Healthpeak Properties Inc (PEAK) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2008 HCP earnings conference call. I will be the operator for today. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may proceed.

Thank you. Good morning and good afternoon. Some of the statements made during this conference call contain forward-looking statements. These statements are made as of today's date, reflect the Company's good faith belief and best judgment based upon currently available information and are subject to risks, uncertainties and assumptions that are described from time to time in the Company's press releases and SEC filings. Forward-looking statements are not guarantees of future performance. Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement or at all. Events prior to the Company's next earnings announcement could render the forward-looking statements untrue and the Company expressly disclaims any obligation to update earlier statements as a result of new information or new or future developments.

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 supplemental information package and earnings release, each of which has been furnished to the SEC today and is available on our Website at www.hcpi.com. I'll now turn the call over to our Chairman and CEO, Jay Flaherty.

Thanks Ed and good morning from Southern California. We are delighted to have followed up 2007, the most successful year in HCP's 23 year history, with the most successful start to a new year in the Company's history. During the first quarter of 2008, HCP produced FFO growth per share of 12%, closed asset dispositions of $336 million, raised equity proceeds of $560 million, accomplished the Company's stated delevering goal, achieved superior operating results from the three acquisitions completed last year, and was added to the S&P 500 Index. I will comment further on these issues but let me first introduce Executive Vice President, Chief Financial Officer, Mark Wallace; and Executive Vice President and Chief Investment Officer, Paul Gallagher. Mark?

Thanks, Jay, and good morning. Since our year end conference call, our efforts have been focused on meeting our commitment to deleverage our balance sheet. So far this year, we raised $560 million of equity capital and $336 million from asset dispositions. These transactions have generated net proceeds of $896 million, all of which were applied to reduce the balance on our revolving credit facility. Our overall leverage at the end of the quarter stood at 58%. Pro forma, for $866 million in proceeds we received in April from the equity raise and asset sales, our overall leverage is down to 52%. We are now leverage neutral relative to our pre-Slough announcement levels, have $1.4 billion available under our $1.5 billion revolver, and had $78 million of unrestricted cash at the close of business yesterday.

Our other credit metrics are in great shape as well. On a pro forma basis, our secured debt ratio is 12%, unsecured leverage ratio was 62%, and floating rate debt represents 28% of our total debt or 16% adjusting for the natural hedge provided by our Americare investment. Our bridge loan balance is $1.35 billion, it currently accrues interest at 3.4% and has an extended final maturity of July 31, 2009. Debt maturities for the remainder of 2008 are limited to $300 million of floating rate senior unsecured notes in September, and $89 million of mortgage debt amortization. For 2009, our debt maturities other than the bridge are limited to $277 million of mortgage debt.

During the quarter, we issued 174,000 shares under our dividend reinvestment plan for total proceeds of $5 million. We also converted 577,000 non-managing member DownREIT units into common equity. Investment activity for the quarter was principally focused on life science development, with five projects scheduled for completion this year comprising 466,000 square feet. We funded floating $9 million in capital projects this quarter. We acquired one senior housing facility for $11 million with a yield of 8.5%. We sold one senior housing facility and three skilled nursing facilities for $30 million at a weighted average exit yield of 8.7% and recognized over $10 million in gains.

In April, we sold 17 properties for $306 million, at an average cap rate of 9.3% based on 2008 contractual rents. For the first quarter of 2008, reported FFO per diluted share was $0.56, a 12% increase over the $0.50 per share we recorded last year. Merger-related charges were $1.2 million for the first quarter or less than $0.01 per share, while such costs were at $10 million or $0.04 per diluted share in the first quarter 2007. Our same property portfolio this quarter now includes assets acquired from our purchase of CNL Retirement Properties and assets included in our former GE joint venture. Our same property pool now represents over 2/3 of our total properties. Same property cash NOI growth for the first quarter was 2.3%, led by senior housing at 5.1% and skilled nursing at 3.8%, with both sectors benefiting from contractual escalators and rent resets.

Senior housing also benefited from rent in the first quarter of $2.5 million from property level expense credits related to our Sunrise properties. Of the $2.5 million, $1.1 million is reflected in direct financing lease income and $1.4 million is reflected in rental revenues. In the life science sector, we have signed leases on all of the space vacated during 2007 such as our [Lusk] campus in San Diego that impacted same property results. We expect occupancy and rents on that space to commence later this year. Our Slough portfolio, which is not included in our same property pool, was 91% leased at quarter end, up from 82% at the deal announcement. Medical office cash NOI growth was 1.2%, reflecting rent increases of 2.3%, partially offset by the collection of past-due rent in 2007. Our hospital sector same property cash NIO growth was impacted by one hospital in Texas that was vacated, one hospital in Louisiana where rents are being reserved, and lower additional rents recognition on tenant hospitals.

Regarding our guidance for 2008, we now expect reported FFO to range between $2.21 and $2.29 per diluted share. net That range is $0.05 per share lower than our previous guidance due to the 17 million shares we issued in April and the acceleration of our asset dispositions. The midpoint of that range represents a growth rate of 5.1%. That growth is primarily driven by our Slough portfolio and the return on our Manor Care investment, partially offset by asset dispositions to further deleverage our balance sheet.

Let me provide a few of the key assumptions that underlie our 2008 guidance. Our guidance contemplates no additional acquisitions of real estate or debt investments, except those completed in the first quarter and no contributions of assets into joint ventures. We expect to fund $90 million of development and expansion projects this year principally in our life science sector. Asset dispositions for the full year are expected to range between $700 million and $800 million with gains for GAAP earnings on these sales between $250 million and $350 million. Our investment management platform should generate $6 million in fee income. Same property cash NOI growth is expected to range between 2.5% and 3.5%.

G&A should be just over $70 million or roughly 6.5% of total revenues. Income tax expense is expected to be about $5 million for the full year. We now reflect a separate line item for our income tax provision in our financial statements, which primarily arises from activities in our taxable REIT subsidiaries. We expect to close on at least $225 million of agency secured debt later this year, at an interest rate of 6.5% or better. Merger related cost for the year should be about $4.5 million or $0.02 per share, primarily the amortization of bridge loan fees. And our forecast assumes that we exercise the first six-month extension option on our bridge loan. I'll now turn the call over to Paul.

Thank you, Mark. I'd like to walk you through HCP's first quarter portfolio performance in greater detail. Before I go through our five segments, I want to highlight what will be a recurring theme in our supplemental, now that we are showing sequential quarterly results. On a going forward basis, you will likely see sequential decreases from the fourth quarter to the first quarter of each year. Likewise, you will see sequential increases from the third quarter to the fourth quarter, as we do not typically recognize additional rents until the fourth quarter of each year. This is especially true with our tenant and Sunrise assets.

Now, let me walk you through our five segments. Senior housing. Our same property portfolio represents 99% of HCP's owned investments in senior housing and now includes our CNL assets acquired in the fourth quarter of 2006. Our sequential same property performance for senior housing declined 12%. As I mentioned previously, this is due to the recognition in the fourth quarter of add rents primarily from our Sunrise assets. Year over year performance, however, increased by 5.1%, driven by normal rent increases and prior year period expense credits. Occupancy for our same property portfolio is 90.2%. Although this represents a decline both quarter over quarter and year over year, it is still within our historical operating range for stabilized senior housing assets.

Our largest operators, which represent about 85% of our same property units have experienced an average occupancy decline of approximately 100 basis points year over year and 80 basis points sequentially. Despite the occupancy declines, our operators continue to improve facility performance through increases in rates and other service revenue. As a result, same property cash flow coverage year over year has increased from 1.06 times to 1.13 times.

Hospitals. First quarter same property NOI was down sequentially 19.7%, again due to the recognition of add rents, virtually all of which come from our tenant hospitals. The year over year decline of 3.1% was the result of repositioning a hospital formerly leased to Community Health Systems to a new operator. Same property cash flow coverage year over year is up 1.96 times to 2.31 times.

Skilled nursing. HCP same property skilled nursing owned portfolio reported a first quarter sequential decline of 2.2%, driven by tenant reimbursables generally billed in the fourth quarter. The portfolio produced 3.8% growth year over year from contractual rent increases.

Same property occupancy for both year over year and quarter over quarter has remained relatively stable at 86%. Same property cash flow coverage year over year is down from 1.64 times to 1.39 times. This decline was a result of fair market rent increases in one of our stabilized portfolios.

Manor Care has provided us guidance on the company's first quarter performance. Occupancy for the first quarter of 2008 was 89%, which was stable compared to fiscal 2007. Quality mix remains strong at 73%. Actual debt service coverage for the first quarter increased to 2.15 times compared to 1.79 times, pro forma, for the full year 2007. This was driven by Medicare and managed care rate increases, higher acuity census and lower interest rates. This guidance indicates that Manor Care's performance is significantly exceeding our underwriting.

Medical office. Same store performance for the quarter was up 1.2% on a year over year basis. This was driven by higher base rents and improved expense recoveries but was offset by previous collections of bad debt reserves reflected in 2007. The same property portfolio occupancy was 90.7%. Through the end of the first quarter, we experienced strong leasing with 45% of the 2.6 million square feet initially set to expire in 2008 having already been renewed or released. We executed 177 leases totaling 690,000 square feet of first quarter expirations, including the conversion of 141,000 square feet of month to month leases to long-term leases. Of the executed leases, approximately 108,000 square feet related to previously vacant space and the remaining 582,000 square feet related to the renewal of previously occupied space at 5% higher rents. The renewed leases brought our retention rate for the quarter to 82%.

Of the remaining 1.8 million square feet of space scheduled to expire in 2008, approximately 432,000 square feet has already been leased. And we have a pipeline of nearly 300,000 square feet of active negotiations. As for the overall portfolio MOB occupancy was 90% and now includes our newly developed MOB in Colorado Springs, currently 75% preleased to Memorial Hospital. Our predevelopment pipeline includes six properties totaling approximately 555,000 square feet with a projected cost of $150 million.

Life science. Since committing to the SEUSA acquisition, HCP has released or renewed 1.2 million square feet in our life science portfolio. Approximately 629,000 square feet of this leasing activity represents renewed or re-leased space where rents have been increased by nearly 55% over expiring rates. As a result of the leasing success achieved since mid-2007, we've increased portfolio's leasing from 82% to 92% from the end of the first quarter. Occupancy in the portfolio was down 1% to 81% since last quarter, driven by the termination of a single tenant in the Bay area. However as tenant buildout of recently executed leases is completed, occupancy will increase in the second and third quarter.

During the first quarter, HCP completed approximately 35,000 square feet of leasing activity, all of which was in the Bay area. Of that 17,000 square feet related to new or renewal leases on previously occupied space and resulted in mark-to-market increases of 11%. The remaining 18,000 square feet of lease related to previously vacant space. In addition, 42,000 square feet of space was leased in one of our life science joint ventures.

Leasing prospects for 2008 are strong with 54% of 2008's remaining 302,000 square feet of expirations already renewed or released. Combined with the pipeline of nearly 500,000 square feet of active prospects, we anticipate increased occupancy and income growth as rents are rolled to market. We expect to mark-to-market rental increases on the remaining 2008 expirations to range from 25% to 35%. On a same store basis, life science portfolio consisted of only 13 assets, representing 898,000 square feet or approximately 6% of our life science investment. Adjusted NOI from these life science assets was down nearly 16% year over year as a result of the repositioning of the Lusk campus, which is now complete.

As mentioned on last quarter's call, the entire same store portfolio is now 100% leased and is in the process of tenant build out. The Company's committed development pipeline is unchanged from last quarter and is projected to total 544,000 square feet in six buildings in south San Francisco. Five of these buildings, totaling 466,000 square feet, will be delivered this year. Genentech will take approximately 50% the space that will be entirely rent producing by the end of the second quarter. Amgen represents the remaining 50% of the space that will be delivered and rent producing between the fourth quarter of 2008 and first quarter of 2009.

Future development and redevelopment pipeline represents an aggregate 3.3 million square feet of expansion opportunities in south San Francisco, Torrey Pines, [Padalway] and Carlsbad. Our San Diego markets, while improving, have not experienced the demand to warrant new development at this time. This will likely limit any new development starts until 2009. In comparison, given the stronger demand in Northern California, HCP is in active discussions with tenants for new developments on our south San Francisco land and inventory. As a result, we are in the final stages of entitling 540,000 square feet of space, which will be marketed as build-to-suits. Construction could begin as soon as late 2008 upon significant pre-leasing. With that review of HCP's portfolio, I'd like to turn it over to Jay.

Thanks, Paul. We made substantial progress in executing the delevering plan we committed to following the acquisitions that we closed in 2007. Before getting into those specifics, let me first welcome our newest board member Lauralee Martin, who is was elected an HCP Director at last week's annual shareholders' meeting. Lauralee is President and Chief Operating Officer of Jones Lang LaSalle and brings a tremendous amount of real estate, capital markets and international expertise to our Board of Directors.

During our February earnings call, I described our plan to dispose of $750 million of assets during 2008 and indicated that we had already received LOI's for 50% of that amount. Two months later we have closed on or have executed LOI's for $685 million, or 91% of the $750 million target. The assets include properties in our senior housing, medical office, hospital and skilled nursing sectors. As Mark mentioned, our pro forma leverage ratio now stands at 0.52. Exactly where would it was prior to our Slough acquisition. We are very pleased to have achieved our commitment to be leverage neutral within one year of the Slough closing, three months ahead of schedule.

If you pro forma the anticipated agency debt placement and remaining asset sales, our $1.5 billion bank line will be completely undrawn and we will have cash balances of approximately $600 million, reducing our bridge loan on the net basis to approximately $900 million. In so doing, we will have effectively toggled our $900 million Manor Care mezzanine investment from our bank line over to our bridge facility. This creates a hedge of a LIBOR-based asset, paired with LIBOR-based funding, locking in a positive spread of just under 600 basis points.

Since committing to our $3 billion Slough credit facility nine months ago, we will have raised $3.2 billion, comprised of $860 million in equity, $825 million in debt, and $1.5 billion of asset dispositions. While we had initially targeted a 50% debt, 50% equity refinancing split, we have ended up with a 43% debt, 57% equity split. Notwithstanding the turmoil in the credit markets, this success has enabled to us rapidly reduce our leverage ratio created by the significant acquisition program achieved last year. And this acquisition strategy has delivered superlative results for HCP shareholders.

Our February 2007 acquisition of Medical City Dallas, via a DownREIT, is presently 97% occupied with NOI margins of 65%. These margins are 300 basis points above projections and have resulted in superior cash flow from the project that is 4.6% ahead of our underwriting assumptions. Our 2007 acquisition of Slough Estates USA in August is nearing stabilization, with an operating portfolio that is 91% leased and 88% rent producing. And we own major sites for future development and redevelopment in San Diego and San Francisco.

Our December 2007 Manor Care mezzanine debt investment generated a 2.15 times debt service coverage ratio for the first quarter of 2008, up nicely from a pro forma 1.79 times debt service coverage ratio for all of 2007. Consistent with the strong operating performance that HCR Manor Care has produced over the last several years, the Company continued to hit new highs in several important operating metrics, leading to cash flows and earnings levels that were significantly better than we projected at the time of our investment. In fact, the Company was sitting on $150 million of cash balances at March 31, 2008; well ahead of plan.

I concluded our June 4, 2007 conference call, noting, and I'm quoting directly from the conference call transcript, that our Slough acquisition solidifies HCP as one of the premiere REIT's in the world and the institutional partner of choice for healthcare real estate. A further affirmation of this status occurred last month with HCP's addition to the S&P 500 Index, described as the leading companies in leading industries and the most widely used investment benchmark for the U.S. equity markets. The reshaping of HCP in the space of a few short years has created a portfolio of long duration, inflation protected, reliable income streams that are diversified cross five property types, located in high barrier to entry markets, with tenant concentrations that represent the leading players in their respective sectors. This effort has involved the passion, the creativity, the ingenuity and the persistence of HCP employees. And on behalf of the Company's Board of Directors, we salute them all on them all on a job well done. Operator, we would be pleased to entertain questions at this time.

(OPERATOR INSTRUCTIONS) And your first question comes from Rich Anderson. You may proceed.

Thanks and good morning to everybody over there. The first question, Jay, what was meant by Slow Down? You moved too fast in the opening music.

I appreciated your suggestion to go with Leader of the Pack I just thought that was little over the conference.

And do you happen to know Jim Kramer's track record on Mad Money? We'll leave it at that. Just a couple quick questions to be serious here. In terms of deals of size in the market, how are you seeing the market today with everything that's going on? Is it -- are there opportunities out there and what's your confidence level to pursue sizeable deals, even though your acquisition number is zero in terms of your guidance?

Well, as we started to communicate on two quarter's conference calls ago we we're seeing -- actually we saw this kind of in July start to really fall down, the acquisition volumes. And we had suggested that you would see sequential down drafts in volumes in Q4 of last year versus Q3. On our last call, we said that would absolutely continue in Q1 versus Q4 and we suggested it would continue in Q2 from Q1. We have seen absolutely nothing at all to move us from that perspective. In fact, if you look at the transactions that actually have closed in the last six, seven months I think it's important to note that possibly without any exception they were all kind of cut pre-August 1, the credit crisis. There are some deals, good sized transactions that are out there. We've been in dialogue with those situations for the better part of six or nine months. I would say that there's probably a convergence of perspectives on the part of sellers and buyers but it's not yet at the point where people are prepared to pull the trigger. So, there's a lot of chatter, a lot of dialogue but near term nothing actionable.

In terms of leasing the bridge outstanding, I understand you're marching it with the mezz loan and it's relatively cheap money of course. But you still want to sort of keep your dry powder in terms of the line in your cash balance because ultimately you do need to pay that down in the six months plus July 2008 or so. How -- is that the strategy to sort of keep your pockets open or to keep your pockets empty, so that the when the day comes you have to pay it down that you will be ready to do that or are you going to be pretty aggressive building up the line and hoping for the best?

I'm not sure I totally understand the question. For starters, the bridge, the final maturity on the bridge is July 2009, not 2008.

Well, I know but you're adding --?

Number one. Number two, we anticipate in addition to having nothing drawn on our line, which on a net basis we are already there today, significant cash balances over the next couple of months as we close the remaining asset dispositions and the agency placement. At that point, I think what we choose to do in terms of completely paying off the bridge or allowing some of it to remain outstanding given our Manor Care investment, will probably be a function of two factors, Rich. One would be, what's going on with the timing of our acquisition pipeline. And as I've just indicated, we see nothing actionable at the present time, although there's quite a substantial pipeline in the aggregate. And two, just the general conditions of the capital markets. So, those would be the two drivers as to what we do. But as you can tell by the fast pace in which we've delevered the balance sheet, there was nothing at all in the context of hoping for the best in regard to this. We had, as you can tell by now given the timing of the closing of the asset sales, those things were in the works back in Q4 of '07.

You can only be added to the S&P once, though, right, that did help in this case?

Yes, but that's why we were going to end up with $600 million of cash proceeds here in the next month or two. That was all --- which means that we are that much farther ahead schedule, which means we've had to reflect that in the $0.05 adjustment to the guidance. But that -- the plan had always assumed that we would be leverage neutral by our committed time line of July '08.

Last question is on the development schedule for the life sciences, you changed the title heading from estimated stabilization date to rent commencement date. Are they the same, do they mean the same thing?

Not -- what we're trying to get across there is that in some cases the rent on the properties actually starts well ahead of occupancy and tenant build out. Okay? So that's the reason for the change, to try to emphasize where the day at which the rent starts as opposed to when TI's are completed, which also controls the revenue recognition date.

Okay. So two of them have -- if I compare those commencement dates with the stabilization date, the last two in the Oyster Bay .2 development, D&C, the got pushed back. Are they -- but they are not apples-to-apples with the fourth quarter disclosure?

They would not be be apples-to-apples, correct.

Okay. I will work with you off-line on that. Thank you very much.

And your next question comes from Jerry Doctrow. You may proceed.

Thanks. I want to do come back, maybe this is Mark's, and just clarify a bit more some of the swing in rent recognition kind of from fourth quarter to first quarter. Because I think we were a little high, I think, on first quarter partly on that. And then also wanted to get a little more color on G&A because I think you indicated it would be at $70 million for the year, if I understood you right. But the run rate from first quarter is a lot higher, so trying to understand where it's headed.

Okay, on G&A as I said in my prepared remarks, I think G&A will still be slightly over $70 million for the full year. I think that G&A -- as you know, most of our G&A consists of compensation and other professional fees. I think what you are likely to see for the full year is that the first quarter to be higher and then for the remaining quarters in the year to trend lower. So I don't expect the first quarter to be a run rate for the full year.

Okay. And then, just on the swings for the first, again, I think you talked about rent recognition on sort of variable rent recognition in the fourth quarter. Could we just get a little bit more color on sort of how much that sort of swung the numbers? And basically, what I sort of want to clarify is whether the first quarter is kind of the right number, so a good base number to go from?

Okay. Well, first of all what I said in terms -- let me, in terms of the credits themselves it's going to impact the revenue recognition, I will start in terms of the sequential quarters that -- as I said it was the impact of Sunrise property level credits was $2.5 million of FFO in the first quarter. Now at the same time in the fourth quarter of last year, the effect of property level credits from Sunrise were $7 million -- I'm sorry, for $4.1 million FFO effect from Sunrise in the fourth quarter of '07. So you did have a swing from $4.1 to $2.5 million. And just to give you the same breakdown that I gave earlier, the $4.1 million of -- $3 million was recognized in rental revenue in the fourth quarter and $1 million was recognized in direct financing lease income.

Okay.

Okay?

Right. And then I think there was a swing also in sort of the hospitals as well?

That would just be, yes, the SAB-104 adjustment on Tenet, which have every first quarter, Jerry.

And just on the SAB-104 and I hate to be as picky as I am but just on the SAB-104 it's like $4 million and change, I think, for first quarter. It's sort of listed as a positive but it's really a negative in the first quarter or the first three quarters at sort of that same level and then it will go positive in the fourth quarter. Is that right -- that's the mechanics of what's happening?

The revenue that we recognize in the first quarter is less than the cash that we received in the first quarter. I think that's the right way to think about it.

Right, so you've got a charge of like $4 million that's sort of being a deduction, there's more --.

Right so if you are doing a FAD reconciliation, then you would add it back.

You're recognizing less than the cash? Okay.

Jerry, you've got the same thing with the revenue recognition on the Slough portfolio. You've got $0.06 of rents that are coming in, contractual rents that people are paying on that goes back to, I think Rich's earlier question, because they're not occupied yet, we are not recognizing in FFO even though they are in FAD. So that's $18 million just for '08.

Okay. That's helpful. And again, Rick sort of asked this, but I just had maybe a lint broader question on the development in sort of these leases that are coming online. The timing -- there are substantial amounts of leasing activities so the timing that you've got in there is rent received but if tenant improvements and stuff are still underway, you're not actually recognizing that as income.

Per GAAP accounting, right.

Right. So, what should we be thinking on you in terms of against in terms of what's in there? The timing that's in there right now is rent receipts, meaning cash rent is coming in but it won't be recognized in GAAP and will be an add back for FAD. Is that kind of the --?

Exactly that number. Just for the life science portfolio where we've got a preponderance of that development build out is $18 million in '08 which is $0.06 per share.

Okay. Great. Thanks.

Your next question comes from Steve Swett. You may proceed.

Hi, Jay. My questions on the revenue recognition were answered but perhaps this is for Mark. The held for sale on the balance sheet, is that related solely to the assets that have been sold already or is there anything still in there for assets under contract?

Yes, there are a few other assets in there but it is by and large the assets that we disposed of in April or the balance.

Steve, that's a three part transactions, three separate closings going through some [rofers] that need to clear. Two of three have closed. There's one that is remaining, which is expected to close in the next two weeks.

But you had referenced that there's $600 million plus of sales that you already have under letter of intent but those are not in the held for sale or a lot of those are not.

Yes but just to be clear I said there were $685 million but not under letter of intent, $685 million either closed or --.

Or under a letter of intent.

A good chunk of the $685 million has actually already closed. In other words, 91% of our targeted $750 million, to Mark's guidance point, the range dispositions for the year $700 to $800 million, 91% of that's either closed or under LOI and the only portion of that you'd see in the balance sheet classification you're referring to are the deals that have been closed and then the last piece of that transaction.

Okay. I got it. And then just your comment on the -- your new Board member and her international experience, does that imply your interest in expanding?

Well, look, we look at everything. We've got an experiment, if you will, it's modest but it's doing quite well, south of the border. We've looked north of the border and we've looked -- I've personally been over in Asia twice in the last five months. So we're -- we've got our antenna out everywhere. So we're constantly looking to see what the best opportunities are. And really goes back to our model, kind of five property types with five products. We've got a very large universe under which we can either deploy capital, given appropriate conditions or recycle capital. So we're very fortunate in terms of the investment universe that we've got to review.

Okay. Thanks.

Your next question comes from Michael Mueller. You may proceed.

Yes, hi. Going back to your question about -- or not question but comment on acquisitions. And it sounds like the probability of something happening at some point this year is a little bit higher than having nothing baked into guidance. So if something does arise, is it more likely to end up being for the investment management program based on what you're seeing at this point or say transactions that would more likely just end up being on your balance sheet?

It probably depends, Michael, a little bit about the nature of the investment. For example, if it's in -- depending on the property type, I think it would tend to be more an on balance sheet transaction if it was in the skilled or the hospital property types. I think it would tend to be more a candidate for one or more of our existing JV partners, with some dry powder still committed to us, if it was in say life science or MOB's. And then in senior housing it would be -- it would kind of depend on what our investment partners' appetite is. In particular, right there I think they're a little more focused on development within senior housing right now, as they are acquisition of stabilized core properties. So, kind of hard to give you a specific answer but if you give us a pretty good situation of a particular property type and particular product type, we can kind of zero in on that for you.

Two questions coming from that then. Number one, can you comment on your partners' appetite when you think of the investment management -- the institutional investor community, the appetite to put money to work today and how that may be different than, say, this time last year? And also the flow of transactions that are coming across the desk, are they a little more skewed to certain property types than others?

Let me take the last one and then I'll -- since Paul just got back from [PREA] up in Boston last month, I'll have him talk about appetite on the part of our prospective institutional capital partners. With respect to kind of where the flow is right now, a lot of interesting mezz data. Our view is that in a market like this, you ought to either be buying quality at a discount or alternatively pursuing maybe some distressed opportunities. With respect to the first category, quality discount, we feel we knocked it out of the park with our Manor Care investment and it's only one quarter's worth of performance to date but they're really rolling. And as you'll recall we were able to buy that piece of paper at $0.90 on the dollar.

With respect to distressed, there's some situations where we're monitoring but I think it probably goes more towards the good underlying economics of healthcare. They're not really at the point where I'd call them distressed yet and quite frankly, it may never get there. I think -- so there's a lot of mezz inquiry. There continues to be senior housing inquiry, continues to be medical office building inquiry. The life science has after a lot of activity in '06 and '07 slowed down a touch.

Skilled has slowed down a touch and the hospital is actually, this is the first time, I think, in three years I've been able to say that there's some life starting to show up in some of the fundamentals for the hospital space. You've seen unfortunately for those afflicted by it, yet a very strong flew season, which means good things for the hospital space, it probably means at the margin, not so good things for the senior housing space. And I think there's a growing recognition on the part of the populous and Washington DC that something is going to have to happen in the next administration with respect to some sort of floor or program to take care of the folks that don't have any insurance because they've lost their jobs or they're unemployed, which at the margin ought to going forward at some point, will probably mean a reduction in the bad debt expense coming off the -- that whole issue. So I would say the hospital fundamentals are finally, after several years, starting to look a little bit better. Do you want to talk, Paul, about what you heard?

Sure. I think the common theme that came out of the PREA conference was the concept of the denominator effect. A lot of of the pension funds' fixed income investments are down and it's skewed their real estate allocations up significantly higher. Most people are talking in terms of doing self-funding transactions where they would need to exit something before they would need to enter into new transactions. The focus is away from core investments, looking more towards value add and opportunistic. there was focus some emphasis on doing new developments. I think the reception to being in the deal flow and understanding what the opportunities are are high. But definitely, there is less capital out there right now that can be placed.

Great. Thank you.

Your next question comes from Jim Sullivan. You may proceed.

Hi, it's Rosemary Pugh here at Green Street Advisors, with Jim Sullivan. How are you?

Great, how are you.

Good. In the first quarter you brought a senior housing property and sold nursing and senior housing at cap rates in the mid 8% to 9% range. What are you seeing in terms of cap rates across the sectors?

The bottom line is there's no precedent to really point to.

There's -- we can honestly say that any deal of size say over $25 to $50 million that was in the market after August of last year, we have not seen transactions close in senior housing and MOB space and for that matter, life science. We just have not seen transactions close. So I don't know that we have a good data point to be able to tell you.

If you do the math and you guys have done it better than anyone else, lower loan to values, higher spreads in terms of borrowing cost, people are maintaining the same IRR's, you can kind of solve for the difference in cap rates. But the bottom line is there's been next to nothing in the way of any transactions to glean any insight.

On your two comments about the two transactions, our 8.5% lease rate that we had on the senior housing property, that was actually originated back in summer of '07. And it was a turnaround property that we put into an existing master lease where there were rental -- where there was an occupancy play and we were able to structure a higher than normal going into lease rate. So that was kind of an off the market kind of transaction. And then the stuff that we sold that referenced the 8.7% cap rate, that was on skilled nursing facilities.

Great. That's very helpful. With respect to the impact of the economy and falling housing prices on senior housing and independent living in particular, what are you hearing from your operators in terms of what's happening in the first quarter of '08, particularly with respect to independent living?

Okay. Well, we got -- spent a lot of time there, given that we've got a big chunk of assets with one of our joint ventures with a pure play independent living. You are seeing both -- first of all year, over year, you're seeing very nice same property performance improvement. That's point one. Point two, both year over year and sequential quarter, you're seeing plus or minus 50 to 100 basis point declines in occupancy.

Now I'd point out that you're coming off two incredibly strong years, '06 and '07, where operators have been very, very aggressive pushing rates and really haven't had a whole lot of push back relative to occupancy. So that's there. And we're -- I think one thing to focus on '08 -- one of things we are focusing on is not just occupancy but rates. I think you're going to start to maybe see some trade-offs there for the first time where they haven't had to do those trade-offs in '06 and '07. Another factor I mentioned, you had a strong flew season. That's very good, unfortunately, for our hospital operators, it's not so good for the senior housing folks.

But where occupancy was we're still well within a range where -- that we would think for stabilized assets. We can find no one geography, and we've kind of been laser beam focused on your question here, Rosemary, no one geography, no one operator, no one property type that really stands out. We really quite frankly, have identified very little sign of any single macro economic weakness with the potential exception of maybe being on some of the entries fee, the pressure might be deferred on some -- operators that are highly dependent on the entry fee, particular the first generation, it's not so much an issue for the second and third generation CCRC's. So that's out there.

As we drill in to really get into -- get very granular with what's going on in our portfolios, we're seeing year over year and sequential quarter, we're seeing move-ins are consistently higher. We're just seeing that the move-outs are a little bit higher than the move-ins. The gap is narrowing, so that's going on. And then my final comment is, as you were aware, our first quarter numbers really represent fourth quarter numbers for the operators. So in addition, we've kind of been formally been pinging a lot of operators in the last couple of weeks, as they have for the first time, kind of closed the books on the first quarter, which won't show up until our second quarter. And without exception, the occupancy levels are relatively unchanged from where they were at 12/31/07. So that's our take as to what's going on.

Great. And one more question with respect to Manor Care. You report that debt service coverage has improved and that Manor Care is doing very well but how did, how did Manor Care do so well given -- or where is the improvement coming from, given that this is is a business where it's hard to change things quickly?

Well, remember, their model -- remember, they're kind of a unique model. They're really not a skilled nursing company. Their whole model is different, very short term stay, kind of subacute. A preponderance of their revenues are from the managed care and private pay, 73%, 74%. You really -- it's a misnomer I think, quite frankly, to call that company a skilled nursing. There's other people on this call that are probably a little more well-versed in that company's history. But -- so they've done very well. They have benefited from some Medicare and Medicaid rate increases. They obviously benefited from lower interest costs.

But if you take a look at that investment, we're very excited about that. If you take a look at just the jumping off point, which was December 21 to today, probably the best benchmark that's out there would be the -- in terms of best in class operator, large scale operator and owner as opposed to a lessee of its real estate, the obvious other benchmark there would be the issue of HCA toggles notes that we also own. I think it's instructive to look at the fact that on the day we closed our Manor Care investment on December 21, those toggle notes for HCA were trading $103.75 and this morning morning they're bid at $107, $107.5. So we obviously felt great about the management team and the Manor Care investment. We were also very fortunate with our timing there to have had the change to take that down at the time we did, given the overall economics we were able to negotiate.

Great. Thank you.

And your next question comes from Craig Melcher. You may proceed.

Hi, I'm here with Michael [Gorman] as well. On the secured debt that you're planning on doing, I think in the past you were saying you were looking to do a $500 million deal and now it's closer $225 million. What's the change in thinking there?

We never said we were going to do $500 million.

Okay.

We've always -- we've been looking at this one portfolio, from the jumping off point, it's always been $225 million and it's pretty far along at this point.

Okay. And with this -- when you're planning on using the bridge rather than the credit facility, what's the thinking there? What's the all-in rate on the bridge versus the credit facility after the bridge rate goes up with the extension?

Well, right now they are identical. They're -- we borrow at LIBOR plus 55 and then we've got a 15 basis point facility. So all-in on both the credit, the revolver and the bridge, we're at LIBOR plus 70. Were we to decide -- were we to move forward at July 31 and exercise the first six-month extension, you would add 15 basis points to that.

Okay. And what are the cap rates on the dispositions that you currently have under LOI?

We look forward to tell you about those as soon as they close.

Okay. Thank you.

Your next question comes from J. Habermann. You may proceed.

Hi, good morning. Just following up on obviously pricing in the market. But, Jay, just the assets you do have remaining for sale, you mentioned the LOI's. Can you just give us a sense of sort of where you're seeing pricing versus original expectations? Has there been much of a change?

None, whatsoever. Again, look at the assets we're selling. They're economically very attractive, master lease or guarantees, parent guarantees in most cases, good quality operators, contractual rents with no roll in the next couple of years. As I've mentioned I think on the previous call, for the folks that are out there that have access to committed short term borrowing facilities, it's very attractive. It looks starts to look a little bit like the same soft of phenomenon we're experiencing on our Americare investment, not quite that spread but -- so you've got the same -- that dynamic. So the folks that are in a fortunate position of having committed credit facilities that are funded at attractive short term rates, it's a nice match of their interests and our interests.

Who generally is buying at this point, is it more institutions?

No, we are in discussions almost exclusively with operators, oftentimes the existing operators similar to what we did last year with the Emeritus and Encore transaction. So there's a nice kind of strategic fit here as well. They know the assets better than anybody else. So, it's a reasonably straightforward process of cutting a deal and going into closing. So, it just works out real well for everybody.

Okay. And you mentioned obviously not much in the way of acquisitions for the balance of the year. But if you just had sort of a rank, where are you seeing the best risk adjusted returns?

Hang on a second. I didn't say not much in the way of acquisitions for the rest of the year. I said we have nothing in our guidance for acquisitions for the rest of the year. You should not take from that that we anticipate making no acquisitions.

In terms of just seeing the best risk adjusted returns, where are you seeing that today?

Probably right now today, probably development. We've got -- we've worked very, very hard in the first quarter with the entitlement process particularly up in the Bay area on four specific sites; two developments totaling about 865,000 square feet and two redevelopments totaling about 570,000 square feet, which would be marketed on a build-to-suit basis. So that's pretty good. The pipeline that Paul described in MOB's where it's about $150 million of costs, those look very, very attractive. I'd say that they're probably kind of the top of the list right now. I expect there to be some additional conversions here eventually, maybe over the next quarter or two between buyers and sellers of the more stabilized portfolios that are out there. So, that's our view as to what's happening.

Now, are you seeing any slow down in the VC money? Is that impacting any of the -- it doesn't sounds like it, based on your comments on life sciences but is that impacting any of the demand there?

The VC money is going to come and go with how good the IPO market is, Jay. And so, I think it actually has slowed down, given there wasn't much in the way of IPO's up until a couple of weeks ago. So I think that has slowed down. I think -- we have seen a slowing in the velocity of the leasing in life sciences but again from our standpoint, we're out of inventory in San Diego and up in the Bay area we're rapidly approaching that point. And the pipeline of inquiry that have is well in excess of what we've got. So we feel very fortunate that we are, where we are, when we are, where we are, if that's not too complicated a comment. But I think the last six months the VC has slowed down. But again, we'll see what happens with the market. That's going to be a function largely of the IPO market.

Okay. And just two other questions. The $35 million, the one time or I should say interest and other income is that a good run rate type? Are there any one-time fees in there or is that simply just the addition of Manor Care?

It's just the addition of Manor Care, that should be a pretty good run rate for the rest of the year.

So that's the first real full quarter of Manor Care impact?

Yes.

And lastly Jay you mentioned deleveraging but do you see changing that sort of 50% sort of debt to cap target over time if this credit crunch sort of persists longer?

That's a hell of a good question. We were kicking that around last week at our Board meeting. We'll see. I think it's important not to over-react either way. So I think the -- we're in a fortunate position, we kind of dial in a capital structure here, if you want, given the -- our proven ability to recycle capital, our relationships with the Street where not once, not twice now, we've delevered after acquisitions. In fact, I'd argue that we kept that same -- we held ourselves to the same standard of being leverage neutral after Slough, notwithstanding the fact that subsequent to that we made the Manor Care investment.

But we're thinking about that. And obviously, we're most focused on the unsecured debt markets when I make those comments. For the better part of the last six months quite frankly, we've opted to be investors in those markets as opposed to issuers. We do have the ability to access this agency market, particularly on the senior housing side. So we're kind of taking this all in. I think it's important, it shows, you wouldn't want us to just -- after a quarter or two but I think we're taking all this in and we've been very pleased that we've been able to execute a delevering plan in the middle of all this but we'll see where that goes. That's fertile food for thought over the next year or two, I would suggest.

Great. Thanks.

And your next question comes from Omotayo Okusanya. Please proceed.

Good morning, Jay. A quick question for you. In regards to -- going back to focusing on the operators, I know skilled nursing is a much smaller part of your portfolio right now but what are your operators saying about potential changes in regards to Medicare policy? And I know most states right now are having a tough time with their budgets and what that could mean for potential Medicaid policy going forward?

Your concern that you raised is right out of our five-year business plan of three years ago. We were very concerned, given that most skilled operators have a preponderance of their revenues from state-based Medicaid programs and we certainly didn't predict a subprime fallout along the lines that's occurred. But if you go back and look at state governments, the way they have revenues, they basically have two sources of revenues. Right? They've got tax receipts on ordinary income and they've got tax receipts on capital gains transactions. And in order to grow tax receipts on ordinary income, last time I checked, you've got to have growing employment. We certainly don't have that in the country today and we feel that probably more acute probably out here in California, where I think unemployment just ticked over 6%. And then, with respect to capital gains transactions, given what's happened in the stock market and real estate markets, I don't think there's a lot of that happening. So, you're seeing enormous swings from surpluses to deficits on the books of the state budgets.

California alone, in less than 12 months we've gone from a $9 billion surplus to a projected $14 billion deficit. And that was really the main driver as to why we decided to significantly reduce our Medicaid exposure. We feel good that we did it when we did it. We've got very little left. And with respect to the debt investment in Manor Care, that's really a different model. As I said earlier, their Medicaid exposure is very, very low and again that investment is a debt investment as opposed to an equity investment.

So I think there's some concern out there. I think they've had a pretty good run for the last three or four years. The operators that we talk to say they're concerned but oftentimes, it's an election year and chances are if anything happens it won't be as pronounced as some of the initial proposals. That's the general buzz that we get from the operators. But watch what we've done not what we say.

Thanks, Jay.

And you have a follow-up question from Jerry Doctrow. You may proceed.

Just another minor point. There's an item I think in the Q that just talks about the default on five, I think, senior housing properties. I think it was maybe in the fourth quarter as well. I'm just trying to get a little color mostly in the context of what's going on with the operators.

Yes, I think those are our -- are those our foreclosure properties? We've had -- those have been around for two or three years. So that's some of the few remaining vestiges of some of our fourth quarter tile. I think the only thing that's left out of our fourth quarter tile portfolio review that took place when Paul first came in four years ago, so they've been around -- they've been identified in that bucket for three or four years. You should not at all see anything from a standpoint of that being an indicator of what's going on.

And Jay, again I probably should know this but can you just give me a little more color as to how much -- of your senior housing stuff, particularly thinking of the big stuff, the Brookdale and Sunrise stuff, is that just -- it's a straight lease and you get some ups sort of at year end or do you have any operating exposure on those or operating -- participate in the operating profits?

We've got, for the most part -- Paul is going to whack me if I say it's a straight up lease because I don't think we have one lease that's the same as another. In the original, when we did the mezz deal into American Retirement Corp. -- we have a participation, don't we?

We have a participation in the incremental revenue on some of the assets.

But isn't it over some threshold?

Yes, it's over a threshold.

I think for the most part, Jerry, I think we're modified versions of leases, which is why we feel so good. Again, we spend a lot of time on this -- on the comment that you're really getting at with respect to the operators in our portfolio. And I think we detect some softness but it's after two phenomenal years. And from a HCP shareholder standpoint, I get real comfortable when I start to take a look at some of those coverage ratios, what the last two years of good times have created in terms of the coverage ratios across the whole Company but particularly in senior housing. So, I think that would be my take on that.

And then so what's driving again -- and I asked this earlier but what's driving that swing then in the fourth quarter where you get the pop in the earnings?

I'm sorry, what?

In the senior housing starts you had sort of a -- earnings were higher, fourth quarter revenue was higher, fourth quarter and then it's coming down in first quarter.

We're not going to -- well, we recognize, it's the add rents. For example, we'er not -- we'll reserve the add rent, even if we are getting them or sometimes there's call back features in some of the leases. So until we have it for sure, we're just not going to reflect it in our fourth quarter. So we tend to be very conservative on that. I think for us, this is kind of the first quarter most of you folks have seen the CNL portfolio, it's the first time we've really drilled into the sequentially quarter disclosure that we've put in, as opposed to just the year over year. That's all great and we are glad to answer all your questions. I think it's probably more representative to take a look at our year over year metrics, as opposed to sequential quarters. They're there for you and glad to answer any questions. In particular, it's probably not at all representative to look at that differential between Q4 and Q1 because that does have an extra bit of noise in it.

But it will be sort of a normal seasonal variation that you will see just because of the way the leases are structured?

Yes, as you know, Jerry, and probably anybody else on the call, senior housing tends to have kind of a soft first quarter. So you've got all sorts of thing going on. I think looking at things on a year over year basis is probably a little better. Obviously from an asset management standpoint, we're actually looking out over the next couple of quarters. And again, we see kind of more of what we just reported quite frankly, nothing that's got storm clouds brewing.

Okay. Thanks a lot.

And your next question comes from Karin Ford. You may proceed.

Hi, just a couple quick questions. The MOB portfolio, what do you think the occupancy will be after all the successful leasing you've done this quarter? And did you say you were getting 5% rent increases on the MOB portfolio?

We got 5% rent increases on the renewal rents that we had.

And are new leases being signed at roughly the same rate as well?

New leases for vacant space?

Yes.

We are either achieving or exceeding what we budgeted for those particular spaces. So we don't see any -- we're getting the rents that we're targeting in the various different markets.

What do you think occupancy will be in the MOB portfolio later in the year?

Low 90's -- a lot of it is retention. We're doing 82% right now. So, we might see a couple basis points tick up with the leasing that we've achieved.

Great. Last question. On the life science portfolio you mentioned that a single tenant had terminated their lease in the Bay area. And I notice that Amgen had moved down your top tenant list, was Amgen that tenant that terminated?

Actually this was, the tenant had the right to terminate the lease and we actually were able to negotiate a nice little fee for them going away. But the thing we liked about that deal is the rents were $1 a square foot and we think we can easily re-lease that space about $2 to $2.25. So, we actually see some upside in that particular transaction.

For those of you, and there are several on the call, that is toward that, our properties -- that was at the Seaport campus. So that was, you may have something similar there to what happened down at the Lusk campus. So.

Great. Thanks.

Your next question comes from Adam Feinstein. You may proceed.

Great. Thank you. It's late in the call here, so I'll be brief. First, I'll thank you for all the details on Manor Care. I was like listening to a nursing home conference call here. So, appreciate that.

I thought you'd like that.

Yes, helpful for me. But just real quick. Clearly, the same property change in NOI will bounce around between quarters. You made that point. But as we think about the five segments, could you just help us ballpark the growth for those five segments for the full year? So not looking at the changes between the quarters but just looking at an annualized full year number, just curious in terms of how you think about growth between the five segments?

You mean, growth prospects in the five sectors, Adam?

Yes, growth prospects.

I would say -- I would say life science has got a lot of new stuff coming on. Paul mentioned the Amgen and Genentech campuses that will click into rent producing mode for the first quarter here, notwithstanding the fact that you're not going to be able to see it in FFO. So, that's obviously that. Plus the rents rolling there. The leases that we have rolling in market, I think Paul put them between 25% and 30%. So that's a big pop there on top of the rent producing leases at Genentech and Amgen coming on line on top of the Lusk campus, which will start to become fully rent producing on July 1. So in life sciences you've got kind of outsized sort of growth opportunities there, which is probably as much a function of kind of the things we've strategically done to the portfolio, either the down at the Lusk campus or the Slough portfolio.

MOB's is probably a little more kind of steady-as-she-goes X the development pipeline, that Paul mentioned, the one in Colorado that we're really excited about. We are seeing very, very good retention rates, kind of low to mid 80's and nice increases there. Hospitals, I think that's going to be kind of flat, maybe trending up towards the second half of the year. So that's, again, our coverage is there. I think they're at the all time high since I've been here and that excludes the Medical City Dallas campus, just because that's not on our same property yet. And if you recall, when we bought, that that was north of six times coverage ratios. So, you'll see our coverage ratios in hospitals start to kick up. Again that's a function -- I'm not sure if that's representative of the entire hospital portfolio as it is the Medical City Dallas campus coming online and that would be in the next quarter, I guess.

Hospital, skilled, I think that's probably flat to maybe down a touch, just with some of the rent increases you'll see the coverage maybe -- you saw some of that moderate already. Again, the owned real estate portfolio, that's a very small piece. Almost all of our investment in that space now is represented by the Manor Care investment. And then senior housing, I would say that's going to moderate here. I think two fantastic years for the industry, I think it's a great business. We love it, we love our operators, we love our real estate but I think just you can't keep going up at the low to mid double digits forever because that will moderate a little bit as well.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS).

Okay, operator?

Yes.

I think, is that it?

Yes, you have no questions at the time.

Okay, everybody, we appreciate your time and your interest in HCP and we'll talk to you in a couple of months. Thanks again.

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Good day.