Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Health Care REIT Incorporated Second Quarter 2008 Earnings Conference Call. Today's 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. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Ms. Vicky Baker of the Financial Relations Board. Please go ahead.

Good morning and thank you for joining us today for Health Care REIT's second quarter 2008 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 www.hcreit.com. I would like to remind everyone that we are 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 statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements 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 turn the call over now to George Chapman, Chairman and CEO of Health Care REIT for his opening remarks. Please go ahead, sir.

Thank you, Vicky. We're very pleased with our second quarter results. Our investment program is highlighted by record gross investments of $488 million drove 12% quarterly FFO and FAD growth. Normalized FFO and FAD payout ratios are also quite good, 78% and 83% respectively for 2Q '08 and 80% and 85% for year-to-date 2008. Net investments for the quarter equaled $355 million as we disposed of $133 million of assets, 88% of which were standalone senior housing and care assets. We recognized a gain of $118 million from such sales. Although we are quite pleased with the magnitude and quality of our investment program, we are also pursuing a disciplined approach to managing our portfolio. We have a very diversified portfolio by property type, operator and location. Our top five operators comprise only 27% of the portfolio and our top 10 operators add up to only 41% of the portfolio. At the same time, payment coverages at the facility level are approximately 2:1. We are on track to move our mix in senior housing and care towards combination projects as we firmly believe the combination of some or all of the long-term care service levels will have more appeal to the consumer over time and drive higher occupancies and revenues. At the same time, we continue to look to our freestanding ALFs and skilled nursing facilities as constituting a very strong part of our portfolio and revenue base. These assets generally have very strong portfolio coverages and the protection of master lease structures. However, at right price, we intend to dispose of some of these assets that have maximized their value and, as you can see, we did so very effectively in the second quarter of 2008. We've also made a strong commitment to the medical facility sector with medical…

Hey, good morning everyone. I am going to take us through our investments, talk a little bit about the market, give you an update on the portfolio and then review where the reimbursement legislation came out. We had a great quarter of $488 million of gross investments, including $220 million of acquisitions at an initial yield of 8.6%. year-to-date, we've done $670 million of gross investments, $314 million of acquisitions and initial yield of 8.7%. We've also funded a $143 million in development, 30 properties and five expansion projects with a total commitments of $1.2 billion. There are $143 million of convergence during the quarter at average initial yields of 9.8%. Dispositions had $133 million during the quarter with gains of $118 million. Most of these occurred at the end of the quarter, and Scott will update you on that. In terms of the market, we continue to see our relationship investment strategy perform well. Cap rates generally are down 25 to 50 basis points. MOBs are around 7% to 8%, independent living 7.5% to 8%, assisted 8%, skilled nursing 12% to 13% and hospitals around 14% to 16%. Of course, quality assets in any category will trade at a premium, often times as much as 150 to 200 basis points. Looking at the portfolio, 63% was in combination seniors housing, CCRCs, medical office and specialty care, which is up from 58% at the end of '07. Freestanding nursing homes have declined to 19% of our portfolio when you consider all the construction commitments outstanding. We currently have 481 properties in seniors housing and care with 56 operators in 37 states. Payment coverages remain strong. We have stable payment of 14 for independent living and 16 for assisted living, 2.3 times [ph] for skilled nursing. On a same-store basis, coverages…

Thanks Ray. Good morning everybody. We clearly enjoyed a record quarter on both the gross investment and earnings front. And second quarter normalized FFO per fully diluted share increased 12% to $0.87 from $0.78 last year. Normalized FAD per fully diluted share also increased 12% to $0.82 from $0.73 in the comparable quarter of 2007. Strong results were primarily driven by our success on the investment front, $143 million of conversions out of CIP to full yielding assets and annual increases across the portfolio. Please refer to the earnings release for a detailed reconciliation of FFO and FAD to net income per share. We recently declared the dividend for the quarter ended June 30th of $0.68 or $2.72 annually, representing a 3% increase above last year's rate. The payment represents the company's 149th consecutive quarterly dividend. Gross revenues excluding discontinued operations totaled $136 million for the second quarter, up 21% versus the same quarter last year with 92% of gross revenues coming from rental income. Our interest expense was essentially flat versus last year at $31.9 million despite higher borrowings under our line of credit, primarily due to lower line costs and an increase in capitalized interest as we build out our development pipeline. Second quarter G&A came in at $10.6 million, in line with our expectations. We believe this run rate of approximately $10.5 million to $11 million is appropriate for the remaining quarters of 2008. There were several other items of note during the quarter. As Ray mentioned, we had pay offs with an aggregate book value of $133 million. The most significant disposition was our sale of 19 assets to Emeritus which occurred right at the end of June and was the primary driver of our $118 million gain on asset sales. These were sold at a…

Thank you, Scott, thank you, Ray. At this point, we'll open for questions. Question And Answer

The question and answer session will be conducted electronically. [Operator Instructions]. We'll take our first question from Rich Anderson, BMO Capital Markets.

Hey, good morning everybody.

Goodmorning.

Hey Rich.

Scott, you mentioned in guidance and Q2 strength tweaking up guidance for the full year. When you say 2Q strength, you mean the investment activities exceeded your expectations, is that what drove the guidance?

I think it's a little bit I think timing. It's a minor adjustment, but we obviously had a good quarter and continue to see the benefit of lower costs on our line. And I think it's really just an issue of timing. We obviously... I think we gave you all the details to put together your estimates. But I think I'd just leave it at that.

Okay. I think George, you said that 80% or more of your dispositions would be standalone facilities, is that correct?

Yes, Rich, especially if we can get the kind of pricing that we've been seeing...

But that's throughout, ILF, assisted living, skilled nursing, anything sort of standalone.

Right. Our general direction is to move toward more combination facilities, but we frankly still like our standalones. It's just that we are able to get some pretty good pricing at a time when it probably makes sense to enhance our cash with some dispositions.

Okay. So right now, standalone accounts for 32% of the portfolio. Would you be able to say what you think that number will be two, three years from now?

20% to 25% probably.

20% to 25%. Okay. In terms of the investment process being accretive to you, can you talk about financing and what is different about the financing environment even for you guys and also your cost of equity that gets you to a point where you can make positive spread investing?

The big issue that all of us face is the difficulty in raising unsecured money from unsecured debt issuances. What we did a year or so ago with a 10 year we issued it at a 6% yield and today it would be over 8%. That's sort of tough to deal with. Could be that overall that as cap rates change, we are all going to have to get used to a higher interest rate environment. No one is quite sure about that. I'll let you speculate on that Rich. And in terms how we look at our equity... or cost of equity, I suppose that over time we've been pretty conservative. We for years have thought of our cost of equity when we are compiling our overall cost of capital as 12%. And then now we've come down to 10% and where are we now Scott?

I would say 9% to --

9% to 10%. And could it be given what is happening in the capital markets that we could begin to look at it in a different way. We're constantly looking at that quarter-to-quarter, but we also trying not to lose our long-term perspective in terms of what investors want in terms of return on an equity investment. So it's sort of a to some degree a moving target, Rich, but we've been fairly conservative.

Okay. And when you're... when you think about how you are financing acquisitions, is it in your mind 50:50 or is it 70:30 equity... debt equity? How are you getting to your numbers?

We look at our general mix between equity and debt and preferred. And Scott, you want to elaborate --

You are right, I think the concept is we manage the balance sheet to maintain our investment grade ratings. And I would say conceptually that usually, as we have stated I think in the past, our target debt to undepreciated book cap levels are about 45% to 50%, will fluctuate over time. And we'll be opportunistic as we always are in continuing to raise capital. So that's probably the appropriate target.

Okay. Last question, I just... I missed this number... you said you would invest how much in MOBs in the next 12 months?

We've already begun the process of investing in MOBs in the second quarter and many of them are development because they are very new and very customer focused. But I said that including some that have started in the second quarter, we'll do hopefully $2 billion or more.

$2 billion. Okay, thank you.

Medical office... George, I probably should refer you [ph]. You are probably alluding to specialty care as well combining. I don't know if, Rich, your question with specifically medical office building, combining specialty care with medical office building to be the numbers George referenced.

We will go next to Karin Ford with KeyBanc Capital Markets.

Hi, good morning. Ray, did I hear you right that you said that cap rates are down 25 to 50 basis points?

Did I say down? I meant up.

Okay, that's what I thought. Okay. Can you just talk about... I know you mentioned Scott at the very end there you talked about the new legislation and you said you guys will sort of look at that potentially. And what type of format would you guys consider changing your strategy using the new legislation parameters?

Wellwe all think and all of us our [indiscernible] soon having how to reach... this of this as an opportunity and we're going to use very carefully. We think the market may change a bit for operators in terms of how they sell our properties and what ongoing returns they might take. So we have to be ready to be able to use it effectively. On the other hand, at the moment, many of our operators that we have relationships with view us as our capital source and could view a very aggressive move into these RIDEA type platforms as almost competitive with them. So I think we're going to do it carefully and consider what our ongoing relationships with operators are. But I think we'll clearly use it. We view as an opportunity to get a larger part of the revenue slice... larger slice of the revenue coming off the properties.

Would you look to restructure current triple net leases or only on new deals.

No, I think that one has to look at RIDEA as an opportunity to do whatever can be mutually beneficial for ourselves and operators. And so I don't... I certainly wouldn't rule out restructuring. I suspect that it's more likely be done in... for new transactions. But again, if the marketplace changes as between investors and operators, perhaps it will gain momentum. I don't think anybody can predict that right now, Karin.

Okay.Just one more question, turning to be MOB portfolio. Can you just talk about your new leasing prospects for the second half of the year and how you expect to get from 89% occupancy to 92% by the end?

Sure. Is Fred on? I'm happy to do it.

Yes, I'm here.

Go ahead Fred. Why don't you start?

Yes, Karin, we had hired four we expanded our leasing staff from three to four in earlier quarters and we have also changed broker relationships where we weren't getting results in properties. And we're starting to see some very positive leasing trends. So when you look at a lower rate of lease expirations in the second half of the year versus the first half of the year and new leasing activity picking up, that's how we expect to improve it and move the occupancy up.

It looked like retention rates had declined a little bit. Do you expect that to rebound as well?

Well, that's really a function of what's happening in each individual property, and so we do expect that to rebound.

Okay, thank you.

We'll go next to Jerry Doctrow with Stifel Nicolaus.

Thanks. And George, I think you need to move a little closer to the mike; having some trouble hearing you. But my question really was back to senior housing. We've now seen a little bit of results from some of the operators. We had some other REITs talking about this yesterday. And some of the comments that were made seemed to indicate that occupancy was firming, and at least in July sort of more upbeat about prospects for the rest of the year. I mean you guys have been active in this probably longer than anybody. I was just curious as kind of your overall take on the market kind of beyond the stats that you have put out, but just where you are sense is things are today and where you see them headed.

It's Ray, Jerry. When you look at the statistics coming out of NIC, you look at our portfolio, you look at other industry statistics, we still continue to perform at very good levels as an industry. And you may see a little slip between time to time in some occupancy or our margins. But generally, the industry remains very strong. We just reviewed all the industry trends in connection with our bank group meeting and it was good to see that performance was still very strong

Okay. And you... we saw that performance you're thinking occupancy rates or some combination or just if you can give me a little more color.

Occupancy rates and margins

Okay. And particularly on maybe if we can drill down on CCRCs, which I think folks are most nervous about given housing market and you've got a couple coming out of the ground, I think at least entrance fee and then rental as well and you've got some others in your portfolio. How about that slice, particularly how you're feeling about it, how you're feeling about the development and the stuff you've got stabilized?

Jerry, it's still a little early on the ones that are just coming out of the ground but I'll say anecdotally either one of that opened couple of months ago was behind on some of their pre sales and it has gained momentum since opening. So perhaps that one being in the mid west people really wanted to see it open and ready to go but as we look at our say 14 communities right now and that can change quickly. Eight are meeting expectations, three are ahead. One was just acquired, which was a terrific piece of real estate down in Sea Island and two are currently somewhat behind budget. So right now, I think we're pretty happy with what we are seeing, but we will keep you posted as we get more data. It's just to early. I mean one operator has seven of them open and three in development and he is covering and continues to add to existing... his existing assets. And we think he is one of the strongest operators out there and so far, that's a... those are CCRCs in the Southeast and we are very, very pleased with the quality of real estate and the progress that that company has made. Some of the others have just started and one company in Midwest that has just opened one has another one under construction. We are just going to have to keep you posted on those. But so far so good.

Okay.And then just a little bit on yields, again I think Ray had talked a little bit about cap rates currently I mean I was actually a little bit surprised to see the yields on the new stuff as high it was I think it was 6.8% on the acquisitions. Are you yes then that's even a little bit above the range I think that Ray has suggested. I mean where are you seeing so I just did ask and may be trend on that side of it as well

I think that one has to break down the actual acquisitions in a quarter or in a partial year depending upon the asset type. In a quarter where we're going to do more AL and IL, you are going to have probably lower overall yields. But in the second quarter, for example, we had a number of LTACs and similarly in the first half. So that can skew the numbers. If we had done... right now, I guess we could read these out... the CCRC, the second quarter of '08 Jerry just to give you some color in it.

Yes.

We did 56 million of CCRC entrance fees at 8%. We did some combination rental $34 million at 7.5%, freestanding dementia 9%, specialty care hospitals 9.3%. MOBs at 8.8%. So that just gives you an example. It really depends on the weighting to a certain extent of the asset types.

Right. But some of those even like the MOBs, others seem to be buying at 7%, 7.5%. Is that because your different markets are... you can call them deep properties or... it just seemed a little higher --

Yes, one of those I know was a standalone facility out in Tucson that we got at a better yield, higher cap rate just because it was a standalone.

Okay.

It fit into our market, but we weren't going to pay up for it.

Okay. Alright, thanks.

Yes.

We'll go next is Philip Martin with Cantor Fitzgerald.

Good morning.

Hey Philip.

Hey Philip.

George, a couple of questions on the combination projects. In terms of revenue per bed, revenue per resident, what type of a premium are you getting from the residents on these combination projects over a standalone independent assisted et cetera? Are you able to qualify that yet?

Ray, do you have some thoughts on that?

Generally, it's hard to compare it in our portfolio because what do you compare it against? But generally, when you look at it from an industry perspective, you can get 10%, 15% premiums.

Is the discussion... I mean a lot of the issues and concerns dealing with residents and their family is getting them into a property, and that can be pretty stressful, emotional period. Is the process, is the negotiation... not negotiation, is the process, the conversation with the family and the resident an easier one at a combination property than a standalone?

You are right on point, Philip. I mean getting them to move is the hardest thing and then if you are in a freestanding setting, say, independent living, then there is a question about what if their acuity increases, are they going to have to move again. In the combination facilities, you lose that. The other dynamic that occurs is people become... come in a little earlier and it's their home and then they know they are going to stay there the rest of their life. And if you take good care of them and they are happy, they become less price sensitive on the annual rate increase.

Exactly. So all the way around this is okay. Also, on the combination, how much of your plans and your development going forward will be developing these or creating these for lack of a better term clusters there are a few on a...there are more standalone than combination. They are more difficult to develop, more costly, more operating intensive. So how much of your program going forward will just be creating new and developing new and dealing with systems and getting them on board and doing that sort of in terms the growth.

I think in terms of senior housing, you will see the development of combination properties as our focal point. We also think there are certain types of services that can be... that will continue be desirable in a freestanding setting such as the dementia care. So you may see us continue to develop some more of that as well.

Okay. So a lot of this is going to be creating rather than acquiring and adding to --

We're already... we include in our development pipeline the additions to existing CCRC's and adding facilities to existing, for example, a skill nursing and AL, adding an IL unit to it and then it gradually converts to a permanent kind of financing for us. So it's all over the map. As you look at our $4 billion, shall we say, shadow pipeline, while we certainly think development will be maybe 60% or two-thirds of that number, we are seeing some pretty attractive acquisitions too Philip. I mean 35% to 40% would be our guess as to that shadow pipeline. It could be more. For example, we just closed on the Sea Island CCRC at I think last quarter $55 million, $56 million when somebody had originally put it up for $105 million. So we are also seeing some very attractive transactions out there. But clearly, either one has to add on, so to change the sort of the environment in existing assets or build new to get what we think will be some very attractive state-of-the-art properties going forward.

Okay. Okay. I have a couple of more questions there, but I'll ask them offline. The last question I have here is just on the MOB number. I just wanted to confirm that was that 2 million square feet or $ 2 billion

Scott made clear. It's $2 billion in our sort of shadow pipeline would include both of MOBs and...

And specialty care

... hospitals and that's just a guess. I mean shadow pipeline enhances... it's enhanced probability of getting the deals we are not saying they are coming. Okay it's like a relationship problem. In term the square-to-foot shifts to remain square feet, in terms new MOBs and if you let that out say pouring out the existing and you look at perhaps calling out over time some percentage of existing that aren't going to stand the pace of change. Or I think we are going to have a great very opportunity to have one of the very best MOB portfolios in the sector. And already have a good one.

Okay, perfect. Thank you again.

We will next to Tayo Okusanya with UBS.

Good morning gentleman, congratulations on another solid quarter.

Thanks Tayo.

Just a couple of questions around development. When I look at the conversion schedule in the supplemental, it seems like some annual conversions have moved over from 2008 to 2009. Just hoping you can give us some color in regards to that.

Sure, Tayo, it's Scott, how are you doing? I think you'll always see some minor fluctuations from month-to-month. We have projects change from time-to-time. You can have weather delays, permitting difficulties, or something in particular that moves projects around for... by a few months, minor construction delays. And I think, you are right, our number... this year's conversions did decline slightly from what we were advertising last quarter, but it was only about $40 million that got pushed out to 2009. We had one, just to give you an example, we had one combination rental assisted living facility that got pushed out from November to April for about $18 million. There's another assisted living facility, about $10 million that was pushed from December, projected conversion to April and another $8 million project from December to January. So we're talking only one to four months push out towards the end of the year

Okay, that's helpful. Then the second thing is when I try to reconcile on page 30 of the supplemental, when I look at the development activity... you have development activity going on for 42 projects. But when I look right below that, it was funding [ph] projections. You only have funding projections for 35 projects.

Yes, I can help you. I mean the development activity at the top half of that page is any fundings for any projects throughout the entire year, some of which may have converted while the bottom part, the 35, it just represents projects that are currently still under construction.

Okay, that helps. All right, thank you very much.

Sure.

[Operator Instructions]. We will go next to Rob Mains with Morgan Keegan.

Yes, thanks good morning. I had to jump in middle of something. So if I ask something that somebody... that you've already touched, just tell me and I'll talk to you later. Guidance for TIs was down. Anything going on there?

Scott, you want me to take that one?

We actually didn't hear anything after they said Rob's name. We didn't hear any of the question.

Could you repeat that Rob?

Temporarily muted.

Yes, sure. Can you hear me now? Guys, can you hear me?

No, not very well. We can't you hear you, Rob that well.

We will go next to Dustin Pizzo with Banc of America Securities.

Is that something that, Fred, you could repeat? You heard his question?

Yes, he asked why the TI guidance went down.

Oh, the CapEx numbers. That's really just a minor adjustment related to when our leasing activity occurs. And Fred, I don't know if you want to add any more color, but it's really given more of our leasing activities in the fourth quarter, it's just the latest estimation of when we will have that CapEx and spend the money on CapEx and TIs.

Yes, I think that handles it; it's just the lag time.

Yes.

Hey, good morning guys. It's Dustin Pizzo with BofA.

Hey Dustin.

Just... I may have missed this as well earlier. I hopped on a little late. As you think about the RIDEA legislation, would buying an operator be something that would interest you or is that a business that you guys want to stay out of generally?

I think we are open to any possibilities in terms of using RIDEA. I think I made that clear. We are just going to be fairly considerate in it because of our close relationships with our existing operators. We are going to see... we are going to just see how the market evolves and hopefully we will take advantage of it.

Okay. And are there any asset types that something like that would appeal to you more in or is it again, just across the board?

It's across the board. I think our preference for combination facilities over time would suggest where we probably like to be in that. I guess I would just add that RIDEA is not just without its problems. RIDEA gives on a chance as the lessee to a TRS to capture more of the revenue stream. But the question then is, in hiring an independent manager, is there a sufficient incentive for that manager? So the key is to do that only when you have a top flight operator who has some incentive arrangements and some disincentive arrangements within the management contract. Absent that, the question is why will a operator work hard enough to produce that extra revenue that will go to our TRS lessee? So I think people have to be a little careful looking at RIDEA. It's not fantasia by any means. I mean people have to be considered in using it.

Good. Thanks.

Thank you

We will go back to Rob Mains with Morgan Keegan.

Yes, I replaced [ph] the headset I was using there. Is this better?

Yes, much better.

Okay. The other question I had was given that we are seeing CTI levels recently that we haven't seen in a few years, and I don't... looking at your portfolio, I don't know where most of your lease are capped. But might we be looking at if CTI stays where it is now, any kind of movement up in your annual bumps, or don't you think that will be material?

Most of them have ceilings on them. I wouldn't anticipate any material increase in earnings growth as a result of higher inflation. We may see some in the private pay area where we share a little bit, but it's not going to be a material number.

Okay, thanks.

With no further questions in the queue, I'll turn the conference back over to Mr. George Chapman for any additional or closing remarks.

We'd just like to thank everybody for participating in our call and Scott and others will be available if you wish to follow up. Thanks very much.

Once again, that does conclude today's presentation. We thank you for your participation and you may now disconnect.