Healthpeak Properties Inc (PEAK) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 HCP earnings conference call. (OPERATOR INSTRUCTIONS) Now I would like to turn the presentation over to your host for today's conference, Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may go ahead, sir.

Thank you. Good afternoon and good morning. Some of the statements made during this conference call will contain forward-looking statements subject to risks and uncertainties which are described from time it time in press releases and SEC reports filed by the Company. Forward-looking statements reflect the Company's good faith belief and best judgment based upon current information, but they're not guarantees of future performance. Projections of earnings and FFO may not be updated until the next announcement of earnings and events prior to the next announcement could render the expectations stale.

Additionally, certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures as well as certain related disclosures in our first quarter supplemental information package or our earnings release each of which has been furnished to the SEC and is available on our website at www.hcpi.com. I will now turn the call over to our Chairman and CEO, Jay Flaherty.

Thank you, Ed, and hello, everyone. Welcome to HCP's 2007 first quarter earnings conference call. Joining me this morning is Executive Vice President, Chief Financial Officer, Mark Wallace to whom I will now turn over the call to discuss our recent results. Mark.

Thanks, Jay, and good morning. We made significant progress this quarter on a number of initiatives that will drive the 11% FFO growth rate that we discussed on our last call. We expanded our investment management business with the formation yesterday of a new $585 million joint venture. We have completed over $450 million of investments to date. Our same property portfolio delivered solid performance once again, and our balance sheet continues to be in great shape.

This morning we reported FFO per diluted share for the first quarter of $0.50. These results include $0.03 per share of CNL merger related costs and $0.01 per share of costs we wrote off this quarter related to acquisitions that were not consummated. FFO per diluted share for the first quarter excluding those items was $0.54. It is important to remember the first quarter of 2006 included income of $7.3 million or $0.05 per diluted share resulting from a prepayment penalty received upon early repayment of a secured loan receivable.

Consolidated GAAP basis same property NOI growth was 4.6% while same property adjusted NOI growth was 3.4%. Each of our four principle sectors turned in solid performance. Adjusted NOI growth of 4.8% for our hospitals reflected higher additional rents, including the successful clarification with HealthSouth of additional rent provisions in our leases that allowed us to recognize those rents. Our medical office buildings delivered adjusted NOI growth of 4.5% driven principally by lease renewals and contractual escalators. Our other sector was adversely impacted this quarter by one tenant reducing their space by 160,000 square feet at our Lusk campus in San Diego. Jay will have more to say about this in a moment.

We acquired interest in $449 million of properties during the quarter at average initial yields of 8.2%. Our principle investments included the Kindred exchange and the medical city Dallas DownREIT transaction. We also acquired three medical office buildings from affiliates of the Cirrus Group for $25 million at an initial yield of 8.2%. Occupancy at two of the properties are in excess of 90% with one lease-up property currently at 59%. We subsequently placed $16 million of 10-year secured debt on these properties at 5.46%. All three properties will continue to be managed by the Cirrus Group.

In December we completed the sale of 69 skilled nursing facilities for $392 million. As part of this process tenants for nine additional SNFs exercised rights of first refusal to acquire properties valued at $52 million. The sale of all nine of these facilities closed during the first quarter. We recognized a gain of $30 million associated with these sales although such gains are excluded from FFO. Combined with the SNFs sold in the fourth quarter of last year we received total proceeds of $440 million for a gain of $256 million on the 78 SNFs we sold.

We previously announced the formation of an institutional joint venture on January 5, with HCP contributing 25 Horizon Bay managed senior housing assets valued at $1.1 billion. We acquired these assets in connection with the acquisition of CNL retirement properties. We retained a 35% managing member interest in the venture and earned an acquisition fee of $5.4 million at closing which we recognized in the first quarter of 2007. We received proceeds of $280 million at closing which coupled with the proceeds from a Fannie Mae facility we expanded in December brought our total proceeds on this transaction to $726 million.

Yesterday we formed a new medical office joint venture with an institutional partner that includes 55 properties valued at $585 million and includes the three recently acquired Cirrus MOBs I mentioned earlier. Prior to closing we placed $122 million of secured debt on 14 previously unencumbered properties that increased the portfolios overall leverage to 344 million or 59%. The portfolio secure debt has a weighted average rate of 5.47% and an average maturity of just under nine years. Upon formation we received $196 million in proceeds which included a one-time acquisition fee of $3 million. We retained a 20% interest in the venture, will act as managing member, and will receive ongoing asset management fees. Our investment management platform now includes 3 institutional joint ventures with assets of $1.8 billion.

Regarding capital markets activities on January 19, we issued 6.8 million shares of common stock for net proceeds of $261 million, three days later we issued $500 million of ten-year 6% senior unsecured notes receiving $493 million. Net proceeds of both offerings were used to fully repay our term loan facility and reduce borrowings under our revolving credit agreement. Our balance sheet at quarter end includes consolidated debt of $5 billion, about 14% of which is at floating rates. Borrowings under our bank line at quarter end were $190 million.

CNL merger related costs of $7.3 million for the first quarter were in line with our expectations and included the following $4.5 million related to retention and severance programs provided to Orlando personnel are reflected in G&A; $1.6 million of bank fees associated with our term loan is included in interest expense, the term loan is now fully repaid as I mentioned earlier; $1.2 million of integration and other costs are also included in G&A.

Regarding guidance for 2007, we are maintaining our prior FFO guidance of $2.15 to $2.25 per diluted share excluding CNL merger related items. Mid-point of that range represents a per share FFO growth rate of over 11%. CNL merger related costs for the full year are still expected to be $11 million or $0.05 per diluted share.

The key assumptions that underlie our current guidance are as follows--gross investments are forecasted to be $1.5 billion, 20 to 25% of gross investment volume is targeted for joint ventures. We continue to expect transfers of assets into joint ventures this year to range between $1.7 billion to $2.2 billion including the senior housing joint venture we formed in January and the new MOB joint venture we just announced. Our investment management platform generates between 15 million and $20 million in fee income, asset dispositions are expected to be between $250 million and $400 million, gains reported for GAAP earnings on these sales are estimated to be about $125 million.

Adjusted same property performance is expected to be 2 to 3%, reported G&A is expected to be between $70 and $75 million, our guidance does not currently contemplate any new capital market transactions, and our guidance assumes weighted average diluted shares of 216 million for the full year.

Last, we made some changes to our supplemental package this quarter to provide more information on our joint ventures and respond to suggestions we received over the past few months. We'll continue to evolve the information to ensure it is helpful as our new operating platform to expand and we welcome your continued suggestions and comments. I will now turn the call back over to Jay.

Thank you, Mark. As you have heard, with a third of the year in the books, we've enjoyed solid performance across our property sectors and business platforms. Let me provide a little more color to Mark's remarks by touching upon five separate topics. Number one, the CNL acquisition.

It has been a year and a day since we announced our $5.3 billion acquisition of CNL Retirement Properties. While I understand many of you were initially surprised at the levered capital structure we utilized to close the acquisition, and then equally surprised at how quickly we delevered the Company's balance sheet, the passage of time now allows us to highlight the non-balance sheet impact of the transaction to HCP. At this point a third of the acquired assets sit in two separate joint ventures. One, in the MOB space, and one in the senior housing space. The Cirrus development platform has already contributed a number of assets to our new MOB venture. Another 40% of the assets our Sunrise portfolio, are candidates for additional joint venture opportunities.

We have sold our 55% stake in the DASCO property management entity back to DASCO, and they continue to property manage a portion of our CNL MOB portfolio. The CNL portfolio's performance has exceeded HCP's underwriting assumptions. For example, in our Sunrise portfolio occupancies are up 200 basis points at quarter end from 89% to 91% versus the year earlier period. The CNL integration continues to go well. With the planned September 30 2007 closing of the Orlando office, we are very far along on restaffing our Long Beach and Nashville locations with transfers of Orlando professionals and new hirings. Two-thirds of the Orlando office space has already been subleased, and we plan to complete that process in the fourth quarter of this year.

I want to again express my deep appreciation to our colleagues in Long Beach, Nashville, and Orlando for the enormous progress that's been achieved in such a short time frame.

Two, sector operator review. The relentless wave of consolidation in the senior housing space continued during the quarter as two more of our operators, Merrill Gardens and Summerville were acquired.

On the hospital side, we are focused on maintenance CapEx concerns at three of our tenant properties, and we are having some chats with them about those issues. We are very pleased with the overall 3.4% increase in adjusted same property performance for the first quarter and the continued sequential quarter acceleration of this metric. Our four main property types were up nicely ranging from plus 3.4% in senior housing to plus 4.8% in hospitals.

There is some noise in our other category which I want to elaborate on. In January 2004 we acquired the Lusk campus in the Sorrento Mesa submarket of Northern San Diego County for $38.5 million. It is a two-building complex and prior to closing the transaction the tenant indicated their intent to downsize and consolidate their space needs into one building by year end 2006. As a result, we structured the lease to allow us to reposition the campus as a multi-tenant complex.

As we started 2007 one of the buildings was 100% occupied at the existing contractual rent of $1.43 per square foot and the other building was vacant. We have signed a lease for half of the vacant building at $2.70 per square foot and are in discussions to lease the remainder of the building. The result of this activity is that this campus will experience same property declines in 2007 and then spike in 2008. As an aside, the price HCP paid for the campus of $186 per square foot compares favorably with the recent sale of a comparable building by Maguire Properties for $421 per square foot.

Three, balance sheet. What a difference six months makes. For the first time in recent memory, we are now long cash at HCP as pro forma for the closing of yesterday's joint venture transaction. We have no outstandings on our bank line and one quarter of $1 billion in cash balances. This should come in quite handy in light of our current pipeline volumes. It is very important to understand the balance sheet implications of our asset sales and joint venture activities. The viability of these initiatives were the single most critical input in the decision to borrow $4.4 billion of the $5.3 billion CNL purchase price. In addition, this capability allows us to fund our forecasted 2007 investment activity ex any strategic transactions without the need to go to the Capital Markets.

Four, investment management. Yesterday's joint venture announcement demonstrates our tremendous momentum with this platform. As our investment management program approaches $2 billion or approximately 20% of our assets under management, our MedCap and Sunrise portfolios present the potential for HCP to double the size of this platform from current levels. I cannot emphasize enough the economic and strategic benefits that this capability provides the Company, adding lower left quadrant acquisitions with upper right quadrant returns provides superior risk adjusted results for HCP's shareholders.

Five, deal environment. The already active real estate deal environment has now been joined by unprecedented healthcare services M&A volumes to create a target rich universe of investment opportunities for our company. All of our five property subsectors have participated in this activity. In addition, other healthcare REITs are now creating institutional joint ventures for the first time. These two trends auger well for the continued acceptance of healthcare real estate as a major allocation of institutional interest.

Further evidence of this trend can be seen in the senior housing space where recent activity on the part of private equity investors includes Fortress' success with Brookdale and more recently Holiday, Blackstone's closing of a joint venture with Emeritus. Apollo exchanging its ownership stake in Summerville for a position in Emeritus. Lazard, who has been an active buyer of portfolios via its Atria investment and Chartwell ING which added to its Horizon Bay exposure with an investment in Merrill Gardens. It is particularly significant to note that none of these firms are taking any money off the table at the present time.

That concludes my formal remarks. We would welcome your questions at this time. Operator.

(OPERATOR INSTRUCTIONS) The first question comes from the line of Mark Biffert. Please proceed.

Just in regards to adding on to the acquisition market, what are you seeing in terms of assets? Is it more portfolios or one-off assets and which property types are you the most interested in right now, MOBs, senior housing or hospitals?

Let's see. In terms of the composition of the pipeline, I would say it is pretty broad based. You've got certainly good representation across hospital, skilled, senior housing, MOB, and lab pharma. It is really quite complete, and as an aside, I have never seen a situation where not only is there a lot of volume but it is real quality stuff. If you just take a look at the hospital and skilled space, for example, in the last couple of months you've seen the acknowledged leader in the hospital space, HCA, be sold, and the acknowledged leader in the skilled space, Manor Care going through the process, and that's consistent with the other property types. So it is from our standpoint, it is not only the volume is good but the quality is extraordinary. That is really very exciting from the perspective of our acquisition colleagues.

That's a little bit of the composition of the pipeline. In terms of where we're interested, I mean I think we're looking across the board. We -- obviously it's a function of what's available and the price it is available at, but I wouldn't rule anything out, and as you've seen in the hospital space, we've really been primarily focused as an active investor but more in the form of mezzanine or hybrid mezzanine structures a la our Medical City and HCA investments as opposed to being a pure equity investor there, Mark.

Any interest in the Health Care REIT trust MOB portfolio as they've sold off the remaining of their senior housing assets, would the MOB portfolio be of any interest or?

I am sorry, any interest in -- you just cut out right after that.

Sorry. The Health Care REIT MOB portfolio? Given they sold off their senior housing portfolio?

Yes, Health Care REIT, I think unless -- I think they bought [Windrows]. I am not aware that it is for sale, Mark. Maybe I might be missing something. You may be talking about Healthcare Realty Trust.

Yes, that's what I--.

Yes. Well, look, as I said on many occasions, we think quite highly of Dave Emory and his team and his pipeline, but again I am not aware of any strategic activity there at the present time.

Okay. And lastly, related to the 3 MOBs that Cirrus developed for you, where are those assets located and who are the major tenants that are filling those buildings?

They're all located in Texas, Mark, and you typically would see, different doctor groups that's kind of their model. They kind of go after a small number, but a concentrated number of high quality doctors groups which result in that a nice multi-tenant mix within the MOB structure.

What's the dollar volume are you expecting for the rest of the year in terms of deliveries from Cirrus?

Our development pipeline overall, you recall at our last call I indicated it was approximately $230 million. We've had -- that's in total, Mark. That's not just Cirrus. I will go to the Cirrus component in a second. Overall our development pipeline on our last call which reflected 12/31/06 metrics was $231 million. Today that's dropped down by the amount that's come online in the first quarter which is about $37 million, so that pipeline in the aggregate today is about $194 million, and of that 194, the portion that is Cirrus is $138 million.

Okay. And by the way, I like the "O, Canada" song at the beginning. Was that a knock on Sunrise REIT?

Nope, we're not knocking anybody.

Okay. Thanks.

Our next question comes from the line of David Supros with Merrill Lynch. Please proceed.

I think we're going to start devoting a section to analyzing the songs you choose to intro with. You have been a net seller of SNFs in the past six or so months, and given you talk about Manor Care's potentially being out there, has your thinking on this asset class changed at all?

No, no. I think you got to go back and look at the strategic reasons. Go back and look at what we talked about on the SNF disposition, what we were at there were a couple of strategic initiatives. One, recall we had a lot of properties with a lot of different operators, and I think I used the analogy of borrowing from a retailing concept, the SKU concept where we wanted to go from being like a Kroger or a Safeway or a Winn-Dixie down to more being like a Costco where we had chunkier concentrations of properties with a smaller number of operators and I believe we achieved that with respect to the 78 property disposition of the SNFs which closed effectively in two traunches, one in November and one during this quarter.

Now, Manor Care's model is a little different, much more short stay. They own all their real estate, so that's really -- I would put Manor Care in almost a class by themselves relative to the skilled nursing. I wouldn't say that represents any change or look we're opportunistic and we're obviously as things present themselves we take a look at it and the stuff that gets through the filter is a very small percent of what we initially look at.

With that in mind, it looks like your expectations for dispositions went up a little bit, so is that in any particular asset class or is it more along the same lines of your strategic selling of assets?

I think you should expect to see us again take a step back. We believe there is a lot of merit in continuing to recycle our capital. We've obviously done a lot of that in the last two years. I think I've said which I would continue to say this morning that we're going to continue to do that although you shouldn't expect to see the 1.5 billion to $2 billion worth of volumes that we've seen in the last twelve months going forward, but I think the dispositions that we've got in the model I think now reflect the effect of the ropers that were exercised on the skilled portfolio. We took the market in the third quarter of last year. Those are all closed, and away from that you should probably expect to see us perhaps part with some senior housing assets.

Okay. All right. Fair enough. Thank you.

The next question comes from the line of John Litt with Citigroup. Please proceed.

It is Craig Melcher here with John.

Hi, John how are you doing.

In the write off of acquisition costs in the first quarter, was that Sunrise or are there other large acquisitions that you were looking at?

That's Sunrise REIT.

Will there be any other charges related to that in the second quarter?

I don't expect any no,.

The interest and other income jumped quite a bit from fourth quarter to first quarter. Is there anything in that first quarter number that is nonrecurring, the $16.1 million number?

No, there is not. From fourth quarter about the only thing that you would have in there would be you would have the four quarter HCA investment.

Right. But there is nothing else in there.

No.

And on the MedCap and Sunrise potential joint ventures, when I guess in your guidance it doesn't really seem to be in there since you're already closing in on the low end of the range on the contribution of your assets into joint ventures, but when can we expect that timing maybe to be?

Well, I think we're working quite hard on this. We feel pretty good about going from 0 to 20% of our assets in four months, so I think now that we've got yesterday's venture behind us, we will turn a greater portion of our available resources to I think -- I don't think it is out of the question to think that by the end of the year those could be put to bed, but no guarantees.

If you get that $2 billion how would that break out between the Sunrise assets versus MedCap.

The $2 billion that's closed contains -- just be very clear, we are now closed on about $2 billion of assets which represent 20% of our total assets. I was suggesting that the MedCap and the Sunrise portfolios presents the potential for us to double that platform, but right now none of our Sunrise assets and none of our MedCap assets are in any joint ventures. Those are the next in the queue if you will, and I would put MedCap further along in the queue than Sunrise.

The next question is from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Thanks. Good morning. Just a couple things, Jay. Sticking on joint ventures just for a moment, I was wondering if you can give us a little bit more on the sort of the metrics on the one you did -- maybe some guidance just to think about them conceptually going forward, cap rate which you're selling some of this stuff, just clarify the asset management fees, sales fees, theoretical leverage ratio?

Well, it continues to evolve. We typically would look to contribute the asset set at acquired costs into the venture initially. That was certainly the case for the three ventures we have up and running now, the Johnson portfolio, the Horizon Bay portfolio and this most recent portfolio which is comprised of Cirrus and DASCO medical office buildings.

The things that are changing between them are a couple of things. One, depending on the asset class you will see different leverage ratios. For example, in the MOB ventures you typically will see higher leverage in those ventures than you will see in senior housing. Generally senior housing kind of tops out at 60, maybe 65% where as you can see 65 to 70% in the MOB ventures.

Another variable that moves around a little bit is HCP's ownership of the venture. Recall in the -- in our original MedCap portfolio we owned a third of that portfolio. In the Johnson portfolio we owned 35% of that portfolio. That's consistent with our Horizon Bay portfolio, and then in the portfolio we closed yesterday we're down at 20%.

And in terms of just your thinking about where those things might play out as we go forward because obviously a couple of those things really could move numbers significantly. What's your ownership share likely to be? Any sense of where that might come out?

I think -- we don't have any one single black box, Jerry. It is a function of what the prospective partner is looking at in terms of trading off overall return for that component of the return that's current income versus their own comfort level with leverage. We're -- our view is we're pretty relaxed.

We own the assets and hopefully we're doing a good job taking care of them, and we're really more interested in the profile of that venture partner, and having that venture partner be both long-term in two respects, one, having a long-term time horizon, and I think I have spoken previously about some of the lessons we learned from the first go-round on the MedCap joint venture, and then secondly if we're doing -- hopefully if we're doing a good job and our venture partner likes what they're doing, they're going to continue to reup with us, and that's certainly been the case in some recent activity, and we're trying to grow those relationships over time.

And asset management fee, it is 50 bips and then you get a sale and a disposition fee? Can you give us a sense of where those might come out?

Again, a little bit all over the map. Typically you would see acquisition fees at about 50 basis points, and then you would see ongoing asset management fees that are going forward likely to be structured as in the form of cash flow promotes maybe averaging 30 to 40 basis basis point zone, and then dispositions, that's a little -- a lot of times the whole strategy is -- doesn't really contemplate dispositions.

Just one or two others if I could. Any just color you want to give us on Sunrise REIT in terms of your decisions to bid not, originally not bid and then bid now that the thing is settled or?

Here is what I would say on Sunrise REIT. I would say Sunrise REIT is an interesting transaction, and we congratulate Ventas on closing it last month. I have communicated that same message directly to Ventas' CEO the weekend before last and from HCP's standpoint we moved on.

Just your interest in Biotech lab space, that was one of your product types but just feelings about that go forward and is that sort of JV-able as well, that property type?

Well, our feelings in lab, pharma, office has not changed whatsoever. We like it with the caveat that our preference is to have a portfolio that has a tendency that is less a profile of small Biotech companies where you don't have a lot of products and commercial use at the present time. A lot of times you will see the Biotech model will be someone has got a patent and they're kind of in a Phase I or Phase II--.

You like tenants with actual income?

Yes. That's probably more succinctly put than what I was saying. I think if you take a look what we've got in our portfolio, we have got companies like [Allain], Myriad Genetics, a number of old people like that that are kind of they have graduated from the biotech into maybe emerging pharma. We like that. The profile of that tendency in this space is not easy to come by, but we continue to pound the pavement. I don't think there has been any change at all in our strategic interest or selection criteria.

Now, with respect to joint venture activity, it is fascinating to watch. I think I shared with a number of you the story where you if you just go back and look at GE Real Estate as a proxy, back in the first part of this decade, they really had no health care exposure, and their first foray, if you will, was a fixed income investor into of all things the MedCap portfolio. Then when we were going to acquire them a couple years back, they realized they were going to get taken out of that investment, they came to us and they graduated to a joint venture model and then they went on to make direct investments not just in the MOB space but ultimately came all the way across the risk continuum in healthcare to arguably the most risky side of the space which is skilled nursing and last August you saw their activity there.

You're seeing the same thing. It is just spreading like waves across all of our subsectors. I thought it was very interesting no note that during the quarter Biomed announced a joint venture with an institutional capital partner on I believe it was the stabilized portfolio of their Lyme investment. I think it is just there, and that's my comments in my prepared remarks about the combination of the performance of the property types as well as a number of recent joint ventures that have been set up by healthcare REITs that represent their first healthcare REIT ever. These are all signs that there is a growing acceptance and comfort level with healthcare real estate on the part of institutional investors, and that's good stuff as far as we're concerned.

Okay. Last one for me, the NOI growth same store on the senior housing portfolio was a little lighter. I was reading 2.8 in your supplement although I thought you were saying a different number, and I was just curious if anything was going on there, especially looked like the occupancy was up a couple percentage points. I expected the NOI to be a bit higher and I was just wondering if we get any color on that.

I think the number that we were referring to was the cash number was the higher number. But, no, I don't think there's anything in particular going on in the senior housing spec.

Our next question comes from the line of Rob Mains with Morgan Keegan.

Good morning. Good afternoon. A couple questions on fab. The straight line rent for the quarter was still kind of high. Is that going to -- is there anything going on in the quarter that is going to settle down in subsequent quarters? I have a similar question about TI and CapEx where they're going to settle out or whether this is a good run rate.

On straight line rent for the quarter okay, the number or the -- if you look in the supplemental package, the interest accretion in straight line rent is actually, it actually came down from the fourth quarter. It was 13 million in the fourth quarter, came down to 9.7 million. I think those two numbers will come down as we move assets into joint ventures. Okay? We'll pick up our proportion of share, so let me give you a couple of numbers here. For the -- based on the forecast and based on the joint ventures that we are anticipating forming, I would expect the straight line rent component of that number to be, for the full year to be just under 19 million, okay, and then the interest accretion number to be just under -- just over 9 million.

Okay.

I think, Rob, Mark correct me if I am wrong, but I think it was some straight line rent on that Horizon Bay portfolio which you saw in the fourth quarter results, Rob, but as we moved it very early in the first quarter into a joint venture. The investors share of that obviously went away from our P&L.

That's right. Again if you look back in the supplemental package where we break out the joint ventures, you will see the straight line rent component is shown there separately.

Same question for TI and CapEx. Which was up sequentially from $7 to $8 million?

I am showing -- our forecast right now shows a TI and CapEx of just over $26 million for the full year.

Okay. So some of that goes away in the JV's as well, I guess.

That's correct.

I want to make sure I understand the same store on the other office space. You have a tenant that moved out a part of the building that you own but you released it almost double the original rent. Is that new tenant not included in the same stores?

You won't see that until next year. That at least kicks in on September 30 I think is the effective day of the lease.

As we're speaking right now it is still empty.

Right. The lease is signed, and then we're pretty far down the path on a lease for the remainder of the buildings, so it really creates nice upside for our shareholders in light of being able to mark-to-market the rent there versus what we had on that particular building.

Right. And then I want to make sure I understand your comment right about what's going on in the M&A market right now, Jay. There's as you suggested there is a lot of LBOs going on involving all sorts of healthcare facilities. Is that creating an opportunity to -- is that where you see the opportunity partly because you've got guys levering up who now need to monetize some of the assets they own or is it beyond that?

Well, I think I'd point you in the direction -- it certainly includes that. A lot of times one of the friction points for that particular technique would be tax basis of the assets which often times ends up being a little bit of a stumbling block. We obviously have our DownREIT card which is in the aggregate represents $1 billion of transaction activity that we've been able to bring in for the benefit of our shareholders through DownREITs. If you're an institutional investor, that's probably less -- particularly if you are a leveraged investor looking to take proceeds, that's probably less relevant, so that's certainly one-way to play it.

Another way to play it would be the way we played the LBO of HCA where we came in and took 20% of the mezzanine stack of the capital structure. There is a variety of different things we can do.

If you have a community buying a Triad, does that create an opportunity to get some MOBs that they might want to shake free just to reduce their leverage?

In theory it could.

Well, you answer in theory. I am assuming that you're not seeing a whole lot of activity towards that direction?

Which direction? We have a lot of MOB activity in our pipeline.

Being -- it is the catalyst is not leveraged buyers wanting to reload their balance sheets?

Leveraged buyers reloading their balance sheets.

Someone who's bought a bunch of hospitals and levered up is not looking to get rid of MOBs just because they want to raise cash.

I haven't seen a lot of that. What I have seen is people then looking to sell whole hospital campuses.

Right.

And typically, by the way they typically don't want to look at sale leasebacks as an option there because the nature of their credit agreements are such that they would probably pick up the lease obligations, so that's why we focused on at least on a couple of situations now, play in the way we did in the HCA LBO.

That's helpful. Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

Thanks, and good morning to you. What do you forecast to be the charges CNL merger related charges in the second and third quarter?

Right now, okay, so we had the way we have it forecast is 7 -- we had $7.3 million first quarter, $2.2 in the second, $1.2 in the third, and then the balance in the fourth quarter.

Okay. I am sorry, I missed your -- I got interrupted. The acquisition disposition target for '07?

$1.5 billion for acquisitions with 20 to 25% being targeted for joint ventures, asset dispositions of 250 to $400 million.

Now, Jay, the JV target has all for at least for the recent past has been 30% of the portfolio. If you do double up on it with the Sunrise portfolio and the MedCap portfolio you get to 40%, so since you have sort of maybe are at least considering going past that ceiling level, how big of a percentage do you think JV investments could become for HCP?

Well, those percentages, Rich, would assume that we added no additional properties to the assets portfolio for between now and the end of the year which I don't think is a very likely scenario, so--.

Are you still sticking with 30?

Yes. Who knows. We're opportunistic. If we we're getting on pretty well with a particular partner and they like the experience and they want to grow, we would be pleased to grow that with them, so I think -- you shouldn't take 30% as an absolute ceiling. I definitely want to say that, but we really kind of carved out the space and we want to go at it hard and we've got a lot of very high quality resources internally focused on growing this platform right now.

Okay. And speaking of opportunistic, and the hospital business, how sustainable would you say that same store growth level is for the future considering some of the challenges that are still--?

I think that 4.8 number as Mark indicated in his prepared remarks, that benefited somewhat from a little bit of a catch-up with respect to our HealthSouth portfolio. We clarified some things during the year. We had reserved some things from last year, and then with a clarification that got released in this year, so I am not sure that's necessarily indicative going forward.

Lastly, on the topic of lab space, it's well known that [Plough state] is looking to sell its U.S. portfolio. Have you taken a look? Are you interested, any comment?

As you know, we have a policy of not commenting on any speculation or rumors on transactions.

Did you hear about it?

I heard about it from you.

Thank you.

The next question comes from the line of James Kumpel with Friedman, Billings, Ramsey. Please proceed.

Can you just give us a sense of the market now in terms of cap rates and the different asset categories that you're interested in and if you think any one of those particular asset classes have hit a bottom or if you can continue to see just slowly chipping away at those cap rates?

Yes. I think it is really your last comment. I mean, we had a move down there in late '05 and the first quarter of '06, and then things went sideways for the summer and into the fall, and then we had a dramatic move down in Q4 of '06 like a step function down, and the activity to date this year is really I like the way you just phrased your question, it's really more chipping away at it. We haven't had a step function down, but things are definitely trending lower. A couple for instances in MOB land if you're on campus you're bouncing off a six cap rate, 6, 6.25ish if you're off campus, that can be anywhere from high 6's to high 7's.

Senior housing if we're talking more recently developed high barrier to entry sorts of products we're in high 5's, low 6's, and then by the way there is -- there used to be three years ago you would get a discount on a larger portfolio and you would see premium for the smaller one-off property portfolios that's completely done a 180 by the way. That is completely upside down now, and then for properties that don't have the characteristics I just cited, you can see the cap rates there trend into the low to mid 8's.

Let's see. In life sciences again, depending whether you're in one of the core research markets with high quality tendencies, you can see that drift into the mid to high 5's, low 6's, and then if you're something that has got a little more speculation in it or a market that might be a little soft or if you're in a concentric circle, it's one or two concentric circles away from ground zero, ground zero being the research institution. You can see those go into the low 7's. Skilled, you're looking at cap rate on rents anywhere from say 7.5 to say maybe 9, and cap rates on the enterprise you have got to look at it both ways on the skilled side to be 11.5 to 12.5, so -- but every single one of those metrics I just cited they are all trending lower, but trending lower not -- we're not seeing the fall off the cliff we saw in the latter half of '06.

I guess on that point since they are churning lower, what kind of -- it makes the deals look more risky obviously, and so what kind of rent coverage levels are you looking for respectively? In the SNFs are you looking at 1.2, 1.3, but in the senior housing maybe more like 1.1?

David, I think earlier in his question pointed out we really have not -- I don't think we've acquired a SNF property, I could be off on this since our Tandem acquisition in April of '04, so we're probably not the best folks to talk to with respect to coverages. A lot of it depends on the growth rate, for example, in senior housing if you've got a property, like if you take a look at our Beverly Hills mansion that Sunrise operates. When we acquired that, I think that was about 56% occupied, six months later we're in the mid-90's, and we have a tremendous pop there, so for something like that, if there is something like that we can see what we've got and it is recently developed, and it is a good location and stuff like that, I think we would certainly be more aggressive in terms of what a going-in cap rate is going to be based on what we perceive to be the growth. It is really kind of hard to generalize, the question of what do you got going on in terms of the current performance and the anticipated performance.

I guess in contrast to like the Sunrise type portfolios, if you're looking at the higher risk long-term acute care stuff where you're kind of in a difficult reimbursement environment yet you might be looking for 1.3 to 1.5 or something.

I think in hospitals, no, I think hospitals got a lot more moving parts going on than either a skilled nursing property or a senior housing property, a lot more things can go bump in the night. So from our standpoint I can't remember any hospital investment we looked at that had a coverage below a 2.0.

Wow. Okay.

Okay? You got more operating risk in a hospital, but the hospital is much more of an operating business platform as opposed to say senior housing or skilled where you got more, it's more of a real estate--.

Lodging residential kind of thing.

Exactly.

Well, can you opine a little bit about international opportunities, you didn't go overseas but you went over the border in looking at the Sunrise stuff in Canada.

A little cold up there, hey?

What kind of international items or portfolios are in your sights and what might we be able to expect the next three to five years?

Well, I think the water is a little warmer south of the border, so there is an opportunity there. We've been horsing around a little bit down there. We have looked at some things in Europe both in the U.K. and on the continent, hard to make that math pencil out given the differential in cap rates over there versus here, and that's really less a healthcare comment and more just a general real estate comment. You've got much lower cap rate environment over there. I keep coming back to what I said for a long time. We're in a unique fish bowl here which is the United States of America there is no other country civilized or uncivilized that's got 16% plus of its gross domestic product going into healthcare. We can all have a very interesting discussion as to whether or not that's appropriate, particularly with the 48 million Americans that don't have insurance, but it is what it is, so that in and of itself gives us a very large universe of investment opportunities. You ask three to five years out. I can't imagine a scenario where HCP's portfolio wouldn't be significantly weighted to real estate exposure in the states.

I guess my last question is going to be on whether or not there is some new nontraditional pockets of opportunity that maybe don't fall into a bucket that you're involved in now, but that you see emerging as opportunities and maybe over the same time frame domestically?

Yes. I think I am not sure -- there are opportunities. I am not sure those opportunities will manifest themselves in new sectors. They may well manifest themselves in different ways that we can play those same sectors. For example, as a mez investor as opposed to an equity investor. For example, with more of a weighting towards development as opposed to stabilized properties. For example, maybe taking advantage of a taxable REIT subsidiary such as the one we have today that really got a very significant amount of capacity in it that given that we don't have anything in that TRS right now.

I think we like the sectors we're in. I think they're all growing. They've got different risks associated with them, particularly those that depend on the government reimbursement mechanisms be they Medicare or Medicaid for their reimbursement. We like the five sectors we're in. We like to do different things in them at different times be it selling assets or holding or acquiring assets, but I think the way I foresee our activity changing would be different ways to play those sectors like we've already proven out with our investment management platform.

That's great. Thank you very much.

I would like to turn it back to management for closing remarks.

Okay, everybody. Happy May day. Appreciate your interest, and we will talk to you in a couple months and for those of you that will be at NAREIT in the city next month we'll see you then. Thank you.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much.