And then on the property management they pointed out, well you know, we're just as much interested in how the property management does as you are because that's our lifeblood for development pipeline. So we really want to be in there with you on the property management and that seem to be a good story as well. So why not team up on the property management. But it evolved from looking at it as a maybe a total acquisition to something that was really more of a partnership.

Craig Melcher - Citigroup

Okay. Do you have any say with, I guess about how the future developments are underway or lined up? But the other half that you may have an option to buy over the next seven years, what sort of say you have or control you have over those potential projects that you may be a able to buy over the next few years?

Unidentified Company Representative

With subject to a few exceptions like if there is some restrictions imposed by the hospitals on who they can partner with to develop it’s pretty much anything that PMB is developing that is of the comparable quality to any of the post-2000 vintage buildings that we’re acquiring as part of the first two transactions or first three transactions. So anything of that kind of quality, basically a 2000 plus MOB which is some of the larger MO… on campus MOBs and then we also have the option, it's not of that caliber, but it's something we're otherwise interested in to also pursue that as well but the classic development project will be something like the stuff that is shown in our slides for post 2000.

Douglas M. Pasquale - President and Chief Executive Officer

But if we don't like a transaction we don't have to participate.

Unidentified Company Representative

No.

Craig Melcher - Citigroup

So if you don't participate, would you then be partially managing or would they sell that to a third party?

Douglas M. Pasquale - President and Chief Executive Officer

If they went on and developed with somebody else, if we chose not to participate in this specific project, they of course would want to develop it or to manage it and we have a 50% ownership in there so and that... through that mechanism we would participate in the project but only that mechanism.

Craig Melcher - Citigroup

And last question is just on the cap rate you mentioned, the 61. What's the cap rate? It looks like that's on the whole piece over the next couple of years. What the cap rate specifically on the '08 piece? And is there any difference between what the stabilized cap rate is versus what the current cap rate is if the assets aren’t fully leased up?

Unidentified Company Representative

The '08 acquisitions are about 6.2.

Craig Melcher - Citigroup

Okay. And that's the cap rate you'll receive in '08 there's no… because it's already... that's already stabilized occupancy?

Unidentified Company Representative

That's correct.

Craig Melcher - Citigroup

Okay. Thank you.

Unidentified Company Representative

You're welcome.

Douglas M. Pasquale - President and Chief Executive Officer

Thanks Craig.

Operator

Your next question comes from Kristin Brown.

Kristin Brown - Deutsche Bank

Good morning guys.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning, Kristin.

Kristin Brown - Deutsche Bank

I wanted to ask though, in terms of the development you are acquiring stabilized assets, is that correct?

Unidentified Company Representative

That is correct.

Kristin Brown - Deutsche Bank

And so you are not bearing any of the construction related risk, it’s all on their side?

Unidentified Company Representative

No. Of the construction costs, PMB will be responsible for any overruns on the construction costs. On the lease-up stabilization, obviously there is a takeout commitment and when the construction loan matures, if the property hasn't stabilized, we are committed to take it down, but the pricing would reflect the occupancy level and the NOI available at that time.

Kristin Brown - Deutsche Bank

Okay. And then just in terms of the additional $1 billion pipeline what do you see in terms of a time frame for... I mean just in terms of annual volumes for acquiring development?

Unidentified Company Representative

Well, let me introduce Mark Toothacre and he'll take that.

Mark D. Toothacre - President, Pacific Medical Buildings

Good morning everybody. We've been doing in the neighborhood of $150 million to $200 million per year on a cost basis in development over the last several years, and we would expect that level of activity to continue. That equates to somewhere between 3 and 6 or 7 projects a year depending on project size.

Kristin Brown - Deutsche Bank

Okay. And then my last question is just on the guidance, what G&A run rate does that assume?

Unidentified Company Representative

The fourth quarter G&A amount is a pretty good proxy for what the run rate is somewhere right in the neighborhood.

Kristin Brown - Deutsche Bank

Okay. Great. Thank you.

Unidentified Company Representative

Thank you.

Operator

Your next question comes from Dustin Pizzo.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning.

Dustin Pizzo - Banc of America Securities

Good morning. I guess just before digging into MOB deal a bit more, can you talk a little bit about what's happening in the CCRC portfolio. Looks like occupancy fell a little bit there sequentially and the coverage is also down about 10% or so?

Douglas M. Pasquale - President and Chief Executive Officer

Brent?

Brent Chappell - Vice President Portfolio Management

Yeah. In terms of one of the CCRCs... one of the facilities in Oklahoma is being repositioned, and that comprises a large piece of... for the declining occupancy there. That's going to be taken care of the next year or so.

Dustin Pizzo - Banc of America Securities

Okay.

Unidentified Company Representative

I think few CCRCs that we are on, if one is hiccup you can see it. So...

Dustin Pizzo - Banc of America Securities

Sure. All right. And then looking at the transaction, I mean what do you guys think just more anecdotally it's going to do to the internal growth profile for NHP?

Douglas M. Pasquale - President and Chief Executive Officer

Well, one of things it is going to do for us is we have solid reason based on what Mark just told you is their track record of developments on an annual basis, but we have predictable growth from our MOB portfolio with them on the new development front. So that's exiting and good. It also gives us as we mentioned, real stability in cash flow which is a good thing and actually I think that as PMB and NHP have a chance to visit some of the hospital assistants and talk to them and give them the comfort of what we can do together as a team. I wouldn't be surprised frankly if we might not even be able to increase and improve on the development they've been able to do in recent years. So I think that gives us all kinds of opportunity and certainly now I think we will see even more medical office buildings as this certainly puts NHP on the medical office building map and we've had good success in seeing most transactions, but I think we will see even more opportunities across the ! country because of this transaction.

Dustin Pizzo - Banc of America Securities

Okay. And then on acquisition, the five acquisitions in '09 and '10, are you locked into the pricing there already?

Unidentified Company Representative

There is a mechanism to adjust the cap rate based on a BBB index bond pricing.

Douglas M. Pasquale - President and Chief Executive Officer

So cost to cap will change then. It's possible that depending on how much it changes that the cap rates that we have agreed to would be modified based on the changes in the cost of capital.

Dustin Pizzo - Banc of America Securities

Okay. And is that… I mean is that a one-to-one move or is it some sort of long formula that would take away too much time to get into here?

Unidentified Company Representative

There is a formula, but basically there is a floor before it goes into effect and after that it's basis point for basis point up to a certain level of cap and after that we came back off the deal if we don't like it.

Dustin Pizzo - Banc of America Securities

Okay. And then I guess on the development assets just a similar question. Is there... I guess, how is the pricing determined up on stabilization when you look to potentially acquire those assets?

Unidentified Company Representative

The mechanism is at the time we are ready to break ground and we agree that this is a qualified project we want to pursue. That's when the fair market value cap rate is agreed to and that is when the development costs are agreed to. We assume the risk if that fair market value cap rate is different at the time we take out. They assume the risk if the development costs are different at the time the project is completed.

Unidentified Company Representative

Or benefit.

Unidentified Company Representative

Or benefit.

Dustin Pizzo - Banc of America Securities

Sure.

Unidentified Company Representative

Whichever way it goes.

Dustin Pizzo - Banc of America Securities

Okay. Thanks, guys.

Douglas M. Pasquale - President and Chief Executive Officer

You are welcome.

Operator

Your next question comes from Michael Mueller.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning.

Michael Mueller - JP Morgan

Let me go back to a prior question now and try to ask it in a different way. The core growth of the portfolio if you exclude the developments that you are looking at and the development benefits, can you talk about just the internal growth, I guess the track record for this portfolio, what your expectations are going forward and then compare that to what your current portfolio produces on a year-to-year basis?

Douglas M. Pasquale - President and Chief Executive Officer

As you can tell by the occupancy the portfolio is pretty well leased up today and of course we hope we can improve on that a bit. Medical Office Buildings typically don't show dramatic changes in leased rates when leases renew and then our supplemental information we show a schedule of the turnover of leases so that you can look at that to give you some guidance as to the opportunities from lease terms. But this is a relationship-driven business, and it's again why it's so important to team up with somebody like PMB because we want to make sure that we're doing things in sync with both market competitive positions and what things are acceptable to the hospitals because they've to deal with the physicians on a going forward basis. So typically, you are going to see increases when leases rolls somewhere around inflation rate, not nearly as dramatic or as volatile as you would see in regular office buildings. So, because of that you would say that it should be relatively consi! stent with the lease escalations that we have in our triple net lease portfolio, which is around 2.5% to 3%.

Mark D. Toothacre - President, Pacific Medical Buildings

This is Mark Toothacre. Our growth rates generally track with inflation. We have CPI adjustments in virtually all of our leases. When our leases roll we had typically at very high retention rate and the renal rates tend to just trend upwards along with CPI. There is one element of our revenue stream that has been becoming more prominently and that is parking revenue, we still think we can grow that revenue stream a little bit faster than general inflation rate and some key parking at hospital and medical office buildings sort of a new animal out here in California, we’re starting at low rates, so you are working up a low base and you usually increase those by discrete increments with deep inflation.

Michael Mueller - JP Morgan

Okay

Douglas M. Pasquale - President and Chief Executive Officer

Southern California has lot of cars, so...

Michael Mueller - JP Morgan

For the $485 million of properties to be acquired in '08, can you... I may have missed this, but, can you talk about what the timing of that is and how it will filter in throughout the year?

Douglas M. Pasquale - President and Chief Executive Officer

Yes, we hope to close about $230 million in April, $135 million in May, June, and then about $120 million in November, December.

Michael Mueller - JP Morgan

Okay. And then last question. For the $475 million development or the pipeline where you have developed $475 million in there right now. When are the expected stabilization dates of that, is it '09, 2010? And then of that initial slug that's already in the pipeline, how much of that do you realistically see yourself buying or being interested in at this point?

Douglas M. Pasquale - President and Chief Executive Officer

I think, the answer to your first question, if you're talking about the group of properties that are closing in 2009, 2010?

Michael Mueller - JP Morgan

No, I was talking about the pipeline, when you talk about the additional $1 billion.

Douglas M. Pasquale - President and Chief Executive Officer

The $1 billion pipeline, okay?

Michael Mueller - JP Morgan

Yes.

Douglas M. Pasquale - President and Chief Executive Officer

Right now, based on what we've seen, we'll be interested in all of those that they have in their pipeline.

Michael Mueller - JP Morgan

Okay. And what's the timing on that because you've already identified some projects that are '09 and 2010?

Douglas M. Pasquale - President and Chief Executive Officer

That's why I wanted to clarify. Those '09 and 2010 are buildings that are already being constructed as we speak, and those are the times that we expected those to be stabilized. Those projects are not part of the $1 billion.

Michael Mueller - JP Morgan

Okay, so this...

Douglas M. Pasquale - President and Chief Executive Officer

Those $1 billion is on top of that and I'll let Mark speak to what he thinks the timeline for those will be.

Mark D. Toothacre - President, Pacific Medical Buildings

The first project in our pipeline is breaking ground in March of this year, and then we would have ground-breaking every say four or six months after that is kind of based on our historical deal flow.

Michael Mueller - JP Morgan

Okay. Okay. Thank you.

Douglas M. Pasquale - President and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Jerry Doctrow.

Jerry L. Doctrow - Stifel Nicolaus

Hi, a lot of this has been covered, but just to start to follow-up on that market and so what's your typical development lease-up schedule if you're starting one in March when might that actually be purchased by NHP, what's kind of that theoretical time line?

Mark D. Toothacre - President, Pacific Medical Buildings

That one is actually a single tenant project so... and it has a construction period that is roughly a year so it could be purchased as soon as say this time next year.

Jerry L. Doctrow - Stifel Nicolaus

March '09, yes. And the other stuff would be obviously 4 months to 6 months, after that you're getting into sort of mid-late '09 maybe and starting into '10?

Mark D. Toothacre - President, Pacific Medical Buildings

The typical multi-tenant medical office buildings has schedules sort of like this, a year construction and then typically between 12 months and maybe 24 months to [inaudible] and it goes a little bit slower to maybe 36 months, but I would say the average would be from the time point that we started construction to delivery somewhere between 24 months and 36 months.

Douglas M. Pasquale - President and Chief Executive Officer

And Jerry, in markets if you don't mind just speak a little bit about that concept and process you go through in terms of pre-leasing. Jerry [inaudible] your time.

Unidentified Company Representative

We typically... the demand profile for medical office building is pretty well known since we're doing mostly on-campus medical office buildings we're able to identify the level of demand by surveying the hospitals medical staff and any other specific targets that they may have identified that they're not medical staff. So in terms of... if we do our homework properly on our feasibility study it is hard to miss size these buildings but they're usually opened at a very high occupancy somewhere between 75, maybe at the low-end and upwards towards 90 at the high-end and fill up over fairly short period of time because of the fact that we're usually pretty confident going in what the market is going to yield in terms of occupancy.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And just wanted to more than I have, I think... Don I think you had sort of touched on this but just want to clarify so that the 8% cap rate on buying these is upon stabilization but that cap rate really again is not fixed at 8% it really is set again I know it's by formula or whatever and you would lock in for each building like this, building it open to March or you're supposed to break ground on in March, you would lock in the cap rate on that particular property in March to take it out two years later, is that what I understood you say?

Donald D. Bradley - Senior Vice President, Chief Investment Officer

That is correct, Jerry. The process is really... the 8% was just an example that we gave maybe it wasn’t clear as it should have been but process is once we're ready to break ground, PMB and us will agree to what fair market value cap rate ought to be and what the constructions cost will be. From that point forward we're both locked in what we've signed up for and we've either benefit or don't benefit from what the final takeout price is.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And if you're doing it today, is like 8% sort of, about where you think the fair market cap rate would be, is that kind of what you used in your example?

Donald D. Bradley - Senior Vice President, Chief Investment Officer

That would be what we think the development yields would be.

Jerry L. Doctrow - Stifel Nicolaus

Okay.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

I think that's what Mark would say it’s around 8%.

Mark D. Toothacre - President, Pacific Medical Buildings

Yeah and we're trying to push those up a little bit as we speak because I think cap rates are moving a little bit. We target a threshold of at least a 200 basis point spread between our development yields and what we feel cap rates are and that 200 points that we and NHP will apply that going forward on deals.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

In the cap rate Jerry, just in terms of what kind of building we’re talking about, if we’re talking about another building like we have going up in Orange or in Arlington, that's going to be a very low cap rate unless the market changes.

Jerry L. Doctrow - Stifel Nicolaus

Okay.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

Talking about a building in maybe Nevada, it is going to be a different cap rate.

Jerry L. Doctrow - Stifel Nicolaus

Okay. So, if your cap rate maybe was 7, you're adding your 200 basis points with BNI [ph] and then NHP and PMB are kind of splitting the differences? Is that kind of...

Donald D. Bradley - Senior Vice President, Chief Investment Officer

That’s the kind of way.

Jerry L. Doctrow - Stifel Nicolaus

Okay.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

We split the difference up to... there is a formula there. We basically split the difference up to the first 150 basis points and then it is a little bit lower percentage of the next 150 basis points, but in effect that's the concept.

Jerry L. Doctrow - Stifel Nicolaus

Okay. That's helpful. I just want to turn a little bit to the financing side of this if I could. On the OPM units I guess there is the initial $100 million or so that you are paying out and there is a collar on those, is there a lock-up period for that stock or could we see it being sold tomorrow theoretically?

Douglas M. Pasquale - President and Chief Executive Officer

There is a one-year lock-up period, Jerry. So, they can start converting the units into stock a year after it is issued.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

One point... sorry to interrupt, but one point on that, there are two different kinds of situations where OPMs will be issued, one is on these first group of properties that we are talking about and then that second is in connection with the development takeouts. The PMB folks have agreed to take 5% of the value of the development in the form of OP units that are restricted for 10 years. So those have a different element to them.

Douglas M. Pasquale - President and Chief Executive Officer

And I think for the most part, the significant PMB principles are looking at tax deferrals and it is one of their primary objective so their intent, I think in many cases is to hold OP units well, well into the future.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And similarly, do you have restrictions on your ability to sell, resell these properties to avoid the tax bit?

Douglas M. Pasquale - President and Chief Executive Officer

We do indeed.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And then, if we just start looking out a little bit further, Doug, do you ever, again I think you said that your... the actual cost of or the cap rate on buying the '09, '10 stuff will indeed vary with market, I think tied to the BBB index and stuff, but financing is not in place for that, do you just have a sense? I guess if you can talk about acquisition environment outside PMB for this year and what I am really trying to get at is the potential need for equity, whether you keep using the what I call continuous equity issuance or whether you would have a need for equity, can you just kind of roll through what you got left in your line and kind of how much you could do before you'd have to come back to the equity market?

Douglas M. Pasquale - President and Chief Executive Officer

Actually, our history is I think starting to become apparent, Jerry. We have taken opportunities to issue shares through the continues equity program for a variety of reasons. At times when we think that it’s a good opportunity to deleverage possibly which we did in anticipation of the PMB transaction, which allowed us because we knew that there was some secured debt that was very attractive that we wanted to assume and we could re-leverage back up to four historic standards. So, we're going to be opportunistic and issuing through the controlled equity program. Again, we think it is a very efficient, the most efficient way to issue equity and we've been successfully doing this now for at least a couple of years. The development pipeline, which Don can speak to, or I should say the acquisition pipeline is really not as strong right now as we've seen it in the last couple of years. We anticipated that it might slow down a bit just… that the market constipation where buyer! s and sellers are really trying to sort out where asset prices are going and so they are just not quite as much movement.

I think we spoke on our last call about the fact that in assisted living we expected there to be less inventory available for sale just because so much inventory are traded either to strategic buyers that wanted the assets for the longer term or financial buyers that frankly would have a difficult time flipping the assets that at a profit based on what's going on in the capital markets and the prices they paid. So we are seeing a little less activity there but frankly it changes on a dime sometimes and you can go from not feeling particularly terrific about what you see for the next six months and one or two deals will change that and all of a sudden you are right on top of things. So I guess flexibility in being nimble and opportunistic is really the key and it's why we have identified and put in place the joint venture, the controlled equity offering program and number of different capital sources selling assets strategically as we done with Brookdale and we will do short! ly with Emeritus to make sure we can match capital needs with investment opportunities.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

Jerry, I think that yet another reason and we pointed this out I think at [inaudible], but having MOBs now in our platform because there is a lot of diversification, would otherwise be a very difficult investment climate. We still are seeing plenty of opportunities in the medical office building sector whether it be triple-net lease type opportunities with higher yields or be something along the lines of high quality like the PMB folks have. So it is nice to have that when the other markets start quieting down or there is some... or the product that we are seeing is not something that's very attracting to us. And that is just a plus from this transaction from my perspective.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And last thing and then I'll jump off. Would you see any advantage to having sort of AL or IL operating platform all out through a taxable REIT sub, like Ventas has done, you have got something... you have got some pretty close affiliations with some operators now through existing investments but is that any advantage, I mean clearly you guys know the business?

Douglas M. Pasquale - President and Chief Executive Officer

I am sitting right across the table from Abdo and I think if anybody in our space can do, we can and I think we will at the appropriate time. We are... that's on our radar screen and at the appropriate time we will venture into that. We'd frankly like to see the legislation pass first and take that risk out of the element. I guess it can be structured around but we prefer not to take that incremental risk. So we are preparing ourselves for that opportunity and I think when we get to it we will be terrific at it because again we have done that business and it is not just Abdo and I, it's most of our senior investment officers. Now that we know it from the inside out. So at some point in time I think you'll hear us talking about that but it is not imminent.

Jerry L. Doctrow - Stifel Nicolaus

And anything happening on the legislative front and then I will jump on that stuff, are we still just waiting for tax bill?

Douglas M. Pasquale - President and Chief Executive Officer

That is primarily it. That's one of the things we are looking at it and the right opportunities. There are some disadvantages to it and so we need to think carefully too. We want to find a way to do it that creates value for our shareholders and also a way that we can produce values for our customers. So we don't want our customers feeling like we are in direct competition with them. So there is some things that we need to give some thoughtful consideration too. But, I'm confident that we'll find a way to do that.

Jerry L. Doctrow - Stifel Nicolaus

Okay. Thanks a lot.

Douglas M. Pasquale - President and Chief Executive Officer

You're very welcome.

Operator

Your next question comes from Rob Mains.

Robert Mains - Morgan Keegan

Hey, Good morning or afternoon, I'm here on the East Coast. I just want to make sure I understand the guidance probably given what you had in the guidance for straight-line rents, do I surmise that these leases are largely triple-net?

Douglas M. Pasquale - President and Chief Executive Officer

I'm sorry which leases you're talking about?

Robert Mains - Morgan Keegan

For the new ones that are coming out with the PMB.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

They have some triple net but also there is CPI increases you have to straight line with that too.

Robert Mains - Morgan Keegan

Okay. But it’s not by operating type leases?

Donald D. Bradley - Senior Vice President, Chief Investment Officer

They are operating, most of them are operating type where if that on a triple-net basis, the tenant is build for that like our triple-net leases for assisted living and skilled nursing, the tenant takes care of all cost, they pay them directly. In the medical office building, the triple-net lease in most cases if the landlord pays for the cost and then builds back the tenant.

Robert Mains - Morgan Keegan

Okay. Let me ask it differently. Which line on the, which revenue line will the rents fall on to them?

Douglas M. Pasquale - President and Chief Executive Officer

That's… we have an MOB revenue line on our income statement and that's where the PMB revenue will show.

Robert Mains - Morgan Keegan

Okay, but that will revenue will include a straight-line component.

Douglas M. Pasquale - President and Chief Executive Officer

That is correct.

Robert Mains - Morgan Keegan

Okay. If you describe these assets are having high barriers to entry. I know that California is not a CON state so what barriers you are speaking of?

Douglas M. Pasquale - President and Chief Executive Officer

We're really talking about the cities that we're in a lot of places like Verbank and Pasadena, Mission Viejo, where there is just not much land available, we're also on [inaudible]. So, once you connected with the hospital systems, really to PNB's great credit. They’ve just done a fabulous stuff, 12 really terrific hospitals systems. And so, these hospital systems are not going to be doing business or other developments with people on their campus. So, it's not a monopoly, it's in a pretty good… darn position to be in.

Robert Mains - Morgan Keegan

Got you.

Douglas M. Pasquale - President and Chief Executive Officer

That's just [inaudible] have very difficult regulatory processes to go through in terms of getting new projects approved. So even if they are with the competing sites or whatever the process of getting a building approved and up and running is very difficult.

Robert Mains - Morgan Keegan

Okay. And then last question, speaking just of the California properties, are they all compliant with the seismic regulations?

Douglas M. Pasquale - President and Chief Executive Officer

Introduce Bob Rosenthal, who is the founder of Pacific Medical Buildings, do you want to answer that?

Robert A. Rosenthal - Executive Chairman, Pacific Medical Buildings

The codes, the doming codes in California and most of the web change every three years as new codes are revised every three years. So, that's virtually impossible to say that an existing building is totally compliant with the latest code. All other buildings were built in compliance with the code at the times they were constructed and because they are relatively new portfolio, they tend to be a lot closer to the current codes than an older building would, but I think the answer is no, [inaudible] absolutely current.

Douglas M. Pasquale - President and Chief Executive Officer

The great majority of our buildings were constructed after the Northridge earthquake that caused an upgrading of the seismic code.

Unidentified Company Representative

And the seismic requirements for MOB are a little different than...

Douglas M. Pasquale - President and Chief Executive Officer

They are quite different than a hospital.

Robert Mains - Morgan Keegan

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

So, that really isn't a major issue among the medical office building, generally.

Robert Mains - Morgan Keegan

Okay. That's very helpful. Thanks a lot.

Douglas M. Pasquale - President and Chief Executive Officer

Rob is an architect by background and a real icon in the architectural and medical office building circles and we are excited meet him and Mark and the rest of the team.

Robert Mains - Morgan Keegan

Sounds good.

Operator

Your next question comes from Karin Ford.

Karin A. Ford - KeyBanc Capital Markets

Hi good morning. First just a point of clarification, did you see that in the '09 and 2010 closings that 5% of the purchase price will be OP units?

Unidentified Company Representative

The 5% I was referring to would be on the development pipeline.

Karin A. Ford - KeyBanc Capital Markets

The billion dollars.

Unidentified Company Representative

That's the billion dollars.

Karin A. Ford - KeyBanc Capital Markets

Okay.

Unidentified Company Representative

The OP units are, how much they take an OP units, those I don't know the number.

Douglas M. Pasquale - President and Chief Executive Officer

We have at least a 40% of that equity, a minimum of 40%.

Karin A. Ford - KeyBanc Capital Markets

Okay. Does... I assume that prop 13 applies here and if so what tax increases have you guys assumed on the transfer of the properties.

Douglas M. Pasquale - President and Chief Executive Officer

We have assumed... we had estimates done and we have assumed full tax increase as based on the prop 13 and we have… some of this will be passed through to the tenant and others, will be… were taken in to account in the NOI and also PMB would like to have a portion of it passed through over a period of 2 to 3 years to make it easier on the tenants and they will be a covering us for the difference.

Karin A. Ford - KeyBanc Capital Markets

Okay. What is the income that the management company generates currently from third parties?

Douglas M. Pasquale - President and Chief Executive Officer

That's very little.

Karin A. Ford - KeyBanc Capital Markets

Okay. And is that expected to remain that way going forward?

Douglas M. Pasquale - President and Chief Executive Officer

There is a little bit of third party income associated with hospitals where we own building and often times they will ask us to run building that’s why the reason they still own and those buildings actually are probably an opportunity for acquisition as we go forward with the NHP.

Unidentified Company Representative

There is an other aspect of property management. It is very susceptible to scale that you need a certain amount of staff to run even one or two buildings. But as the amount, as the number of buildings and the square footage increases, the efficiency gets greater and greater. So when the buildings that are under construction right now are completed, we are projecting a profit and which will continue forward.

Douglas M. Pasquale - President and Chief Executive Officer

And Karin from NHP's perspective, we will review that all that profit that comes in as pure gravy. Again the main benefit we've seen from the property management side is maintaining those relationships in growing other relationships with the healthcare systems.

Karin A. Ford - KeyBanc Capital Markets

Okay. Finally, is there any mark-to-market adjustment on the debt that you guys are assuming and what is the term on the debt you are assuming?

Unidentified Company Representative

We taken a look at the individual rates on the various buildings and then the debt that we will be assuming and those rates all fall pretty much right within what would be a fair market value range, so we actually get the closing on various buildings that has specific rates, we'll take an even closer look at that. But at this point, we anticipate either very small mark-to-market or no mark-to-market as these buildings close.

Karin A. Ford - KeyBanc Capital Markets

And do you know what the average term remaining is on the debt?

Unidentified Company Representative

I think we have that front of us, and it again varies based on different building delivery and closing times.

Karin A. Ford - KeyBanc Capital Markets

Okay. Thanks, very much.

Douglas M. Pasquale - President and Chief Executive Officer

Welcome.

Operator

Your next question comes from Omotayo Okusanya.

Omotayo Okusanya - UBS Securities LLC

Good afternoon everyone. Just one quick clarification, Don, when you break ground on the building and you do… do your negotiations to decide what the...you expect in regards to the cap rates. At that point, are you locked into buying that particular asset or can you can still walk away?

Douglas M. Pasquale - President and Chief Executive Officer

No. Well, that point, if we said we are proceeding, we are proceeding. Now they have to be... deliver building that has significant occupancy, what we do is give a take out commitment to a bank, we don't advance fund anything. So once they've got this difficult occupancy and the bank can exercise and take out then, we would be required to buy. That’s the TAC rate [ph] we agreed to.

Omotayo Okusanya - UBS Securities LLC

So can you end up in a situation where once the building is completed and you're ready to acquire it down the line that your cost of financing is higher than the cap rate that you agreed to?

Douglas M. Pasquale - President and Chief Executive Officer

I guess it's possible, we would hopefully; if we saw that kind of market presented to itself either advance fund we'll be hedging our finance requirements.

Omotayo Okusanya - UBS Securities LLC

Okay. All right. That's helpful. Second question, in regards to the actual portfolio trying to look for... you guys have historically been very good at... looking at your portfolios and particularly on opportunities for upside. It sounds like with this portfolio, you know, yes you have a nice development pipeline in front of you, but it sounds like most of the portfolio [inaudible] that increase by CPI every single year, the management company that was the 50% stake you have in that, they are not doing a lot of third-party management and they don't expect to in the near term, and the portfolio itself is fairly stabilized at least to '08 acquisitions that you'll made in about 94% occupancy. So just based on that where do you guys kind of see potential upside that could drive your yields higher versus where you initially purchased the portfolio?

Unidentified Company Representative

I think clearly the place for... there is potential for the upside on the development pipeline.

Omotayo Okusanya - UBS Securities LLC

Okay.

Unidentified Company Representative

I mean...if we're able to execute that correctly, it gives us the opportunity to get yields that we could not get in the open market.

Omotayo Okusanya - UBS Securities LLC

Okay. So that's really where most of the value is...

Unidentified Company Representative

That's where we conservatively believe most of the value will be. And has Doug had pointed out earlier, this is just a little bit different business than office buildings, and that's good and bad. The bad is when times are rocking and rolling it is very hard to flow through 6%, 7%, 8% rent increases because you damaged the relationships that you've taken so long to nurture and you put yourself in a very difficult position going forward yet additional business. Then again when things are really rough and people are going backwards in office buildings you're still seeing cost of living increases on this side.

So, it's a stable return, it's not the dramatic, excitingly termed potential to it, where it's going to lead, at any particular point, but it's a pretty rock solid return.

Omotayo Okusanya - UBS Securities LLC

[inaudible] stability that you prefers to run it using this lease structure versus some other guys that own medical office buildings through more typical operating leases just beyond the office side?

Unidentified Company Representative

I think we are doing similar kinds of leases, it is just whether or not who your tenant is really, and in this case ultimately the person we're look into is the health care assistant and the health care assistant is monitoring what we are doing. They are going to do additional business with us what they view gauging their tenants that's going to effect our ability to grow.

Omotayo Okusanya - UBS Securities LLC

Okay.

Unidentified Company Representative

Mark has a point to add.

Mark D. Toothacre – President, Pacific Medical Buildings

I have one point add is that there has been a recent spike in construction costs and our buildings cost about double what they were to build just four or five years ago, and that has made the rental rate that is required for new projects has escalated quiet a bit. So the buildings that are being bought by NHP have rental rates that are below what would be required through replacement buildings, so that may leave some room for pressing the rental rates as leases roll over.

Douglas M. Pasquale - President and Chief Executive Officer

And also, it seems there is a confusion about triple net. These are operating leases they are not triple net leases in the nature that you are thinking. So they are operating leases the one they...the leases, there is an increase and as Mark said, there might be an opportunity there to increase trends more than just a CPI.

Omotayo Okusanya - UBS Securities LLC

Okay.

Mark D. Toothacre – President, Pacific Medical Buildings

And the parking revenue that we mentioned before, there is some real opportunities there but as Don said I mean it just really aren't different than regular office buildings and I think Green Street did a piece that I thought was very useful where they showed that on a risk adjusted basis, you can make an argument that medical office buildings were systematically underpriced relative to regular office building just because the slow and study increases often like the tortoise and hare beat the wild and crazy up and down from regular office buildings and the consolidations and economic downturns and those type of things.

Douglas M. Pasquale - President and Chief Executive Officer

And Tayo, we are really just keeping to our theme of, we don't want to over promise and under deliver. This is more of the norm and if opportunities present themselves for us to do better than the norm, we certainly will take advantage of that.

Omotayo Okusanya - UBS Securities LLC

Okay, that’s good. Just one more question and I will drop off. Just in light of the future commitments you may have regarding the development pipeline of this deal and as well as buying the 2009, 2010 assets and as well as any debt maturing in '08 and '09. How do you think about your overall liquidity position, kind of abilities to do acquisitions outside of the MOB world?

Douglas M. Pasquale - President and Chief Executive Officer

Well. Our credit facility balance at the end of December only had $41 million on it, so we had almost $700 million available and with the sale of Americas will have covered all of 2008 acquisitions. And so for '09 and 2010, we will continue to use our various capital sources and in terms of the development pipeline, we do not have the obligation to acquire any of the buildings that PMB will be developing, so depending on what the markets are like at that time we could decide to pass on certain projects. So, we will manage our capital and liquidity as have we have done with all these… when we have transactions, we try to find a creative way of financing them. We have our JV with Pension Fund that's managed by... advised by Morgan Stanley, also still have about $500 million available under that.

Omotayo Okusanya - UBS Securities LLC

Great. Very helpful. Thank you.

Douglas M. Pasquale - President and Chief Executive Officer

Tayo, one other thing the development pipeline will be financed not... not by us as we did in the Gulf Coast or incurred in the…

Omotayo Okusanya - UBS Securities LLC

Right. Great. Thanks a lot.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Philip Martin.

Phil Martin - Cantor Fitzgerald

Good morning, everybody.

Douglas M. Pasquale - President and Chief Executive Officer

Good morning.

Phil Martin - Cantor Fitzgerald

Just wanted to touch on a couple of things. I can take care of a lot of these offline. But are there... does this relationship with PMB restrict you on any other deals with other medical office building developers, managers etcetera?

Douglas M. Pasquale - President and Chief Executive Officer

No. It does not except... we have in 10 states, we have an obligation to... exclusive for management purposes for the proxy management. Other than that, it does not... we still have a lot… to do business with any other medical office building developer.

Unidentified Company Representative

And in fact we closed some in the fourth quarter.

Phil Martin - Cantor Fitzgerald

Okay. Exactly. And I would think this might even help to of you see other pipelines or portfolios that are under managed and you want to bring them under this umbrella, so to speak.

Douglas M. Pasquale - President and Chief Executive Officer

I think that's exactly right. I think of affiliating with PMB and their known quality in this industry is only going to help in that regard.

Phil Martin - Cantor Fitzgerald

Okay. Now in terms of PMB's pre-leasing requirements before development get started. Are they typically pre-leased by a fair amount before these developments get off the ground and if so how much, what are their requirements?

Douglas M. Pasquale - President and Chief Executive Officer

I can touch it on a little bit. Before, we do a feasibility study for every building before we start construction, which we survey entire medical staff, which gives us a pretty good feel for the amount of demand and then we do get signed pre-leases depending on our view of depth in the market anywhere between... I think the price is 50% and to very low end and sometimes upwards 70% to 80% at the high-end before we start construction.

Phil Martin - Cantor Fitzgerald

Okay. So there is a fair amount of risk taken out of this before even development occurs.

Douglas M. Pasquale - President and Chief Executive Officer

We are looking for two things. One. We want to see just underlying demand and also we want to see acceptance of rental rates as well. So we... that's been a home market where we stop these things over the years.

Phil Martin - Cantor Fitzgerald

Okay. Doug is there any interests or capability on PMB's part to do anything development wise in senior living or long-term care or property managed there, making this... kind of a complimentary relationship for the two of you?

Douglas M. Pasquale - President and Chief Executive Officer

I think that, that's a possibility and we've talked a little bit about that, but it's only been very conceptual at this point. But as we explore opportunities or development in that area and our relationship grows, I think that does something it will evolve into at least more detailed conceptual discussions and I'm hopeful that it can blossom into some real activity as well.

Phil Martin - Cantor Fitzgerald

Okay. Because I… certainly your pension dovetail always look kind of 5 years down the road and see how these relationships and businesses is going to evolve that might be an opportunity.

Douglas M. Pasquale - President and Chief Executive Officer

You pointed out some real nice possible synergies Phil.

Phil Martin - Cantor Fitzgerald

Yes. Lastly here. In terms of... Don this is probably a good question for you. The size of your investment pipeline, obviously now... the last couple of years you have worked very, very hard to put a very good relationships in place here, that have some good investment pipelines going forward. So, if we get a… pipeline here with PMB but in addition to this, what is your aggregate kind of a potential investment pipeline, in the next two years to three years, now that you have a several of these relationships on the long-term care senior living side as well as the medical office building sides?

Donald D. Bradley - Senior Vice President, Chief Investment Officer

You tried to catch me at sleep Philip.

Phil Martin - Cantor Fitzgerald

That's right. No not at all.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

You know, we don't give acquisition guidance. So I can't really talk about that, what I can talk...

Phil Martin - Cantor Fitzgerald

And I'm not looking for guidance really, but you've obviously got some... what I'm looking for here is... I mean there is a pretty stable growth... there's a good platform for potential future growth here and I'm just trying to gauge, not really looking for a guidance, as much as I am that there is a lot of kind of built-in growth with these existing relationships.

Donald D. Bradley - Senior Vice President, Chief Investment Officer

We certainly feel that way and... set them up that way and this is… the one with PMB is another example of exactly that, which mean, when we're trying to correlate these relationships, it's not a one-off it's supposed to be an ongoing situation where we are both benefiting going forward and we have several of those in place and we certainly expect to benefit from those.

Phil Martin - Cantor Fitzgerald

Okay. And actually my last question here was. On the new development properties, with PMB here over the next couple of years, are these all on different campuses than the ones you're kind of acquiring... in three years or four years are you going to have two to three medical office buildings within the same healthcare system or on the same hospital campus?

Donald D. Bradley - Senior Vice President, Chief Investment Officer

Many of these are repeat deals from existing clients, sometimes at different campuses, then we also are invited to respond to RFP's... for we think virtually every hospital that issue an RFP for a new development project, we usually see it and we will compete for those, we tend to win our fair share of those in our market area.

Phil Martin - Cantor Fitzgerald

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

Two buildings in the pipelines are on campuses where we have other buildings.

Phil Martin - Cantor Fitzgerald

Okay. So...okay.

Douglas M. Pasquale - President and Chief Executive Officer

That happens.

Phil Martin - Cantor Fitzgerald

Okay. That's... thank you for the answers, and thank you for all… that supplemental, which you guys had published that in hardcopy now and put it on new stands... that. Okay. Thank you, very much.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Rich Anderson.

Rich Anderson - BMO Capital Markets

Hi, good morning to you guys.

Douglas M. Pasquale - President and Chief Executive Officer

Hi, Rich.

Rich Anderson - BMO Capital Markets

Just a few questions here. First, quickly, the share count, will you… you publish your fully diluted share including the units that you're issuing with these acquisitions even before they converted, is that correct?

Douglas M. Pasquale - President and Chief Executive Officer

That is correct.

Rich Anderson - BMO Capital Markets

Okay. I just wanted to make sure that. And just to ask a question outside of PMB for a moment. The purchase options and the debt prepayment, the leakage so to speak is higher this year than it was last year. It is my impression that, that was starting to wind down, yet know it's going back up. What's happening there? And what's the future hold for that leakage.

Douglas M. Pasquale - President and Chief Executive Officer

I will let Brent answered that just a second. But one thing that [inaudible]. When we acquired the HR portfolio in 2007, some of those loans, we knew, we are going to bleed off in early to mid 2008.

Rich Anderson - BMO Capital Markets

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

But there we had good yields to them and so we thought we may as well pick up the cash for our shareholders then but we knew that and so that, at least part of [inaudible].

Brent Chappell - Vice President Portfolio Management

No, that’s a good portion of it, the balance is… good portion of the balance, the stuff we've rolled over from last year. We did some short-term extensions on some things, restructured some other loan. So, part of what you see in 2008, this is the timing mechanism for 2007.

Rich Anderson - BMO Capital Markets

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

Another thing Rich, is what we really emphasize the stuff that pretty much gone away with the margin purchase auctions, where we are weren't getting fair market value that we can reinvest. That's pretty much gone.

Rich Anderson - BMO Capital Markets

Okay, I understood. I want to get back to the straight line rent topic and also the recurring CapEx element, with your new FAD guidance, your straight line rent from 2007 was $0.03 so it seems from your disclosure and now is $0.11. And your CapEx is also $0.03 by my calculation, now is at $0.06 based on your FAD guidance. So, my question is where are those items coming from? Are they coming from this merger or this acquisition or the PMB acquisition, or is it coming from some place else and before you answer, if the leases are generally structured with the CPI based increment, I would think that you can't straight line that and yet you said that there is straight line rent. So, anyway long question. Okay, short answer.

Douglas M. Pasquale - President and Chief Executive Officer

Yeah. The straight line rent some of it is coming from this portfolio but not the majority. We have been... we have a policy, as you know last year lot of the REIT's started to… healthcare REIT's started to straight line the rent on the triple net leases and we have a policy that we do that to and we reserve the big chunk of it based on various criteria’s that we use. And some of our tenants has improved in coverage or other areas of network or others there where we're starting to recognize more of the straight line rent on those leases. So, that's where it's coming.

Rich Anderson - BMO Capital Markets

Okay, that's from the triple net category?

Douglas M. Pasquale - President and Chief Executive Officer

That is correct.

Rich Anderson - BMO Capital Markets

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

As to the lease commissions and tenant improvement, obviously, this transaction will add though not a lot, but as you know we've closed quite a bit of medical office buildings in 2007 and that's what you're seeing also the increase coming from in 2008.

Rich Anderson - BMO Capital Markets

Okay, so, when you look at this transaction on not a NOI cap rate basis, but an economic cap rate basis. It would still be accretive to you?

Douglas M. Pasquale - President and Chief Executive Officer

It's… in '08, I believe it is neutral.

Rich Anderson - BMO Capital Markets

Okay.

Douglas M. Pasquale - President and Chief Executive Officer

So, if you take... we said it's a $0.01 to $0.02 accretive on an FFO basis. So, you would be [inaudible] and leasing commissions are about $0.01 to $0.02 impact.

Rich Anderson - BMO Capital Markets

Okay. Question for Mark. Can you talk just really quickly about the inclusion of other potential bidders besides NHP or was this just an exclusive deal with you guys?

Mark D. Toothacre – President, Pacific Medical Buildings

No we did a fairly extensive process, and we I think fairly quickly decided that we wanted to be with a healthcare REIT just the cultural fit we like to... we have good relationships with our clients and we need a long-term player and then just a cultural fit with the NHP guys was very good and so they were the clear choice.

Rich Anderson - BMO Capital Markets

Did you talk to any other REIT's?

Mark D. Toothacre – President, Pacific Medical Buildings

Yes we did.

Rich Anderson - BMO Capital Markets

Okay. And then last question, any issue with any of the hospital systems that you deal with in terms of the auction rate securities, [inaudible] issue in the market these days?

Mark D. Toothacre – President, Pacific Medical Buildings

I haven't share of any with any of our hospital systems I have a former CFO who's at a new hospital call me with a question about monetizing his MOV's because of that issue, but that's the only thing I've heard of.

Rich Anderson - BMO Capital Markets

Very good. All right thank you.

Mark D. Toothacre – President, Pacific Medical Buildings

Thank you.

Operator

Your next question comes from Jim Sullivan.

Jim Sullivan - Green Street Advisors

Thanks. Doug thanks for the Green Street plug.

Douglas M. Pasquale - President and Chief Executive Officer

Really it's terrific, I hope to guide you right on all that stuff Jim.

Jim Sullivan - Green Street Advisors

We got lot writing now. Question, the topics has being touched on a number of times but I'm still confused, as to who the tenants are in this portfolio, is it typically the hospital systems and then subleased space for the docs or, are your relationships and most importantly you're leases directly with the doctors and the practices etcetera?

Douglas M. Pasquale - President and Chief Executive Officer

The leases are… our typical building has between 20% and 35% occupancy typically by the hospital or hospital affiliates or outpatient services, such things as ASC's, imaging centers, cancer centers, [inaudible] centers that sort of thing, so that portion of the buildings can have a credit element to them and then in addition to that is direct leases with doctors and group practices.

Jim Sullivan - Green Street Advisors

Given that I am surprised your lease turnover isn't more robust over the next few years how long are the leases that you typically sign with the 75% you just referred to?

Douglas M. Pasquale - President and Chief Executive Officer

With regard to the outpatient spaces, we always get north of 10 years, usually 15 years or 20 and then on the multi-tenant position spaces, we try to hit an average of 7 years to 8 years, but we mix them out and the portfolio is fairly new so that the turnover in the near term is fairly low.

Jim Sullivan - Green Street Advisors

Okay. And then with respect to the seller strategy here, it sounds like cashing out albeit on a tax efficient basis for the OP units, cashing out in working months was important motivation. What assurances does NHP have contractually or otherwise that the people who are needed to do all this development are actually going to stick around and do the development?

Douglas M. Pasquale - President and Chief Executive Officer

Well, I'll address a couple of elements of your question, from a cashing out perspective the principles are going to be taking somewhere in the neighborhood of 60% to 80% OP units. So we want to stay involved with our buildings, we think it is an important element, the story to out client that this is a contribution of our properties to a, truly a partnership. From a working perspective, a bunch of our senior managers have got quite a bit of work life in front of us and I don't think we're going to be slowing down any. Although it will be nice to have this transaction behind us, so that we can start focusing on developing again.

Unidentified Company Representative

And I think another component of your question was what's going to keep them from jumping ship and going to another developer and we have a significant... the large... almost all of our senior management has substantial interest in the company, ownership interest in company and we have substantial profit sharing plan for other employees, but all of the senior employees are very much high into the ownership.

Douglas M. Pasquale - President and Chief Executive Officer

I think the average tenure of our top management is over ten years now. Our company-wide turnover is below 5% because we drive profit participation in the project all the way down to most levels of the company and senior management has significant ownership positions in... to these buildings.

Mark D. Toothacre – President, Pacific Medical Buildings

And even Dr. Jeffrey Rush, who is the… been the financial principle, I think find us as with the closing of the first tranch, a major piece in 2008, we expect that he will be asked to join our Board and at some point in time others may be asked as well. So, we have a lot of connections here in tie and we are really giving careful thought how to make sure we have complete alignment of interest.

Jim Sullivan - Green Street Advisors

Okay. And then my final question has to do with ground leases. Ground leases coming in all sorts of the shapes and sizes, are these many ground leases pretty traditional in terms of the kind of ground rent payment increases you might see in the future or there are any unusual features here that might impact the economics for many?

Douglas M. Pasquale - President and Chief Executive Officer

Yeah, lot of these have zero ground rent on a go-forward basis because we pay what we call a ground lease origination payment at the inception of lease and exchange work, not having any rental stream associated with the ground lease. Aside from that, we try to be very careful that there is not going to be a disconnect between rent levels and the underlying ground rent payments. We avoid market resets and that sort of thing. So we try to be very careful about making sure that the ground rent payments conform to the underlying revenue streams of the properties. From a restrictions point of view, typically our ground leases, since we are on the hospital campuses require us to lease to medical staff members [inaudible] of the hospital. There is some restrictions relative to competing services, but anything that is typically done in an outpatient physician office setting can be done on our buildings and then if we were in a religiously affiliated hospitals there will be reproduc! tive restrictions, basically no abortions.

Jim Sullivan - Green Street Advisors

Okay. Thank you.

Douglas M. Pasquale - President and Chief Executive Officer

Jim, we gave you a lot of information that are on page 12 of supplemental. We tried to give you some other information about the ground leases you can have a look at it as well.

Jim Sullivan - Green Street Advisors

Yes, that's what I was looking at. I was just curious if there are any resets or things of that nature that might impact your NOI growth going forward or the value of the assets.

Douglas M. Pasquale - President and Chief Executive Officer

Got it.

Jim Sullivan - Green Street Advisors

Thank you.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Jerry Doctrow.

Jerry L. Doctrow - Stifel Nicolaus

Going on, I appreciate the time. Just couple of real quick things. How much do you expect in your '08 guidance to be generating from your half interest in the management company?

Douglas M. Pasquale - President and Chief Executive Officer

Nothing. Zero.

Jerry L. Doctrow - Stifel Nicolaus

Okay. And then just... don't start requirements, basically require, you said rents in market so you've talked a couple of times about, not being able to push the rents but aren't you really mandated to set the rents at market rents, I mean too many background leases in hospitals and stuff?

Douglas M. Pasquale - President and Chief Executive Officer

Well, that is a underlying trend behind my inspiration [ph] of Health Systems' medical office building asset. And they are the owner, they are required to set rents in market. We are not subject to those restrictions and that's one of the reasons that one more hospitals are looking for third party ownership with medical office buildings that can take some of that potential conflict. But, we just have to look at what the market will bear with… keeping in mind that we don’t want to offend our hospital clients.

Jerry L. Doctrow - Stifel Nicolaus

Yes. Okay, thanks.

Unidentified Company Representative

And Jerry, don't misunderstand we want to get some market rents, we just don't want to take advantage of the situation and doubt somebody for short-term benefit and really step on a our…

Jerry L. Doctrow - Stifel Nicolaus

Right. And then you've got long term leases so the roll over and limit yourself. Okay, thanks.

Operator

Your next question comes from Chris Pike.

Chris Pike - Merrill Lynch

Hi guys. How are you doing?

Douglas M. Pasquale - President and Chief Executive Officer

Good.

Chris Pike - Merrill Lynch

I've got several follow-ups to maybe Don or Abdo together can call me after. But being that I have you on the phone Doug, I just wanted to talk to you about your position with respect to your strategy. I guess last time I met with you folks down in [inaudible] I was under the assumption that you're really fast and steady on the Triple-net lease play and you really want to take on that type of operating risk regardless of the legislation being through. So, is this an evolving and modestly changing posture regarding that business segment. And if so would have to become a little more comfortable with taking on that risk profile?

Douglas M. Pasquale - President and Chief Executive Officer

Well, it's hard to describe exactly. I guess Chris to what degree we may get into it. We do feel that, that has a place for NHP in its portfolio of investment opportunities and some of the questions have been really related to adding a supercharge your earnings a little bit. And that would be an opportunity to be an opportunity with acceptance of incremental risk you could increase your returns because effectively the coverage on our triple-net lease would revert us if we assume the operator position.

So, our view is that there is value creation opportunities there, we would approach it, if and when we decide that something we want to do and I think like we did with medical office buildings for example. When we decided that this was a space we wanted to become better acquainted with, we establish a research and development budget if you will, and entered into the joint venture with Broe Companies. And that started out as a $50 million thing, and look... now that's blossomed. I'm not suggesting that it will blossom like that on the operating side, but I can see situations where maybe we could go on a select basis and find under performing assets. If this economic downturn is severe and/or long in duration, there will be assets on operators to get themselves in trouble.

So, if we can pick up assets that we think are under managed or have some kind of problem that we could fix and who better in our space to do that than a bunch of guys that have done that for a living and turn the companies around. We were on the select basis to do to that and hopefully buying them at wholesale or some kind of distress price, improve them and then may be to a sale lease back with one of our customers. That's one possibility.

Another possibility is we might pickup a handful of assets in different locations and work it up to a portfolio of say 15 assets or something and again maybe market those to a good customer of ours and say hey, we've got a transaction here a group of assets that we might… you might find attractive that could solidify relationships with existing clients and be able to put us in a position to do business with clients that really would prefer to own the assets rather than to lease them, but the only way they can get to the assets on a lease basis. So we won't get into it big, it will be a slow methodical process. I see us earmarking some R&D for this, we'll test to see if they can work and if it works it will grow to bigger if it doesn't we'll abort it.

Chris Pike - Merrill Lynch

Okay, great. Catch up with you guys a little bit then.

Douglas M. Pasquale - President and Chief Executive Officer

Thanks

Unidentified Company Representative

Thanks Chris.

Operator

Your last question comes from Steve Sway [ph].

Douglas M. Pasquale - President and Chief Executive Officer

Steve, thank you for hanging in there with us.

Unidentified Analyst

Sorry to delay the call.

Douglas M. Pasquale - President and Chief Executive Officer

You should get some kind of award.

Unidentified Analyst

Obviously I will teach Mark to go with a public company I guess. Just a couple of questions since I did hang until the end. The timing of the various tranches of the closings. Is there any different in the cap rates with each grouping of assets they close or is it all pretty consistent with the 6.1%?

Douglas M. Pasquale - President and Chief Executive Officer

That is the difference, the cap rates of the ones closing in 2010 is lower at 5.8%.

Unidentified Analyst

Okay. And then Doug just sort of big picture question. Where is the medical office building platform or diversification concentration now versus kind of where you want it and to the extend that you've got significant ability to add to it over the next couple of years. Does that take it to a point that makes it larger than you would like it?

Douglas M. Pasquale - President and Chief Executive Officer

There is lot of elements to that... it's a terrific question. When we set out on this path, people started to ask where would you like to see the company five years from now and this was two years or three years ago and at that time we said, we thought we'd like to be somewhere in the neighborhood of 50% senior housing in the assist to living and independent living, primarily asset class. We thought we would try and work our way down to about 20% skilled nursing and do that, we still like that space, we do it on a select basis, get the newer assets where the quality mix was really good and we saw some opportunity.

There's some new generation skilled nursing that is I think you know we've been involved with, and we think they're terrific. And we've got some really nice relationships with some tenant operators that view that space similar to us, which puts us at around 30% for medical office building, so assuming that we didn't add yet another leg to the store at some point time and frankly we don't see that happening in the near future at all. So, we're kind of not too bad from where we said we wanted to be in five years, it's just we did it in two, two and a half years.

So that said, now having said that and in time some thoughts together from earlier and as Don mentioned, we're seeing more opportunities in medical office buildings today that are attracted just and we are in some of the other spaces. So that been our nature in the past, we're strategically opportunistic, and so if the best investment that we can make over the next couple of years as a medical office buildings on a risk adjusted basis. If that ran up, significantly even from 30% say to 40% to 45% even 50% of our portfolio. That wouldn't be frightening to me personally, because the opportunities will come again to make investments in assisted living and senior housing and that's where we'll focus our attention.

We do want to get ahead of the assisted living curve; we see some real opportunities there but probably on the development front more so than acquisitions. So, we're trying to figure out how may be to get involved in that. So, kind of 50%, 20%, 30% doesn't sound bad to us, as an overall thing. But, as that adjust from year-to-year we... frankly we don't care. Our job is to produce value for shareholders and you do that by making the right investments at the right time not being terribly concerned if you're a little higher or lower to what your model portfolio is in fact just to guess anyway.

Unidentified Analyst

Okay. Thanks.

Douglas M. Pasquale - President and Chief Executive Officer

You're very welcome.

Operator

At this time, there are no further questions.

Douglas M. Pasquale - President and Chief Executive Officer

Thank you very much.

Operator

This concludes today conference, you may now disconnect.

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