Health Care REIT, Inc. Q4 2007 Earnings Call Transcript

| About: Welltower Inc. (HCN)

Health Care REIT, Inc. (NYSE:HCN)

Q4 FY07 Earnings Call

February 27, 2008, 9:00 AM ET

Executives

George L. Chapman - Chairman and CEO

Raymond W. Braun - President

Scott A. Estes - Sr. VP and CFO

Frederick L. Farrar - EVP

Analysts

Richard Anderson - BMO Capital Markets

Jerry Doctrow - Stifel Nicolaus & Company

Philip Martin - Cantor Fitzgerald

Robert Mains - Morgan Keegan & Co.

Omotayo Okusanya - UBS Securities

Christopher Pike - Merrill Lynch

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Health Care REIT Fourth Quarter 2007 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. And again, I'd like to remind everyone that today's call is being recorded.

And I would like to now turn the conference over to Ms. Katherine Shipstead [ph] of the Financial Relations Board. Please go ahead, ma'am.

Unidentified Company Representative - Financial Relations Board

Thank you. Good morning, and thank you for joining us today for Health Care REIT's fourth quarter 2007 conference call. In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it via the company's website at healthcarereit.com.

I would like to remind everyone that we're holding a live webcast of today's call, which may be accessed through the company's website as well. At this time, management would like me to inform you that certain statement made during this conference call are not historical and may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the news release and from time-to-time in the company's filings with the SEC.

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

George L. Chapman - Chairman and Chief Executive Officer

Thank you, Katherine. First, I will briefly go through our achievements for 2007, as this is the year-end call. One, we received... we were very pleased to receive debt upgrades from Moody's and Fitch to Baa2 and BBB flat respectively. And we're also very, very pleased at our timing in expanding and extending our unsecured lines of credit to $1.15 billion while at the same time reducing our interest cost 20 basis points to LIBOR plus 60. It gives us quite a bit of dry powder in what is becoming a very interesting investment environment.

I'm very pleased to be added to the S&P Midcap 400 Index in November. And again, we were very successful in raising $900 million of capital through three transactions as well as through our dividend reinvestment plan. Our solid 6% FFO per share growth provided in… the shareholder return of 9% in a very down year for rates, again was a very welcome.

I want to talk mainly today though about our growth platform and our portfolio. So clearly, people have an understanding of how our portfolio is changing… how it has changed and how it is going to change in the next year or so. One, last year our growth platform drove net investments of $1.1 billion, and at the end of 2007 we had one of the most diversified portfolios in this sector with 65% of our revenues derived from private pay. And in terms of skilled nursing and assisted living, especially standalones, we continue to drive that percentage down. At year-end, our total skilled nursing and assisted living concentrations constituted 32% and 21% of our portfolio respectively, down from 44% and 34% two years ago. And unlike some of the analysts, we do believe skilled nursing and assisted living, especially assisted living, are attractive investments, but we've taken the approach of that they are most effective in combination projects or in CCRC platforms.

As I mentioned in our last quarter call, we continued to report our portfolio breakdowns in a manner that approximates functional groupings. Example, independent living and CCRCs, Continuing Care Retirement Communities, are grouped together and properties are characterized as independent living, assisted living, and skilled nursing based upon the predominant service type.

At year-end, CCRCs together with other combination facilities, i.e. those facilities with one or more combinations of skilled nursing, assisted living, independent living and dementia, comprise approximately 27% of our portfolio or approximately 40% of our senior care portfolio. Viewed in this manner, our standalone skilled nursing and assisted living would represent only 24% and 10% of the portfolio respectively.

Portfolio performance is quite good, as we've driven coverage at the facility level to 1.99 to 1. Occupancy trends have also been strong quarter-to-quarter with IL/CCRC moving up to… up 1% to 93%. Assisted living up 1% to 89%, and skilled nursing up 1% to 85%. And while medical office buildings remained flat at 90%, we believe we have an excellent opportunity to drive up occupancy... occupancies by the fourth quarter of 2008 that should enhance our returns, again primarily in 2009.

We have high expectations for investments in 2008. Our guidance, as you’ve read, is $900 million to $1.2 billion, including $500 million to $700 million of acquisitions and $400 million to $500 million of development. While we are conservative with respect to our underwriting and portfolio management, we believe that we have the best growth platform in the sector. The platform has been successful, primarily as a result of our marketing team that we believe is the deepest and most productive in seniors' housing and health care. And the relationship programs as that we have developed have created a shadow pipeline of approximately $3 billion. This gives us a great deal more certainty of investments than if we were simply trying to find acquisitions in the general market.

If you’d refer to Exhibit 9 of our earnings release, you would see that we have $800 million of unfunded development commitments. This number relates to projects that have commenced construction and we expect approximately $400 million or a bit more of the $800 million to be advanced in 2008 and the remainder thereafter. You should also know that we expect $360 million of our current development projects to convert to stable projects in 2008, which allows us to discontinue capitalizing interest at our average cost of debt, which is approximately 6%, and begin recognizing yields at stated rates that average 9.1% per leased properties. We expect that the conversions in 2009 and 2010 respectively would be $400 million and $327 million, and as each development project converts to a stable asset there is a positive impact to our FFO.

We've mentioned before that real estate platforms must change over time to address customer preferences. That can occur through renovations of existing facilities, purchasing new facilities or development. I also noted our preference for a combination, or CCRC properties and senior housing and care. In the medical office building and acute care space, we believe that many of the new medical office buildings and acute care assets will be much more customer-friendly and will stress wellness and one-stop shop.

Our unfunded developments commitments going into 2008, the $800 million that I mentioned previously, include $448 million in CCRCs and a $140 million for new medical office buildings. And while only $24 million relates to acute care, we are making great progress with health systems providers and developers to invest in new acute care facilities and anticipate that amount will increase over time.

We, again as I've indicated earlier, believe that with our relationship program and our $3 billion or so of shadow pipeline, that we have a much higher probability of investment success than simply finding investments in the markets. The investment guideline for 2008, I should note, together with our other budgeted assumptions produce a projected FFO range of $3.27 to $3.37 per share, which is an FFO growth rate of 5% to 8%. And we believe that this FFO growth together with our current dividend should produce an excellent total return, assuming multiples remained constant. And I must say that while I don't want to get into predicting whether multiples will go up or go down, we believe that our profile and our full spectrum platform presents a very strong case for multiple expansion.

With that, I will turn to Ray Braun and Scott Estes for additional comments on our portfolio and financial results. Ray?

Raymond W. Braun - President

Good morning, everyone. I'll start by reviewing our fourth quarter investments, discuss current market conditions, and then finish with a discussion on our portfolio and reimbursement outlook.

During the fourth quarter, we completed a total of $298 billion of gross investments. This included senior housing acquisitions of $21 million at an average initial yield of 7.5% with an expected yield of 10.2%, MOB acquisitions of $31 million at an average yield of 7.5%, capital expenditures and loans of a $127 million at an average yield of 10.1%, and funded CIP of a $118 million with an expected average initial yield upon conversion of 9%.

Our development activity, which is presented in detail in Exhibit 9 of the earnings release, currently includes 37 projects and a total commitment of $1.1 billion. We started an additional $292 million of development projects this quarter and have 34 million of projects completed with an average initial yield of 9.8%. These include a commitment amount of over 200 million for the construction of several [inaudible] and two medical office buildings, reflecting the extension of our programmatic financing strategy to medical facilities.

On the disposition front, we had $25 million of asset sales and loan payoffs during the quarter that we sold at an average cap rate of 6.6%. In terms of market conditions, we're seeing some slowing of volume in the second half of 2007. Cap rates appear to be increasing across asset types with a credit market dislocation and our ability to finance transactions via considerable investment opportunities for this year.

Turning to the portfolio, our portfolio composition is included in Exhibit 1 of the earnings release. At December 31, 68% of our portfolio was invested in senior housing and care and 32% of the portfolio was invested in medic facilities. We currently have 495 properties in our senior housing and care portfolio with 55 operators in 37 states, and they have a stable payment coverage of approximately 1.5 times. 36 properties are in fill-ups with an investment balance of 454 million.

You'll note a couple of new names in our top five operators. Signature Healthcare acquired and recapitalized Home Quality Management and is now our second large operator. We have 34 properties with 4582 units and an investment balance of 326 million with Signature. In connection with the recapitalization, we extended our $110 million real estate loan with a six-year term and a 10% initial rate. We also recognized a $3.9 million gain on our [inaudible] position in Home Quality Management. Signature now has enhanced liquidity with a strong platform for growth and an experienced management team. Our portfolio for Signature has excellent lease payment coverage in excess of two times.

Another new operators is a top five senior living communities, a regional operator with eight CCRC campuses with a total capacity of 695 cottages, 590 independent living units, 309 assisted living units, 107 dementia care units, and 81 skilled nursing beds. They operate facilities with roughly 200-plus units on 30 acres to 50 acres of land with large clubhouses and fitness rooms, library and other gathering areas.

Our medical facilities include 121 medical office buildings and 22 specialty care facilities in 23 states, encompassing over 5 billion square feet. Our specialty facilities payment coverage increased this quarter to 2.7 times. We currently have three specialty care properties and fill-ups with an investment balance of 51 million.

The medical office net operating income was 20 million for the fourth quarter and 75 million for the year as outlined in Exhibit 4 of the earnings release. Occupancy at the end of the fourth quarter was approximately 90%.

Turning now to our outlook for Medicare and Medicaid, in 2008 nursing homes we see the full market basket, increase of 3.3% under Medicare. CMS is currently considering an administrative fix to the Medicare '08 that may result in a reduction. The proposal is a cut of approximately $4.7 billion over five years or roughly 3.5% to offset increased utilization of nine new RUGs categories created in 2006. We expect CMS to issue a proposal for fiscal year 2009 by early May.

To give you an idea what impact that could have on our portfolio, for each one percent change in Medicare rates, our nursing portfolio payment coverage declines by roughly 3.5 basis points. We had a very strong payment coverage in the portfolio and do not anticipate any material increase in payment risk as a result of this change. Many States are also facing [inaudible] shortfalls as a result of reduced tax revenue collections and weakening consumption. This could result in Medicaid rates being cut, but historically state legislators have avoided payment cuts to nursing homes. Florida has been a particular concern in a special session with the legislature. Florida passed a 3% rate cut effective January 1, 2008. This also appears in the Governor's 2009 budget as proposed for the first six months of the 2009 fiscal year. A 3% decrease in the Florida Medicaid rate would reduce our payment coverage by 5 basis points. Again, we do not anticipate any material increase in payment risk as a result of this change.

With that, I'll turn it over to Scott Estes for the financial update.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Thanks, Ray. Good morning, everyone. Our fourth quarter normalized FFO per fully diluted share increased 4% to $0.80 from $0.77 in 2006. Normalized FAD per fully diluted share increased 1% to $0.75 from $0.74 in the comparable quarter last year. Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income per common share.

We paid a dividend for the quarter ended December 31 of $0.66 per share, the company’s 147th consecutive quarterly dividend. The Board also approved a new quarterly dividend rate of $0.68 per share or $2.72 annually commencing with the May 2008 dividend, which represents a 3% increase above last year's rate.

Our gross revenues totaled $133.5 million for the fourth quarter, up 56% versus the same quarter last year with 89% of gross revenues coming from rental income.

Our interest expense increased to $35.5 million from $24.4 million last year, primarily as a result of debt assumed through Windrose and Rendina/Paramount transactions, interest from our convertible debt offerings completed in November of '06 and July of '07, and slightly higher average borrowings on our line of credit.

Fourth quarter G&A came in at $9.3 million, representing 7% of quarterly revenues. We also remain comfortable with the improved quality of our loan portfolio and made no addition to the $7.4 million loan loss reserves during the quarter. There were several other items of note during the quarter. In particular, first, other income of $6.1 million in the quarter included a benefit from $3.9 million in income from [inaudible] equity provision, which was received as a part of the recapitalization transaction with Signature Healthcare that Ray previously mentioned. One other item of note in the quarter was that we recorded $11.7 million in gains on the sale of assets, which are recognized as a result of the sale of one independent living facility, one assisted living facility, and five skilled nursing assets during the quarter.

I'm moving now to the balance sheet. We ended the quarter with net real estate investments of $5 billion. We remain committed to maintaining an investment grade balance sheet. Its leverage at the end of the year stood at 48% on a debt-to-undepreciated book capitalization basis within our targeted range of 45% to 50%. During the fourth quarter, our adjusted interest and fixed charge coverage increased to 3.2 times and 2.6 times respectively.

As of December 31, we had only $307 million drawn on our $1.15 billion line of credit leaving $843 million in availability. Combining this availability with our DRIP, which has raised nearly $70 million in each of the last two years, and $30 million in cash on hand, we have considerable flexibility in financing our anticipated investments this year. Our debt maturity schedule is also in great shape as we find the useful line of credit to repay both the $42 million in senior notes, which come due in March, and the $28 million in secured debt, which also comes due this year.

In terms of capital for the quarter, we completed 3.5 million share offering in December with net proceeds of 147 million, which were used to pay down our line of credit. Our dividend reinvestment plan also continues to generate solid interest as we issued approximately 371,000 shares for roughly 16 million in net proceeds during the quarter.

Now, I am going to discuss our 2008 guidance. As detailed in the earnings release, we expect to report net income available to common stockholders in a range of $1.55 to $1.65 per diluted share, FFO in a range of $3.27 to $3.37 per diluted share, and FAD in a range of $3.01 to $3.11 per diluted share. As always, our FAD guidance excludes any cash proceeds, which we may receive during calendar '08 related to prepaid rent or straight-line receivable payoffs.

Our assumptions are discussed in detail on page 3 of our earnings release. I would like to point out a few items in particular. First, as George mentioned, our FFO per share guidance represents strong growth in a range of 5% to 8% over normalized 2007 results. Our normalized FAD guidance represents a solid 3% to 7% potential year-over-year growth.

Our G&A forecast of $40 million to $42 million is primarily a result of further investment in our infrastructure including a significant commitment to expand what we believe to be the deepest origination scheme in the sector. Similar to the last two years, I would point out that our G&A expense in the first quarter of 2008 will include the impact of $2.3 million in non-cash stock-based compensation related to the accelerated vesting of stock and options for certain officers and directors.

I would like to provide some additional perspective regarding how our development pipelines relates to earnings. Our 2008 investment guidance includes funded development in a range of $400 million to $500 million, representing an increase relative to the $307 million of development we funded during 2007. However, [inaudible] larger amount of construction funding projected in 2008, we also have a large number of projects, which are expected to open up our convert this year. As you can see in Exhibit 9 of our earnings release, we are forecasting $361 million of development conversions at an initial yield of 9.1%, which would represent a significant increase of about $132 million in conversions we declared during 2007.

Finally, I will conclude with the topic at the forefront of everyone's mind, which is how do we intend to finance our growth pipeline in 2008. I think for guidance and internal modeling purposes, we believe that we’ve taken a more conservative approach to how we finance our growth [inaudible] we are able to raise a combination of debt and equity, consistent with our long-term goal of maintaining a strong investment grade balance sheet. However, we are also evaluating alternative capital raising options, which are available to us including potential asset sales, joint venture opportunities, bridge financing, as well as the convertible debt and preferred markets. Most importantly, I think what everyone should expect is for us to look to move opportunistically in this more difficult capital environment. Given our considerable capital availability entering the year, we do remain comfortable that we'll be able to raise the necessary capital to take advantage of the significant investment opportunities we are seeing today at cap rates, which are becoming increasingly attractive.

With that, I turn the call back to you, George.

George L. Chapman - Chairman and Chief Executive Officer

Thank you, Scott. Let me wrap up briefly and then we will open for questions. About five years ago, we made a very strong commitment to full spectrum investing and during the last 15 months we completed our platform that contains development and property management capabilities. The results have been gratifying as we've increased our medical office building portfolio percentage to 25% and we're also quite optimistic that our efforts to grow our acute care investment will continue to gain traction as we are beginning to make inroads with strong systems providers and development groups throughout the nation.

Let me give you a few examples of medical facility investments. One is in January of this year, we purchased a 40-bed all-private suite acute care hospital with an attached 40,000 square foot medical office building. These facilities are on a 6.3-acre site, which should allow expansion for the development of additional health care or senior housing facilities. The facility is operated by physicians and the management company. As an example of where Health Care is going, meals are available from a gourmet menu and robots deliver lab samples equipment and prescriptions anywhere in the building.

In the East, we're investing in a new 246,000-square foot medical office building within a 40-acre site anchored by a major health system that will offer customer focused health and wellness services, providing a continuum of care including traditional medical services, wellness, radiology, therapy, lab testing, fitness, [inaudible]. And we also expect to complete investments in two new hospitals with attached MOBs, medical office buildings; one in the Midwest and one on the West Coast. Both would be projects in rapidly growing areas. Both hospital systems are academic and medical centers, which are joint venturing with physician groups and it is attempting to extend their reach out to the customer. And we are also evaluating additional hospital medical office building, cancer centers, standalone emergency departments, and combination rehab site facility. So there is quite a... there are quite a number of projects that we are evaluating at the moment.

In the senior housing and care sector, the following are just two examples of combination facilities or CCFCs that we have added to our portfolio. In the Midwest, we've invested in a 216-unit campus that includes apartments, cottages, independent and assisted living units. Amenities include a full fitness room, hospitality center, library, theatre, billiard room, clubroom, Internet cafe, and [inaudible], and this project is part of a 700-acre planned community.

A somewhat similar facility in the Southeast includes a 316-unit campus with a full continuum of care from cottages to skilled nursing to services. There is a full range of recreational, wellness, and social programs, and amenities include a 52,000-square foot clubhouse, ballroom and movie theatre. This project is part of an 1100-acre planned community that includes retail, office and multi-family, residential with [inaudible]. And I should say that we currently have investments in 13 projects that meet the [inaudible], and I see definition of CCRC that includes AL, assisted living, independent living and skilled nursing. Once built out in full, our investments in these 13 CCRCs will total $509 million.

And if one were to include campuses, regardless of whether skilled nursing was a part of the project, our large combination CCRC projects would increase to 24 with a total built out commitment of $968 million. The point of this is that we believe we've made very good progress in diversifying our portfolio with 25% medical office buildings, a growing segment of combination facilities in CCRCs and some real traction in the acute care space. The quality of our real estate is improving markedly as we add state-of-the-art medical office buildings and acute care facilities as well as larger combination facilities, CCRCs, in attractive campus settings.

Now, just on another topic, let me take a moment to acknowledge Jeff Otten as the new member of our Board. Jeff was elected to our Board on January 23, 2008. He is an experienced executive who has operated health systems including serving as CEO at Brigham and Women's Hospital in Boston. He's also run medical technology and biotech companies. He adds great depth and judgment to our team. And as I've said many times before, we believe that the capabilities of our management team and the Board of Directors are keys to the success of HCN as a leader in the senior housing and health care sectors.

And with that, we're open for questions.

Question and Answer

Operator

Thank you, sir. [Operator Instructions]. We'll go to Rich Anderson with BMO Capital Markets.

Richard Anderson - BMO Capital Markets

Hi. Thank you, and good morning everybody.

George L. Chapman - Chairman and Chief Executive Officer

Hi, Rich.

Richard Anderson - BMO Capital Markets

I guess the... just first, you mentioned the shadow pipeline of $3 billion. Did you mention… and I might have missed this, like what’s sort of the source of that? Where is all that coming from? Why is it off market to you?

George L. Chapman - Chairman and Chief Executive Officer

Well, a lot of it, Rich, when we are mainly doing long-term care, came out of our relationship programs, lines of credit where people commit… once we do the first projects, they commit to bringing us virtually all of their projects over a multi-year period. We have extended that to some degree in perhaps a different day by... in the acute care space and then we’ll lease space by forming relationships both with health systems and developers and other providers. So it's maybe a little looser than our lines of credit in the long-term care space, but we think that in both cases we add to the predictability the certainty of doing investments.

Richard Anderson - BMO Capital Markets

Okay, fair enough. When you talk about what… you said your sort of standalone SNF exposure, did you say it was 10%, I can't remember the percentage now.

George L. Chapman - Chairman and Chief Executive Officer

It is right now the way we reported. It is at 32%... and 21%, but when we take out... when we really consider combination facilities, which we think are stronger assets generally, we drive these standalone SNFs, skilled nursing, and assisted living down to 24% and 10% respectively.

Richard Anderson - BMO Capital Markets

Okay. So 24% SNF and 10% assisted living?

George L. Chapman - Chairman and Chief Executive Officer

Correct. And I would expect that to… over the next three to five years to… at least in the SNF area to continue to go down as we do more combination facilities and frankly do a few more standalone SNFs. But that's sporadic, so you have to look at it over a longer period.

Richard Anderson - BMO Capital Markets

I guess that was the question. I mean where do you see those percentages going, but I guess clearly it's a push downward but...?

George L. Chapman - Chairman and Chief Executive Officer

Well, I would hope to get SNFs... skilled nursing down to 15% on a standalone basis at some point. About the time I tell you that, I then find a really attractive set of skilled nursing or assisted living, maybe some of those are right for adding other facilities to sites and making them into combination facilities. So we start down and we go up and we go down, but it's going to ratchet down toward 15% over the next three years or so.

Richard Anderson - BMO Capital Markets

Okay. You say that in the same breadth of how insensitive your coverage are to changes in Medicare reimbursement. So it's sort of like you like it but you don't like it, and I'm trying to reconcile that.

George L. Chapman - Chairman and Chief Executive Officer

Well, to some degree we are dealing with the perceptions of the capital markets. We tend not to agree with many of the analysts in terms of skilled nursing. Skilled nursing in fact has been a winner in the Medicare rationalization process. They're very much favored because they provide good effective care. On the other hand, we tend to like campuses because we think over time that's going to be a much more sustainable platform than standalone any things, okay. So we just think diversification of a balanced portfolio is the best way to go.

Richard Anderson - BMO Capital Markets

Okay. On cap rates, can you sort of quantify the rise you're seeing and maybe break it out amongst your key property type?

Raymond W. Braun - President

As I indicated in the call last quarter, we think cap rates were at the lowest in mid 2007. And what we're seeing now are deals coming back to us that we previously quoted on and they didn't get done and they're coming back to us with higher cap rates. If you look at the NIC key financial indicators and their mean cap rates, the most recent data that they had with a little bit mix. IL was 7.4%, AL 9%, SNFs 12%, and CCLCs 9.1%, and that was for the third quarter of '07, reflecting deals that were negotiated several months earlier.

Richard Anderson - BMO Capital Markets

Okay. So maybe a rise in the 50 basis points to 75 basis points range?

Raymond W. Braun - President

I'd say 25 to 50 jointly.

Richard Anderson - BMO Capital Markets

25 to 50. Last question, Scott, you mentioned the word bridge in your financing alternatives. And obviously that's not a really great word these days. So maybe you can sort of talk about your thought process behind considering bridge Financing.

Scott A. Estes - Senior Vice President and Chief Financial Officer

I guess I just used that as a generalization to make the point that I think our model is conservative in that we assume the traditional blend of debt and equity but we're looking at all the options available to us and I think you can assume we'll be intelligent in making our decision.

Richard Anderson - BMO Capital Markets

Okay. It sounds good. Thanks, Scott.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Thanks.

Operator

We'll go to Kristen Brown [ph] with Deutsche Bank.

Unidentified Analyst - Deutsche Bank

Hi. Good morning, guys.

George L. Chapman - Chairman and Chief Executive Officer

Good morning, Kristen.

Unidentified Analyst - Deutsche Bank

I was hoping you could talk a little bit about the competitive landscaping and how it might vary by asset type in terms of acquisitions?

George L. Chapman - Chairman and Chief Executive Officer

I'll start but then Ray will then jump in too. I think it's frankly a lot less competitive than it was because of the capital constraints that we have a lot… few early financial buyers going in. If they're coming in, they’re still perhaps coming in more on the MOB side, medical office building side and more assisted living and the independent living I suppose, because those are more of a real estate component. But we've seen a diminution of competition. So our job and those of our colleges I guess and the other health care REITs who have funds is to make the best allocation of those funds and trust that over time, given the defensive nature of healthcare, the inelastic demand for healthcare, that reasonably priced funds will be made available to all of us to continue pursuing very good investment opportunities. Ray, you want to add something?

Raymond W. Braun - President

Yes. Kristen, I would think that this is a very good time for us because as George alluded to, financing options are more limited than they were even six, nine months ago, so that's good news. The negative is that we anticipate transaction volumes will be down because a lot of the acquisition and refinancing activity occurred at the market peak in 2007. However, as mentioned earlier in the call, we approach our investment strategy a little bit differently using a programmatic relationship oriented approach and given the size shadow pipeline we’re very bullish about the opportunity to invest this year.

Unidentified Analyst - Deutsche Bank

I mean you seem pretty confident in terms of volumes, but just if you don't close the volumes that you’re looking at, what's the earnings impact there?

Raymond W. Braun - President

I didn't quite hear all of that.

Scott A. Estes - Senior Vice President and Chief Financial Officer

You’re breaking up, Kristen. Did you say basically the volumes will impact their earnings this year?

Unidentified Analyst - Deutsche Bank

If you don't meet your targets.

Scott A. Estes - Senior Vice President and Chief Financial Officer

I guess that the point would be would be more backing [inaudible] the guidance that we gave and you can see it would be consistent with the volume we saw in 2007. And I think we're very comfortable in attaining the guidance buffers we put out at this point given the potential deal volume we are seeing.

Unidentified Analyst - Deutsche Bank

Okay. And then what do you estimate the interest savings will be with the ratings upgrade?

Scott A. Estes - Senior Vice President and Chief Financial Officer

[inaudible].

Unidentified Analyst - Deutsche Bank

Sorry. I just asked what do you estimate your interest savings to be from the ratings upgrade?

Scott A. Estes - Senior Vice President and Chief Financial Officer

From our ratings upgrade? I think when we saw a relative improvement in our debt cost to capital of approximately 20 basis points.

Unidentified Analyst - Deutsche Bank

Okay. That's it, thanks.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Yes.

Operator

We will go to Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus & Company

Good morning.

George L. Chapman - Chairman and Chief Executive Officer

Good morning, Jerry.

Jerry Doctrow - Stifel Nicolaus & Company

I had a couple of things. Just one specific beforehand, non-cash comp for the quarter, do you have that and is that going to be good run rate to go forward? I know you mentioned the $2.3 million or whatever it was in 1Q, but what was it for the quarter?

Scott A. Estes - Senior Vice President and Chief Financial Officer

$1.3 million, it’s in Exhibit 13.

Jerry Doctrow - Stifel Nicolaus & Company

Okay.

Scott A. Estes - Senior Vice President and Chief Financial Officer

It was $1.298 million in the fourth quarter, and I think generally that’s a reasonable run rate, again adding that $2.3 million one-time in number to that in the first quarter or '08.

Jerry Doctrow - Stifel Nicolaus & Company

Okay, thanks. [inaudible] dismissed I guess last night. Getting broader, you’re obviously stepping up the development. I kind of have a couple of questions there. One, I don't know if you can give us a sense of sort of when that… the $360 million and the $400 million are kind of going to deliver? Is it sort of spread over the year or is it weighted [ph] one way the other? And you might want to think about putting out a quarterly schedule just to help us do the modeling because it could make a meaningful difference quarter-to-quarter depending on how the deliveries are at timed.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Right. We agree, Jerry. We are actually… for everyone's benefit, we are working on an enhanced supplement and hopefully if we get our act together we will get it done in this first quarter. The number, the $361 million as we looked at it, it is more heavily backend loaded in the year.

Jerry Doctrow - Stifel Nicolaus & Company

Okay.

Scott A. Estes - Senior Vice President and Chief Financial Officer

If you had to model, I would assume that fairly two-thirds of it would be in the latter half of the year.

Jerry Doctrow - Stifel Nicolaus & Company

Okay and then any color on '09, it’s further away obviously, but...?

Scott A. Estes - Senior Vice President and Chief Financial Officer

At that point it’s pretty variable. We include in our… that exhibit the mandatory conversion date. So projects tend to move. It could be earlier, occasionally it can get pushed back later if there is weather delays or permitting delays. We’ve had a few instances, but...

Jerry Doctrow - Stifel Nicolaus & Company

Okay. We will take a look at the detail. And then you are doing a lot of funding of AL, IL, CCRCs, your occupancy numbers were up, which is good, but there's obviously been a lot of nervousness in the market about impact of the housing market and those things. So I was wondering if you could just give me any color… more color from your portfolio about how you think that business is doing, risk from the housing market, and kind of your confidence in going ahead and ramping up development at this point?

George L. Chapman - Chairman and Chief Executive Officer

Clearly, any residential projects have had some effect from these housing issues. But we've really been very pleasantly surprised to see that the... especially in the buy-in projects that we are doing quite well and we are moving ahead very steadily. It's sort of hard to know exactly whether the projects are being impacted. They're moving ahead at a reasonable pace to give us the right results. So much of it is anecdotal. I just read something about one of our projects down in the Southeast yesterday that came out that suggested that the project was not at all being affected by the housing market. That happened to be in a particularly strong housing area generally. I mean I can't help… we haven't really noticed material effects on our CCRCs. I might add to that, about half of the... more than half of our CCRCs, at least the way we're looking at them, are rental and even if we extend it to campuses, which might not have the SNF component, Jerry, we're about half rental as opposed to the buy-in. So the thought would be if there are any that are going to be affected somewhat it would be the buy-in. And again, we've been pretty pleased with the success to date. We're watching it clearly.

Jerry Doctrow - Stifel Nicolaus & Company

But even in your buy-in you're saying you're really not seeing an impact in terms of occupancy slippage or slower lease subs.

George L. Chapman - Chairman and Chief Executive Officer

If anything, one project in the Midwest is somewhat behind budget, but it's actually making up for lost time. What we are finding is, anecdotally… again, what we are finding is that sometimes the buy-in doesn't happen the way it was budgeted. In other words, if you are just in early stage construction, it seems as though people aren't quite that eager to move and now that we're almost ready to open that particular Midwest facility, it appears that there is an uptick in the purchases. So I think we're going to probably have a little bit more feel for the CCRC market in the buy-in and the timing of the same as each quarter unfolds. We are happy to do that. Scott, did you want to answer?

Scott A. Estes - Senior Vice President and Chief Financial Officer

Yes, I just wanted to maybe give everyone a little bit more color. I think entrance fee communities represent currently about 5% of our portfolio. There's actually 12 communities in the portfolio today. Seven of those are under construction, four aren't still up. Of the four that aren’t still up, three of the four are actually on budget. The one as George mentioned that is slightly behind is actually meeting absorption expectations, but having a little bit higher expenses ,and then the one that is stabilized actually has coverage after management fees of 1.7 times and occupancy of about little over 90% for the last 12 months. So that's the perspective on the portfolio today, which is pretty reasonable I think.

Jerry Doctrow - Stifel Nicolaus & Company

And obviously you've got confidence going forward you wouldn't be funding more development.

George L. Chapman - Chairman and Chief Executive Officer

Correct. We actually think these are going to be very, very strong properties and if any of them fill a little more slowly because of the housing crisis, we don't think it's a long-term effect whatsoever. And as Scott indicated to, as we look at the CCRCs the way we're looking at it, 9 out of 13 are stable and as we extend that to campuses that don't have the SNF component but those are the larger CCRC combination projects, 16 out of 24 are stable. So I think we're really being very careful about taking on development risk, but we will continue to do that with the operators have proved that they do a great job of looking at the markets, building, and then filling in facilities. We think these are clearly better platforms in the long run.

Jerry Doctrow - Stifel Nicolaus & Company

Okay. And just... and on the… my last question, on the sort of acute care side, which is as you’d indicated it's kind of a growing business for you. Anything you're doing there to kind of differentiate yourself from your competitors, I mean it’s a handful of other REITs that are sort of out there in that niche?

George L. Chapman - Chairman and Chief Executive Officer

Yes. I think so, Jerry. I think for one thing, we've been in… we have a full service platform, as you know. So we can do the development or we can interface appropriately with some other developer that we work with and we can do the property management on their medical office buildings. And as you well know that some of the hospital systems like to have a buffer between themselves and their key doctors so that they don't have to worry about stark or fraud and abuse kind of issues. But I think finally… I think that our experience in the healthcare arena for all these years, in my experience for nine years being on the Board of an academic medical center together with the experience of our acute care people means that we can bring a lot of ideas to the health systems, what we're seeing around the country, what we think might be appropriate for them in their particular market. And we really expect to continue to add to our infrastructure in that space because we don't think that marketing to the acute care space is done the same way you do long-term care. You have to... one has to bring ideas, experience, be able to deal with doctors and hospital administrators, and I think we have some capabilities there that others may not.

Jerry Doctrow - Stifel Nicolaus & Company

Thanks.

Operator

We'll go to Philip Martin with Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Yes, good morning.

George L. Chapman - Chairman and Chief Executive Officer

Hi, Phil.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Hi, Phil.

Philip Martin - Cantor Fitzgerald

Yes. Just following up a little bit on Jerry's question there, George, certainly the health systems are probably attracted to Health Care REIT as a capital source or an alternative. How much of the decision to maybe work with the Health Care REIT is driven by the need for these health systems to expand and maybe bring in other long-term care alternatives such as more of a campus style CCRC program, etcetera?

George L. Chapman - Chairman and Chief Executive Officer

I think… and I want Fred Farrar to feel free to step in after I'm done as well. But I think that the health systems are looking hard right now for all kinds of ideas, okay. The world is changing rather dramatically for them, and the slow moving not-for-profit systems could actually find themselves in a bit of trouble several years down the road if they don't begin to move, because there is, one, an outreach sort of movement so that some of the hospitals that I mentioned… hospital MOBs that I mentioned that are going out to the suburbs to chase customers, to go where the customer is. That is so different than say, five or six years ago when the only MOBs that really made sense to a lot of the analysts, right on the campus attached to the hospital or whatever, but the fact that there is sponsorship by the hospital system, the health system is maybe building an MOB out of the suburbs to be followed by a smaller hospital or they’re building an emergency department to be followed by other types of health facilities suggest that the world is very dynamic.

So more to your question, Philip, we've had some success, especially in I suppose planned communities out away from the central core and talking to hospital systems about our ability to bring CCRCs and other types of long-term care assets, senior care assets to them because those can be viewed as you well know as a feeder to that health system. So it can very favorable. Some like that, some don't. Obviously, it depends on the size of the property, but it could well be that we could do some things for the health systems if they have the particularly good site, but it's way too many acres for them. We could also not only bring them the feeder system, but we in fact can facilitate completion of purchase and the build-out and development of that larger community.

Fred, do you want to add anything?

Frederick L. Farrar - Executive Vice President

I think your focus on outreach facilities is very apropos as systems look to go where the patients want their treatment. And also our development pipeline through developer partners give us access into those systems that… or relationships that could take years to develop.

Philip Martin - Cantor Fitzgerald

Do you find, Fred, that a lot of these health systems are lacking enough long-term care or senior living services and benefit by some programs that a health care REIT could bring?

Frederick L. Farrar - Executive Vice President

It really varies by market. Some of these systems aren't particularly focused on that and others are. But we're seeing more of these, as George mentioned, these planned communities that include a medical component as well as a long-term senior housing component.

Philip Martin - Cantor Fitzgerald

Okay. As the... maybe this is for Ray, but margins at the operator level, can you talk a little bit about what's happening at the operator level in terms of margin, rent growth, and even in terms of supply-demand fundamentals, which I think are pretty good, but again are these operators seeing what they need to see at the operator level and the demand level for their services to justify their development programs showing forward?

Raymond W. Braun - President

Let me break that down into a couple of components. I think in terms of existing facilities and their operating performance as reflected by the payment coverages we're seeing and by the industry statistics being published by NIC in both their key financial indicators and their MAP data, the long-term care and senior housing industries are operating at a very high level, some of the best operating performance we'd ever see. So the operating fundamentals continue to remain strong.

In terms of new development, that is a market-by-market analysis. In some markets, the rental rates paid by building occupants will not justify development costs and in others they will. So you really have to look that in a market-by-market basis.

Philip Martin - Cantor Fitzgerald

Do you find that the majority of our portfolio is located in above average growth markets, which I know can be defined any number of ways, but...?

Raymond W. Braun - President

Well, roughly two-thirds of our portfolio is located in the top 100 MFAs. So as the MFAs go, so go the opportunities for us.

Philip Martin - Cantor Fitzgerald

Okay. Thank you very much.

Operator

We’ll go next to Rob Mains with Morgan Keegan.

Robert Mains - Morgan Keegan & Co.

Yes, good morning. Couple of clarification questions on number, my others have been answered. On the other income line, I understand the 3.9 million comes out. The figures still comes out about 1 million higher than it's been in other quarters. Is that a reasonable run rate to use for next year?

Scott A. Estes - Senior Vice President and Chief Financial Officer

It does run between probably 1 million and 2 million. One thing we did do this quarter is we moved the property management income from Paramount. Our property management businesses, MOBs that they manage for third parties, up into that line, previously it was reduction in property operating expenses that was about 500,000 this quarter.

Robert Mains - Morgan Keegan & Co.

Okay.

Scott A. Estes - Senior Vice President and Chief Financial Officer

So, I'll give modeling somewhere between 1.5 million, 2 million would probably be about right.

Robert Mains - Morgan Keegan & Co.

Okay, fair enough. And just wanted... the guidance for depreciation is kind of… for the full year will be flat compared to where it was in the fourth quarter, am I missing something? I think guidance is 160?

Scott A. Estes - Senior Vice President and Chief Financial Officer

That is correct. We obviously have a very detailed model with estimates of timing of everything. So maybe we could look at that and if I notice anything I'll give you a ring, but...

Robert Mains - Morgan Keegan & Co.

Okay. It comes down the wash [ph] with FFO anyway, but I was just curious about that. And then… all my other stuff has been answered. Thanks a lot.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Thanks, Rob.

Operator

We’ll go next to Omotayo Okusanya with UBS.

Omotayo Okusanya - UBS Securities

Yes, good morning. Just going back to the development, going on back to what Jerry was talking about earlier on, just 2009, the conversion, I noticed that the yield has come down from where you had them at third quarter. You have them at 8.7 this quarter versus 9.9 last quarter. Just wondering if there was anything specific going in with those properties that caused the change?

Scott A. Estes - Senior Vice President and Chief Financial Officer

It’s Scott. I think on that… with… in regards to that number specifically, the biggest factor is the fact that we've added, I think it’s a little over $70 million MOB construction that is expected to converge in 2009 that will squeeze [ph] that number from the number that would have been reported last quarter. That's something that we started in the fourth quarter.

Omotayo Okusanya - UBS Securities

Okay.

Scott A. Estes - Senior Vice President and Chief Financial Officer

And that is actually the most significant factor. Otherwise, those numbers tend to move around slightly, treasuries may move around but we do have floors on [inaudible].

Omotayo Okusanya - UBS Securities

And with the ramp up in development activity across the CCRCs, the assisted living facilities, and you mentioned the medical office buildings, just with the big ramp up in fourth quarter of '07 do you still expect that you should be able to convert quite a lot of those properties in '08 so you’re pretty much going to have them constructed and ready to go by the end of '08 within a year? Am I reading that right?

Scott A. Estes - Senior Vice President and Chief Financial Officer

I guess I don't have the number for what we had in the last quarter, but that number… no, we would have had projects that would have been underway before this, the numbers that we would have started in the fourth quarter, in addition to I would think most of the projects that we would have started in the fourth quarter would be out and… further than that. Generally speaking, you probably average… you look at… it ranges from 12 months at the short end to 24 to 36 months for a larger campus project.

Omotayo Okusanya - UBS Securities

So that's what I was thinking… the CCRC balance, you have committed balances of about $614 million as of fourth quarter.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Right.

Omotayo Okusanya - UBS Securities

Third quarter that balance was 464, for assisted living it was 218 this quarter versus 156 last quarter, but in general you have your conversions going up for 2008 from 270 last quarter to 360 this quarter just this stuff is expected to come on really fast and I thought it took longer to develop some of these projects.

Scott A. Estes - Senior Vice President and Chief Financial Officer

The one other impact, Omotayo, is we had about 40 million to 50 million of projects run over that were previously expected to convert in the fourth quarter of this year, they've rolled over into...

Omotayo Okusanya - UBS Securities

Okay. That explains quiet a bit I think.

Scott A. Estes - Senior Vice President and Chief Financial Officer

There was some weather delays and some permitting delays on several of our projects that pushed them into 2008.

Omotayo Okusanya - UBS Securities

Okay, that is helpful. And then going back to the whole idea of raising capital this year, could you talk a little bit about kind of with all the different alternatives you may have, kind of listing preference what you would like to do first versus what you would like to do least of the four, five options that you stated earlier on?

Scott A. Estes - Senior Vice President and Chief Financial Officer

It is obviously difficult to answer [inaudible] issue common stock of 55 bucks a share, right? We have to basically… I think the way we intended it… and we are a little different, we talked about it in July. We prefer to give guidance including investments because I think it is important to give color on the investment growth we are seeing, but I think we've assumed the traditional kind of 50-50 debt and equity structure. Obviously, the unsecured market is horrible right now. I don’t think we will be inclined to do anything there, given where spreads are. So we will actually be watching all the markets opportunistically. We actually are looking at some potential for recycling capital in an environment like this. We think that is a good option available to us. And then, obviously we are watching the equity markets closely and we'll be as opportunistic as we can.

Omotayo Okusanya - UBS Securities

Great. Thank you.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Yes.

Operator

We'll go next to Chris Pike with Merrill Lynch.

Christopher Pike - Merrill Lynch

Good morning, everybody.

George L. Chapman - Chairman and Chief Executive Officer

Hi, Chris.

Christopher Pike - Merrill Lynch

Hi, just a follow-up somewhat on that question, I guess back to Kristen’s question. I think you quoted the 20 basis points saving, that is on the line, correct? But if you were forced to issue unsecured at this point, given the re-rating upward from the agencies, where do you think the market is at this point?

Scott A. Estes - Senior Vice President and Chief Financial Officer

We've looked as recently as the ... no, we watch it everybody. It's ugly, I mean our spreads and for everyone in the REIT land has gone up very significantly. There are... I don't think there has been any REIT on securities you’ve got to try to get estimated pricing today [inaudible] exercising utility, but I think five-year unsecured will be as high as 7.25 and all-in costs in 10 years...

Christopher Pike - Merrill Lynch

Probably it's 50 up from there, right?

Scott A. Estes - Senior Vice President and Chief Financial Officer

No. it's even a 100 [inaudible] order. So obviously those are prohibitive and then you say… we obviously think about what our long-term cost of capital is and I think it is somewhat less than that. We don't obviously feel like the markets will stay there for ever, but we don't anticipate doing anything in either those two markets until the conditions improve.

Christopher Pike - Merrill Lynch

Okay. And then I guess back to the line, understanding you pushed it out this quarter, at what point do you guys feel comfortable and where should we expect you folks to start to look to term out some of the short-term debt into longer-term financing alternatives? 307 at the end of the quarter, right?

Scott A. Estes - Senior Vice President and Chief Financial Officer

Yes. The $843 million available on our $1.15 billion lines, and yes, there is potential for a DRIP in cash on hand. We basically did hit the mid-point of our investment guidance and we wouldn't need to access the capital markets very much. On the other hand, the way we looked at it and the way we looked at our equity deal in December, we have to be opportunistic as we really see it's kind of a good investment opportunity. So we look at it everyday.

Christopher Pike - Merrill Lynch

Okay. I'm sorry I missed this, Ray, but the yields on the sales and payoffs... I'm sorry, not so much the payoffs, but the yields on the acquisitions and the loans in the quarter and the timing, can you provide that for modeling purposes?

Raymond W. Braun - President

I would just assume mid-quarter, the new investment guidance.

Christopher Pike - Merrill Lynch

No, what you guys...

Raymond W. Braun - President

The fourth quarter we had 21 senior housing at 7.5, average expected yield at 10.2, MOBs 31 million at 7.5, CapEx and loans of 127 million at 10.1, and funded CIP of $119 million with yield upon high convergence of 9%.

Christopher Pike - Merrill Lynch

And you guys provided the timing in the previous press release when you walked through that stuff because I couldn't get it.

Scott A. Estes - Senior Vice President and Chief Financial Officer

We don't have it here, Chris. I mean...

Christopher Pike - Merrill Lynch

That's what I'm really concerned about, the timing.

Scott A. Estes - Senior Vice President and Chief Financial Officer

The acquisitions… add those two numbers up, the $52 million or so in the mid-quarter, the loans were basically almost mid-quarter as well. So both of those you should model like mid-quarter.

Christopher Pike - Merrill Lynch

Okay. And then I guess back to Ray. From the cap rate... the cap rate question earlier, can you just run through coverages on those caps to get back the lease yields?

Raymond W. Braun - President

Well, I quoted the NIC industry cap rates and those don't come along with coverages. You can sort of look at our portfolio and what its coverages are to get a sense for it.

Christopher Pike - Merrill Lynch

Okay. Fine.

Raymond W. Braun - President

But we're seeing… I'd say, generally we're seeing lease yields on MOBs in the 7 to 8, and on seniors housing in the 8 to 9 category.

Christopher Pike - Merrill Lynch

Okay. And I guess, George, back to your comments regarding MOBs, I guess on the Tenet call yesterday management spoke to potentially an MOB divestiture. I'm just wondering if you guys know any specifics about that portfolio, how big it is and any kind of market chatter on it?

Raymond W. Braun - President

No, we get some market intelligence, but we don't know enough to weigh in here.

Christopher Pike - Merrill Lynch

Okay. Thanks a lot, guys.

Raymond W. Braun - President

Thanks.

Operator

[Operator Instructions]. We will go to a follow-up question from Rob Mains with Morgan Keegan.

Robert Mains - Morgan Keegan & Co.

Yes, Scott, one more question on modeling. I might have missed this if it was earlier… you ended the year with shares outstanding of $85.4 million. How do you get the $92 million guidance for diluted?

Scott A. Estes - Senior Vice President and Chief Financial Officer

That was my point, Rob. When we model guidance we include financing or generic financing assumptions, which include a blend of debt and equity.

Robert Mains - Morgan Keegan & Co.

Okay. So... all right. So that would also imply that if I'm not going to assume… if one doesn't assume an equity offering, one would also probably have a slightly higher interest expense number. I know you don't give it, but that would sort of… that would come on the model.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Sure, and you could run out higher on the line and that would positively impact earnings relative to what we gave in our guidance.

Robert Mains - Morgan Keegan & Co.

Okay, I understand that now. Okay, good enough. Thanks.

Scott A. Estes - Senior Vice President and Chief Financial Officer

Yes.

Operator

[Operator Instructions]. And we have no other questions at this time.

George L. Chapman - Chairman and Chief Executive Officer

Great. Well, we appreciate everybody participating in the call, and Scott will be available for follow-up calls. So that's it.

Operator

Thank you, sir. And that does conclude today's conference call. Again, thank you for your participation. Have a good day.

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