Healthpeak Properties Inc (PEAK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2010 HCP earnings conference call. I will be your coordinator today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. Now I would like to turn the presentation over to your host for today's conference, Ms. [Beejal] Northrup, HCP's Director of [HR]. Please go ahead, madam.

Thank you, Shanelle. Good afternoon and good morning. Some of the statements made during today's conference call will contain forward-looking statements. These statements are made as of today's date and reflect the Company's good faith belief and best judgment based upon currently available information. The statements are subject to the 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 the new information.

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 will now turn the call over to our Chairman and CEO, Jay Flaherty.

Thanks. Welcome to HCP's 2010 second quarter earnings conference call. Joining me in Long Beach this morning are HCP's Executive Vice President and Chief Investment Officer Paul Gallager, and Executive Vice President and Chief Financial officer Tom Herzog. Let's begin with our second quarter results, and for that I will turn the call over to Tom.

Thank you, Jay. There are three topics I will cover today. First, our second quarter results and investment activities; second, our recent equity offering and financing activities; and third, our full year 2010 guidance.

Let me start with our second quarter results and investment activities. For the second quarter we reported FFO of $0.55 per share compared to $0.57 per share before impairments for the second quarter of 2009. Note that the prior period included a $0.02 favorable one time adjustment related to the cost allocation of certain assets acquired in 2006. We have several highlights for the quarter. First, we generated strong second quarter year-over-year cash, same property performance of 5.9%, which included a $4 million deferred rent payment received in April 2010 from a Life Science tenant. The receipt of this payment did not impact FFO. Paul will review our performance by segment in a few minutes.

Second, we made investments of $136 million during the quarter and an additional $48 million in July. On June 1st, we acquired four senior housing facilities for $102 million. These facilities are master leased to Emeritus Corporation for an initial term of 10 years with two 10 year renewal options. On July 26, we acquired a Life Science asset and two medical office buildings for $48 million, which included DownREIT units valued at $9 million and assumed debt of $5 million. Lastly, we funded $34 million for construction and other capital projects during the second quarter primarily related to our Life Science segment.

Turning now to our recent equity offering and financing activities, we completed an equity offering of 15.5 million shares at a price of $33 per share, generating gross proceeds of $512 million. The offering included 12 million shares originally announced, which due to strong investor demand was upsized to 13.5 million shares that were issued in June, and an additional 2 million shares issued in July resulting from the exercises of the underwriters' overallotment option. Net proceeds totaled $492 million, which were used to repay all borrowings under our revolver, prepay mortgage debt, and fund acquisitions, with the reminder held in cash to be used for general corporate purposes. As a result of the offering, our financial leverage was reduced from 43.5% at the end of the first quarter to 40.9% at the end of the second quarter. Our remaining 2010 unsecured debt maturities totaled $206 million, with an average interest rate of 5.17%. Our remaining 2010 mortgage debt maturities and amortization totaled $20 million. We ended the quarter with $270 million of marketable securities and unrestricted cash and $1.4 billion available on our revolver.

Lastly, full year 2010 guidance. We continue to expect our 2010 FFO to range from $2.10 to $2.16 per share before impairment recoveries, which is unchanged from our previous guidance that we provided in connection with our June equity offering. Additionally, our projected full year cash, same property performance growth remains at 3% to 4%. I will now turn the call over to Paul.

Thanks, Tom. Let me break down the 2010 second quarter performance of our portfolio.

Senior housing. Occupancy for the current quarter in our same store senior housing platform is 84.9%, representing a 10 basis points sequential decline over the prior quarter and a 180 basis points decline over the prior year. Our non-Sunrise same portfolio occupancy increased 10 basis points to 84.8% over the prior quarter. While our Sunrise same store portfolio declined 70 basis points to 85.1%, Sunrise's average monthly revenue per occupied room was up 4.5% over the same period prior year. Facility margins across the entire senior housing portfolio held steady and cash flow coverage was stable at 1.15 times. Current quarter year-over-year same property cash NOI growth for the entire senior housing platform was 4.9%. Our non-Sunrise portfolio increased by 9.8%, driven in part by normal rent steps and the 25 Sunrise assets transitioned to new operators.

On June 1st, HCP acquired in an off market transaction four senior housing assets formerly managed by Sunrise Senior Living. The purchase price was $102 million. The properties were unencumbered by management contracts or secured debt. HCP entered into a 10 year lease with two 10 year renewal options with Emeritus at an initial lease yield at 8.3%. Fixed rent steps for the first five years provide HCP with a compounded annual growth rate of 5.7%.

Hospitals. Same property cash flow coverage increased 5 basis points to 4.93 times. Year-over-year same property cash NOI for the second quarter increased 14% as Hogue began paying full rent in June. Hogue's $84 million renovation of our asset is nearing completion, and the state of the art Orange County facility is expected to reopen in September. In addition, at Medical City Dallas, HCA completed a $212 million investment in our asset with the delivery of its new children's tower and a renovation of the remainder of their space. The new 109,000 square foot tower adds 61 pediatric beds to the hospital's existing 129 beds. HCP will receive minimum base rent on the new tower and will participate in revenue generated by the new children's tower without any incremental investment from HCP.

Skilled nursing. Our owned skilled nursing portfolio continues to perform well. Year-over-year cash NOI for the second quarter in our same store portfolio increased 1.2%, with cash flow coverage declining by 5 basis points with coverage remaining strong at 1.49 times. HCR ManorCare reported first quarter trailing twelve month debt service coverage of 4.5 times, an increase of 8 basis points over the prior quarter. This performance reflects a slower revenue growth over prior periods as a result of Medicare's 1.1% rate decrease last October, which was more than offset by strong cost controls. A 1.7% Medicare rate increase for skilled nursing facilities will become effective October 2010. HCR ManorCare's [proper] debt stack is scheduled to mature in 17 months, although a performance based one year extension is expected to push the ultimate maturity out 2.5 years from now.

Medical office buildings. Same property cash NOI for the second quarter was up 2.4% over the same period 2009. The growth was due to normal rent steps, tenant recoveries, and improvement in parking revenues on our Seattle and Houston campuses. Quarterly same store operating expenses were up $356,000 or 1.2% when compared to 2009, due to unusually high temperatures in several of our markets. Our MOB occupancy for the second quarter increased slightly to 90.8%. During the second quarter, tenants representing 1.031 million square feet took occupancy, of which 900,000 square feet related to previously occupied space. Our year-to-date retention rate was 86.4%. Renewals for the quarter occurred at 5.9% higher mark-to-market rents and included 300,000 square feet of HCA affiliated hospital space that renewed for 10 years. Our pipeline remained strong, with 515,000 square feet of executed leases that have yet to commence and 620,000 square feet in active negotiations.

On July 26 HCP acquired [three] DownREIT, two MOBs in an off market transaction. The purchase price was $19 million at a cap rate of 8.8%. The acquisition adds to our existing campuses at Southwest General Hospital in San Antonio and Lakeview Hospital in Bountiful, Utah. Last quarter, we discussed our sector leading green initiatives and our five year partnership with the EPA's EnergyStar program. In May, a representative from the EPA joined us at our annual HCP third party manager's meeting in Las Vegas, attended by 200 property managers of our MOB and Life Science assets to present us with four additional EnergyStar awards for a total of 14 EnergyStar assets.

Life Science. The same store cash NOI for Life Science was up 8.5% over the same period in 2009. The increase in same store performance was primarily driven by the early repayment of previously deferred rent and contractual rent steps. Absent the deferred rent payment, current quarter same store growth would be flat. Occupancy for the entire Life Science portfolio remained stable at 88.7% at the end of the second quarter. For the quarter, we completed 94,000 square feet of leasing, and year-to-date we have completed 256,000 square feet of leasing that has resulted in a retention rate of 76%. In addition, we have completed an additional 87,000 square feet of leasing that will commence in subsequent quarters. Our Life Science leasing exposure for the remainder of 2010 remains quite small at only 194,000 square feet and represents 0.5% of HCP's annualized revenue. Looking to 2011, we have 385,000 square feet of remaining expirations which represent 1.3% of HCP's annualized revenue. HCP is actively negotiating nearly 100,000 square feet of leases, and our leasing pipeline is tracking tenant demand exceeding 700,000 square feet in our markets.

HCP's Life Science development pipeline continues to consist of just three redevelopment projects totaling 252,000 square feet, with projected remaining funding requirements of $37 million. On July 26th, HCP acquired a Life Science asset for purchase price of $29 million at a cap rate of 8.5%. The property is located within our University of Utah Life Science cluster and is leased to an existing tenant, Myriad Genetics.

Finally, the Biotech industry financing environment remained strong, with over $14 billion of capital activity in the second quarter, bringing the year-to-date total to $23 billion. HCP's tenants continued to attract capital, including Sequenom, which has raised over $52 million in a private placement, and OncoMed's announced partnership with Bayer Healthcare to development anticancer stem cell therapies that included an upfront payment of $40 million and up to $388 million for each successfully developed therapy. In addition, the liquidity profile of our tenants remained strong, with Life Science companies in our portfolio with less than 12 months of cash representing approximately 0.5% of HCP's annualized revenue.

With that review of HCP's portfolio, I would like to turn it back to Jay.

Thanks, Paul. HCP had a very strong quarter, headlined by a positive 5.9% same property cash performance. For the first half of 2010, our same property cash performance is now 4.8% versus guidance for the year at the midpoint of 3.5%. These results were achieved across HCP's real estate portfolio, ranging from positive 1.2% in skilled nursing to positive 14% in hospitals. Not only was our portfolio performance broad based in its contribution to NOI growth, but equally important, each of our three lines of business closed on accretive off market acquisitions in the most recent period.

At HCP's May 18, Investor Day in New York City, many of you had your first opportunity to learn more of HCP's unique combination of safety and growth directly from our line of business leadership. The breadth and depth of these teams are evident in the attractive add-on portfolio acquisitions, which as Paul mentioned include a $102 million 8.3% going in cash yield in senior housing, a $29 million, 8.5% going in cash yield in Life Science, and a $19 million 8.8% going in cash yield in medical office. The senior housing investment is expected to produce a 12% unlevered IRR. The medical office and life science investments are 97% occupied and are expected to generate an 11% unlevered IRR.

In addition to the strong results of our real estate portfolio, HCP's debt investments are valued nicely above their investment costs, and underlying businesses of HCA and HCR ManorCare continue to perform exceptionally well. HCP's balance sheet is currently tracking at strong triple B credit metrics and we have accumulated almost $300 million in cash and marketable securities as of quarter end.

Before opening up the call to questions, I did want to update our audience to what we believe is noteworthy insight into our non-Sunrise senior housing metrics. From an asset management perspective, Executive Vice President Susan Tate and her team constantly review and analyze data from each of our senior housing operators, and then aggregate these results on a monthly basis to formulate a proprietary outlook. The most recent quarter was the first quarter in almost 2.5 years since early 2008 that each of the key senior housing performance metrics that we monitor -- occupancy, rate growth, operating margin, and cash flow coverage -- all turned green or positive. The performance was measured on trailing three months, and was positive not only on a sequential quarter basis, but on a year-over-year basis as well. While one quarter does not make a trend, and we continue to anticipate a challenging outlook for unemployment and residential housing in the United States, these results have moved our internal senior housing outlook from cautious to cautiously optimistic.

With that, we are delighted to take your questions at this time. Shanelle, as you are ordering the questions, I did want to acknowledge David Bangs and Doug Pasquale and the entire team at Nationwide Health Properties on the occasion today of their 25th anniversary as a publicly traded company. As someone who was around at the time of that IPO, the Company back then was known as Beverly Investment Properties. It is very special for me to see such class acts as David Banks and Doug Pasquale do so well and have the opportunity this afternoon to enjoy the recognition for their accomplishments. Shanelle, we'll take questions now.

(Operator Instructions). Your first question comes from the line of Jay Habermann of Goldman Sachs.

Hey, Jay, how are you?

Good, Jay, you?

Good. Just a question. The balance sheet obviously probably never been in better shape than it is today. Can you just give us some sense of obviously what you're looking at in terms of transactions? And I guess on the part of sellers are you seeing a little bit more of a desire to perhaps move some of these assets sooner than later? Or I guess just what pipeline are you looking at today versus three months ago?

I would say the pipeline versus three months ago has continued to build. I would say with one of our five properties -- with the exception of one of our five properties sectors, it is broad based. That outlier would be hospitals. We only saw one particular situation in the past quarter that we had dug into and ultimately elected not to pursue, but the other sectors -- medical office, Life Science, skilled nursing, senior housing -- are all very, very active and I think our thesis of substantial second half 2010 activity remains in place. A lot of that is going to be driven by the private equity firms that own a lot of these businesses, and I would imagine perhaps there could be some motivation for getting some things done by year end owing to the potential for tax increases taking effect in 2011.

Makes sense. And then you mentioned some of the senior housing metrics and how you have gone from cautious to cautiously optimistic. Is that an area you think you could continue to see some opportunities over the back half of the year?

Yes. Again, quick bit of history for the folks on the call. We actually got -- the day after we closed on CNL, which was around about October 2nd of 2006, private pay senior housing as a percent of our entire portfolio was 60%. Over the course of the succeeding couple years, either because of sales by HCP of senior housing portfolios or contributions by HCP of senior housing portfolios to joint ventures or acquisitions in our other four property sectors, that space got to about 37%, got diluted down in terms of its representation in our overall portfolio, got to 37% just a month or so ago. In fact, up until what we call the PC7 deal, the four properties we closed on on June 1, which represent the third portfolio now that we have transitioned from Sunrise Senior Living to replacement operators, we hadn't added to our senior housing portfolio at all. So I think we have shared with you in past calls our view as to how favorable the supply and demand demographics look there with the baby boomer continuing to age, and very, very little supply coming on this year, and even less next year, and quite frankly even less being financed given the constraint we have in this country today for construction financing. So that against the backdrop where occupancies are mid-to mid-high 80s, we just think that's a terrific spot to be looking to put out our shareholders' capital over the next couple years. That's a thesis if anything we have gained greater conviction over.

And just last question on the MOBs. You mentioned new rents up about 6%. For the leases that have been signed and executed and I guess what's in negotiations, are you seeing that as a similar trend? I guess that rate increase?

Actually, that was due in large part with the releasing of some [HCA] and 300,000 square feet global reexecution of those leases and we were able to pick up substantial [rates] in that transaction.

So, connecting the dots -- the 5.7% might be a tad higher than we might expect in terms of a normal mark-to-market?

In the past couple quarters, we have been around the 2% to 2.5% range.

Thank you.

Your next question is from Adam Feinstein of Barclays Capital.

Good morning.

Good morning.

Just a question here, follow-up on your comments about moving to a little more cautiously optimistic on the senior housing. Is it -- is it related I guess more to the occupancy or pricing and potential for those to be drivers for NOI for the remainder of the year? Just wanted to see if you had any comments there.

I think it is really looking at it in totality. We have a modified -- looking at the hotel industry RevPAR metric that we do, so it is the entire -- it is not one or the other. It is the entire package, which I think is the best way to assess that particular space. And I think if you had a chance to take a peak at the comments in Brookdale's press release of last night, I think you would see perspectives in terms of rate and occupancy in some of the quotes from our fine partner Bill Sheriff that are very much consistent with the proprietary view point that Susan and her team are gleaning from the data that we see.

Okay. And then just a question on -- I know the MOB that you acquired subsequent to the quarter, did you provide an occupancy level for those MOBs?

The occupancy, the combined occupancy for the -- Just the MOBs was 95%. The one in Texas was at 91%, and the one in Utah was 100% occupied, as well as the Life Science asset of the 100% occupied as well.

The three taken together is the 97% I mentioned, and Paul has given you the breakout of the three properties.

And are you seeing a lot of opportunities there with these MOBs that is have very high occupancy and the potential to buy them which appears to be very on a cheaper basis with what you did in July?

I am sorry, I am not sure I understand the question.

Are you seeing similar opportunities, MOBs where you have high occupancy, but I guess -- like someone wanting to partner with you and give you what I consider a higher yield?

Well, we're fortunate given the breadth of the portfolio we have, which is diversified across five property sectors and diversified up and down the capital stack with five different product types, and led by three terrific line of business leaders to have a pipeline that generates an awful lot of very interesting things. Quite frankly, the hurdle or the filter of those that get in the pipeline versus the ones that we end up closing on is quite small. We have just taken you through three transactions that we have closed on. We're ecstatic about all three of those. We would like that to be more. I would say as a general comment, there has been a lot of activity in the MOB and Life Science space. I would say this, that more often than not in the past quarter or two, we have been outbid for portfolios, particularly in the MOB and the Life Science space. So I think what you see is what we feel very good about. There are certainly other transactions in those two particular properties sectors that have been announced that were at valuation points that we chose not to pursue. So there is a lot of activity I think in those two spaces in particular.

Thanks a lot.

Your next question comes from the line of Dustin Pizzo of UBS.

Hi, Jay, it is Ross Nussbaum here with Dustin. I might have missed this in the supplemental. What were the legal costs that ran through the P&L in the second quarter?

Ross, you didn't miss it. We didn't disclose the legal costs for the second quarter.

So you're not going to?

Right.

Okay. If I look at the same store NOI by segment, I understand the senior housing portfolio ex the FAS 141 adjustment, there was a little nuance there. But sequentially so -- it was down year-over-year 3.6% ex that adjustment, but it was up 3.2% sequentially. What would have driven from Q1 to Q2 3% growth in a triple net leased portfolio?

Are you looking at the entire senior housing or the breakout between -- ?

I am on the same store on page 13. It looks like it was up about 3% from Q1 to Q2.

You're talking about the 3.2% sequential same property performance, and you're asking -- ?

Why would it be up that sharply on a long-term triple net portfolio?

We had there was a cure payment that we received on a performance hurdle default with Sunrise, and that bumped it up by about a 1.3%. And then there was a little bit of noise going the other direction on a release of working capital in the prior period of 2009 that offset that a little bit, but we had just straight organic growth of 2.5% on a cash basis for the senior housing portfolio. Those are the pieces.

The cure payment, Ross, if you go back -- we talked about that on the last quarter. That was a portfolio that was in default, and Sunrise had the option to cure that default with the payment, which they elected to do.

That won't be recurring into the third quarter?

That's correct.

On the Life Science portfolio, I think there was a reference to a deferred rent payment that excluding that would have made the NOI comp [flat] there. What specifically was that relating to?

We had an amount with a Life Science tenant that had been deferred historically as we had worked together with that tenant, and they were able to meet certain hurdles and had the available cash for those hurdles, and they repaid that deferred rent. And accordingly, it doesn't affect FFO, but it does drive same property performance on a cash basis.

Ross, the hurdle was geared off a capital event occurring which it did, so that released that.

Okay. And then lastly, Jay, how would you characterize your relationship with Mark Ordan at Sunrise right now? Are you even on speaking terms at this point?

Sure.

Is there any positive outlook there, or is it primarily the lawyers doing the talking in terms of the determining the future of that relationship?

Mark and I speak actually fairly regularly, multiple times in the last week or so, so I would leave it at that. There is obviously not a whole lot more I can say given the spectre of the litigation, but Mark and I have a cordial and regular dialog that's occurred multiple times in the last period of time.

Thank you.

Your next question comes from the line of Jeff Spector of Bank of America, Merrill Lynch.

Good afternoon. Thank you. Jay, if I could follow up on your comments that you were outbid on some of the recent deals we have seen specifically in the MOB space, I guess could you elaborate on that a little bit? Do you think it had to do with NOI assumptions or let's say -- I don't know if you weren't willing to put as much value on the business?

No. I think different buyers have different motivations. We're at 17 million square feet medical office building real estate, either owned or owned and managed where we're largest player in that space. Our portfolio is clustered in a handful of markets -- Nashville, Dallas, Houston, Florida -- and there are other folks that have not been in that space, or if they are in the space, they're in it in a de minimis way. And so oftentimes you see people for noneconomic reasons, strategic reasons, other reasons, diversification reasons, that want to make moves, which is certainly their prerogative. We're meaningfully in five different sectors. We are the established leader in those five sectors both in terms of the scale, but probably more importantly the quality of the tenants and operators that we're partnering with, so we're -- it is what it is. We watch all of this play out and we're -- we see there is value to be had for HCP shareholders. We move as we did on the three transactions that Paul took you through, and where we don't, we won't.

Thank you. And just following up on some of the other comments about acquisitions and moving from cautious to cautiously optimistic on senior housing, I guess from here on out, should we expect to continue to see singles and doubles? Or do you see something big out there that's still transformational for your company?

Transformational for HCP? Well, I guess in a perfect world we win the Triple Crown, right -- we have the highest batting average, the most home runs, and we would have the most runs batted in. And we're bouncing between a $17.5 million and $18 billion market cap enterprise today, so when we can put up cash NOI growth of 5.9% for the quarter and 4.8% for the first six months of the year, those are big -- when you do the math, those are big numbers. I think I have said in the past I am not aware, maybe with the exception of the Apple store and the Golden Arches, of any other large scale real estate portfolio that through a challenging economic environment is generating cash NOI growth at the rate we're doing. So we feel very good about what we have got, couldn't be happier. And if we can add to that with additional transactions, we'll certainly do that. If they happen to be small, that's fine. If they happen to be big, that's fine, too. If they happen to be something in the middle, we don't have a specific black box that we're moving on except to continue to try to increase shareholder value.

Okay. And then last question if you could just discuss a little bit more the Life Science facility acquisition and how that fits into your current portfolio?

That's a great -- you mean the Slough transaction we did back in 2007?

No -- well, correct, compared to that.

I am sorry. Are you talking about the strategic move we made on Slough or the campus cluster we just added last month?

The one you just added last month.

We have got a concentration up on the University of Utah campus. I don't know offhand how many properties we have up there. This was a nice fold-in property to where we're already on the ground, we already have critical mass. As is the case in medical office, we like controlling campuses or state clusters as the nomenclature works for us in Life Science clusters on campuses. And so this was right down the middle. Myriad Genetics is an existing tenant, and we like that space. In the big scheme of things -- in the absolute size it kind of pales in comparison with our San Francisco Bay Area and San Diego footprint in Life Sciences, but these are nice profitable add-on transactions, and Tim Schoen and his team -- our Life Science leadership do a great job with that.

We own nine buildings on the University of Utah cluster, almost about 600,000 square feet of space.

Great. Thank you.

Your next question comes from the line of Suzanne Kim of Credit Suisse.

Good morning. Did you look at the executive transaction that BMR did?

I am sorry. Did we look at what?

You were referring to a Life Science transaction that occurred earlier, and I was wondering if it was the Executive Way transaction at BMR?

No. We don't comment on specific deals. There has been more than one Life Science transaction in the last couple months that we have bid on that has gone to another buyer, but that wasn't the specific one.

Are there any other clusters that you're looking at across the country? Are you trying to stay on the West Coast?

We would love to get -- our strategy is always been we want to be in those top four clusters. We're in a very, very strong position in the first and third largest of those top four, the Bay Area and San Diego. We do not have a presence in the Boston/Cambridge nor do we have a presence in the Washington DC/Maryland Beltway. But as I think we shared with you, Suzanne, before, our criteria is not just geography. It gets overlaid with the tenant quality. So in order for us to move, we need to have the geographical footprint of one of those top four markets that are the markets that get disproportionately funded by the grants from the NIH, and also we have to have the right profile of tenancy credit tenants, high quality companies, that make money as opposed to more of a venture capital. When you overlay those two criteria together, the opportunities that fall out of that that meet our thresholds are just a small, small universe of opportunities.

In terms of your same store NOI that everyone has been talking about with regards to your senior housing, I know that that part of that 4.9% number is because of what -- the chance for the Sunrise operator, but wondering what a good run rate is and how do you look at seasonality for the coming next couple of quarters?

Again, the 4.9% is actually ex-Sunrise for senior housing. It is actually 9.8%, Suzanne.

Okay.

I think Paul -- I encourage to you go back and look at Paul's script. It is 9.8% ex Sunrise, and yes you're right, has a couple things in it including the outsized growth from the portfolios that we have transitioned to replacement operators. As I think I have shared with you and I know others on the call in the past -- when we have done those transitions, those are not one-year phenomena. What Paul and his team have done is locked in outsized growth in rents for the first five years. So that is why you see a disproportionate amount of the outperformance and will continue to see a disproportionate amount of the outsized performance in our non-Sunrise private pay senior housing cash NOI growth be a benefit from the impact over the next couple of years of these transitions. And obviously we have done another transition on June 1st, which of course is not yet even in the same property performance, so that will layer in for 2011.

What kind of expectations should we expect over the next couple of quarters, and including seasonality?

Our guidance for the year is between 3% and 4% companywide, and I believe that within the private pay senior housing sector, that guidance is, Tom?

4.5% to 6.5% ballpark for senior housing as a whole for the year.

As we sit here today at the halfway point, we're trending above the upper end on both of those guidance points, Suzanne.

Great. But isn't there usually typically a first quarter bump? I am just wondering how that work. And if we start looking into the next year, how we look at the run rate that's going to occur in the third and fourth quarters and how that -- ?

You've got the normal rent growth, and as Jay mentioned with the portfolios we've had in Sunrise, we're going to get outsized growth from those portfolios as they have been transitioned. I think some of the bumps you are talking about would be in ad rent, and last quarter I think I referenced that's a light quarter for ad rent. So ballpark about 20% of our ad rent is in the first quarter. 30% of it is in the second quarter.

I think, Suzanne, it is possible you might be confusing what the economics look like to us, which tend to build over the course of the four quarters, with the largest quarter being the fourth quarter we get ad rent, versus what's actually going on in the community level, where often times the rate increase that the resident sees -- oftentimes that's communicated and done in the first quarter. What's going on in the community is not necessarily mirroring the economics that we flow through our income statement during the course of the year.

Great. Thanks.

Your next question comes from the line of Quentin Velleley of Citi.

Hi there. In terms of the going back to the deal pipeline, I know the $500 million equity raise, and you talk about the pipeline being larger than it was in 2006, which is pretty -- seeing how it's flat. Sounds like a couple of things maybe dropped out of that pipeline. Jay, can you comment on the size of the pipeline and whether there is new deals you are now looking at?

Which ones dropped out of our pipeline?

Something in the medical office building price dropped out.

Our pipeline is certainly as big if not a little bit bigger than at the time we announced the June equity offering. We're in a -- it is very fulsome, robust, and active pipeline that we're in right now. It is one of the reasons why we moved to do the equity at the time we did it.

And so I know on the Investor Day you spoke about potentially buying out some of your joint venture partners. Is that something still in there as well?

Yes. It is obviously going to be a function of what the interest is on the part of our joint venture partners, and we obviously keep close tabs on that. But it is broad based both in terms of its representation across our five property types and broad based in terms of the various products that might manifest itself in terms of new dollars, new HCP shareholder dollars out the door.

Okay. Just lastly, the Healthscope takeover in Australia, I know at NAREIT you commented that you had looked at it. Can you just maybe talk about your involvement in that transaction, and I am not sure whether you can give a comment on pricing and what the pricing might mean for the value of hospitals in the global marketplace?

Well, I can't really comment on that. There is -- it would be unusual for a transaction that is in one of our five property types -- hospitals, skilled, private pay, senior housing, medical office or Life Science -- to be in the market or to be contemplated without us looking at it. So I think that's a general comment. Separately, I think what I said NAREIT, I suspect that had what you could see play out in that particular market, the Asian market -- I think you could see what took basically two decades here in the States where you had initially hospital management companies and skilled nursing operators morph themselves into propco/opco structures and create very efficient markets, but very different markets for the management side of the business versus the real estate ownership side of the business. You have seen a similar movie play out in the hospitality space here in the States, and I believe what I said at NAREIT was that it wouldn't surprise me at all to see what took two decades to unfold here in the healthcare space occur in as soon a period of time as five years. There is obviously one bifurcation that exists down there today. My suspicion is that the transaction you referenced will eventually morph itself into a propco/opco structure, and I think there will be other opportunities as well.

Okay. Thank you.

Your next question comes from the line of Rob Mains with Morgan Keegan. Please proceed.

Thanks. Good morning. Tom, a couple questions for you. The deferred rent on the Life Science at $4 million you said was not included in FFO?

That's correct.

Does that -- can I surmise it is not embedded on that interest and other income line?

It is not embedded in -- it is not embedded in interest and other income. It is literally -- was relieved from the balance sheet from a balance sheet perspective. But it does create cash coming in that affects FAD if you are measuring that and cash coming in -- this affects cash same property performance.

And on the interest and other income line, in the past, things have hung out there one-time in nature -- nothing unusual there?

There is nothing unusual there.

[With a] couple lines on the FAD calculation, I think it was first quarter call -- no, fourth quarter call. You had said that we probably would see straight line rents in the neighborhood of $45 million in commissions and TIs, CapEx around $55 million. You are well below those levels. What are you looking at there, do you think?

As it pertains to the FAD CapEx that I spoke to being $56 million, we're below that right now, but that's timing of leasing and whatnot, and we're still unchanged on the guidance on that. What was your other question? Was it the straight line? The straight line is going to be affected by two things. You probably saw that number decrease from the same period in the prior year -- it'd have gone from [14.3] down to [8.4]. That's probably what you're seeing, and you're going to have two major items that would have driven that. One is the deferred rent payment on the Life Science, because it -- offsets like a flip side of what a straight line rent adjustment would look like where it goes through GAAP and FFO, and comes in in cash and we have the flip side coming through FS, and the other thing is you have the burn off of the Hogue rent abatement, which we went to full rent beginning June 1st, so those are the two items that affected that.

On a run rate basis, it wouldn't be much different from what we saw in the first quarter it sounds like?

Correct.

And, Jay, just one question for you -- when you are talking about the acquisition environment, you said that the idea of taxes being a motivator, potential motivator for sellers, are you talking carried interest, cap gains, both?

Yes, probably both.

Okay. All right. That's all I had. Thank you.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Hi. A lot has been covered, so I will try and be quick. Status of the Sunrise lawsuit -- the one in Delaware is still slated for trial, schedule and that?

Yes. The trial date has not been set for the complaints and counterclaims that have been filed in Delaware.

Okay. And just any sense yet this year or early next year?

The trial date has not been set for the complaints and the counterclaims filed in Delaware.

And I think there was a comment about the ManorCare debt may be extended or something, but I didn't quite pick it up. Where do we stand on the term of your ManorCare debt?

Are you referring to the comment Paul made?

It was sort of quick. It may have been referring to some other debt. There was something about -- it is 2012 with a one year extension?

I think Paul's comments suggest that had in terms of the official, probably the wrong word to use, but the state of maturities is now just 17 months out, January 2012. There is a one year performance extension which, given the amazing performance that that management team has executed, is in all likelihood going to be put in place, so that would extend the ultimate maturity out to January 2013, which Paul ballparked at about 2.5 years from now.

Okay. All right. Obviously they've got the flexibility to carry longer and might make a decision to do something sooner as you made a reference to the private equity?

I am sorry. I am not sure I understand the question.

That's fine. They have got some flexibility on terms of the maturity of their debt. They may choose to do something sooner as one of the private equity guys you were just referring to for --

I am not sure it is appropriate for me to be commenting on Carlisle's intentions, but they do have the ability to extend that piece of debt one extra year assuming the performance criteria is there, and certainly everything that we see looking at that investment would suggest that that performance test will be comfortably achieved.

Are TRSs one of the things you're looking about as potential acquisition structure?

I think at the Investor Day presentation we made, I think I indicated that we have got our 5 by 5 model today, five property types -- medical office, Life Science, hospitals, skilled, and private pay senior housing -- and that we have been very fortunate to play those five property types up and down the capital stack five different ways. So with the change in the tax law, that potentially allows I think -- the slide we put up there suggested there could be a sixth row. We haven't obviously done anything with that. It certainly is another arrow in our quiver that if the situation presented itself and the risk reward was enough to clear the bar, we would certainly look at that.

Okay. And last thing, whenever you say nice things about a competitor, I always think of them as an acquisition target, so is your compliment in HP anything more than just a compliment?

Just a compliment. Was around when that company was born, so I've been through the hiccups, and David and Doug where they are versus some of the hiccups those two gentlemen had to deal with over the last decade or so is quite significant. I think they deserve serious merit for being the fourth healthcare REIT that gets added to the S&P 500 in my view.

The next question is from Tayo Okusanya at Jefferies and Company.

Good morning, Jay. First of all, thanks for the email this morning. I will definitely address those issues in my notes. And then just wanted to talk a little bit about Life Sciences in your area of the world -- with the Roche consolidation going on on its campus, if it is changing any market dynamics?

No. It really isn't to date. I think there is the potential for that to change. They do have some other holdings in that market, and they're in the early stages of potentially rationalizing, consolidating out of some of that, because without a doubt the GenenTech flagship is going to be the research platform that that company chooses to pursue, at least for North America. So I think in general some of the big pharmas tend to be very deliberate and take the time and study these things. And so I think to date you haven't really seen much in the way of an impact, but over the next year or two, I think it is quite possible that you will see an impact.

Would the concern be if they actually are successful in selling an empty campus, by just being aggressive or get lease up for the place?

Well, I think if they sold the particular campus that we're [talking to], they wouldn't have -- they wouldn't have any tendancy on that campus going forward. So it would be an alternative user. So if anything, it would take potential space out of the market, particularly if the potential user is a non-Life Science entity, which is probably the most likely execution of that particular campus.

That's helpful. And then on the MOB side, the deals you did this quarter with the high 8 cap rates -- some of your peers also did deals at the high 8 cap rates and to 9%. And I guess I am a little bit surprised the cap rates are that high. Is anything changing in that market that's making pricing much more attractive to buy MOB assets versus six months ago where everyone was struggling to do these deals at 8 caps?

I am sorry, which other MOB transactions got done in the high 8's and low 9's?

I believe if we looked at -- [F&H] did a couple of transactions this quarter at those kind of cap rates and I believe NHP also did one or two.

In medical office, not skilled?

In medical office, correct. I am surprised the cap rates are so high all of a sudden.

Again, we love what we just closed on, and we think with the unlevered IRRs I quoted there, 11% with going in cash yields at 8.8%, we think that's real good investment flow for our shareholders. So to the extent we can do more of those, we would be delighted to do that.

Do you think it will be possible to do more or do you think it was a unique situation with the ones you bought?

I guess time will tell.

Fair enough. And then just wanted to pick your brains -- your latest thoughts about what could ultimately happen at ManorCare versus your thoughts during your Investor Day. Has anything changed materially or not really?

Yes. The only thing that changed is the Company just continues to knock the cover off the ball. I think we now talked about that investment at 10 quarters, so all the four quarters of 2008, 2009, and now two quarters into 2010. And I believe every single quarter, the debt service coverage ratio has gone up. So it is really -- we feel almost embarrassed to continue to quote some of the debt service coverage ratios, so they're back on something you can take a look at them. But we feel fantastic about that investment and have nothing but the highest regard for Paul Orman and his team, and long-term objective would be somehow manage to stay invested with that platform, but obviously that's by no means under our control.

Okay. That's fair. Thanks for your time.

Yes, sir.

Your next question comes from the line of Rich Anderson of BMO Capital Markets.

Sorry to drag things on here, but just a couple of quick questions. On Sunrise, this is the second time we're hearing -- and I know you talked about it last quarter about some make hold type payments. Is that -- should we view that as some foreshadowing of the company getting more behind things in terms of finances? Is there a new process underway in your opinion there?

I am sorry, Rich, new process specific to what?

I mean, does it seem like they made this [make whole] payment to you for maybe costs shortfalls, and I heard it is about the same type of thing -- I don't know if it is exactly the same situation at Ventas, and I just was curious if you think they're getting more focused on things and more committed to operations?

I think that's certainly their objective. Again, I think I would encourage you to have that dialog directly with Mark. He continues to be in a mode of trying to put out a bunch of fires that he inherited, and he is chopping through them, but -- so again in terms of the nuances and what he is doing from his operating model and stuff like that, that's really inappropriate for me to comment on.

Fair enough. The other question is, I don't know if this is mentioned in the prepared remarks, but do you have a number about how much capital you can deploy today without having to go back to the market that would put you still in a comfortable range from a leverage standpoint? In other words, what's your sort of dry powder today?

A lot.

Can you define a lot?

It is a lot of money, Rich. Again, we don't look at things because they're big. We look at them because they're good. We have obviously -- the market cap to the Company is approaching $18 billion. The unsecured debt markets are wide open to us. Our credit metrics are quite strong.

Before all of that, though, I am talking about what you have cash and I guess --

The cash and marketable securities and availability on our line of credit today is $1.7 billion.

And then you can lever up how much to -- if they were talking about several billion dollars?

Like I said, the best number I would go with is a lot.

Okay. I just had my five year anniversary at BMO in case you wanted to throw me a compliment.

I will give you a lot of compliments on putting up with myself and my peers for five years. Congratulations.

Thank you very much. I appreciate it.

Your next question comes from the line of Michael Mueller of JPMorgan.

Hi. A few questions. First of all, Tom, were there any material acquisition costs in the quarter tied to the acquisitions, and I guess would they be in G&A?

Yes. The acquisition costs, as you know, do have to go through the P&L. They were not material, though.

Okay. Can you talk a little bit about the Q2 Life Science leasing spreads and how we should think about those on a go-forward basis? I know you don't have a lot expiring this year or in 2011, but just where you expect the spreads to trend?

Yes. Let me go through first quarter, second quarter, and then what we have done. On the mark-to-market in the first quarter, those were down 21%. That was driven by an office building or office lease that extended and renewed. In the second quarter, we had a 50,000 square foot tenant who was on a sublease. That sublease had been -- or the lease had been in place for over 10 years and had significant bumps in it. That actually came down 32% in the second quarter. But with the 87,000 square feet of leases that we have completed since the end of the second quarter, those have only been marked down 11.5%. We think we're going to stay in the 20% to 25% mark-to-market for the remainder of this year.

Okay. Great.

Remember, the amount of space we have rolling in that sector is quite minimal.

Okay. So down 20% to 25% rest of year on the mark-to-markets and early read on the 2011 is something comparable?

They'll have [fiscal] at that mark.

Not sure I got this, but Tom -- when you were talking about the cure payment in Q2 for the senior housing, that was in Q2, correct, not Q1?

Correct.

How significant that was number and what would the same store have been for the overall same store housing without that?

The cure payment was $900,000. It would have reduced the senior housing from -- for the quarter year-over-year, for the quarter 4.9% down to 3.5%.

The non-Sunrise component, Mike, would have remained at the 9.8% for the quarter, because the payment obviously came from Sunrise.

Got it. Okay. Great. Thank you.

Your next question is from the line of Dustin Pizzo of UBS.

Thanks, guys. Have a couple follow-ups. Jay, I know your public exposure is limited, but we have heard varying opinions on the Medicaid outlook. I would be interested in hearing what your thoughts are there with respect to the impact of recent cuts effective July 1st in many states as well as potential cuts coming down the road, either near term or further out given the ongoing (inaudible).

I am sorry, are you asking us about Medicaid?

Yes, and just your thoughts on the outlook.

I think the most important [value] we sold out of that business in the last couple of years. We don't like it. And I think we'll see what's going on with the state budget deficits. You think about the stimulus plan, a lot of that was nothing more than journal [entries] federal government to state government to fund operating deficits of Medicaid and unemployment, okay, as opposed to investments that would have had a multiplier effect in creating some velocity. That's basically -- that's where the monies went to, and obviously those stimulus dollars are now coming to an end. It would appear as though there is not the anonymity in Washington, DC to continue to provide that -- there may be interest in providing stimulus. It is fair to say I think there is certainly not anonymity in Washington to continue to have it be just kind of a funding operating deficit. So in that case I think the outlook for Medicaid gets even bleaker.

But I think it will be interesting to see what happens. I think the -- you get through the election, there will probably be some messages sent, and I think a very important perspective will probably come from that bipartisan debt panel that the President organized that I think is due to make its report on what to do about the three major entitlement programs of security, Medicare, and Medicaid round about December 1st.

Okay. And then on the four senior housing properties you acquired, I think you said in the opening comments they were unencumbered by management contracts. But was there any payment to Sunrise embedded in the purchase that you can change operators?

That was all done on the part of the seller. The seller of those four portfolios is someone that was in our portfolio, and we worked with closely in the past, and the terms under which we agreed to take ownership in that portfolio required the seller to deliver to us those four properties unencumbered by either a management contract or any existing secured debt of which there was some as well. So those are the terms under which we stepped into that four property portfolio.

I believe Ross has a quick follow-up as well.

Tom, on the G&A line, I think you had previously given guidance earlier in the year of $77 million for full year. You have done about $45 million in the first half. If I annualize that, obviously it is higher than $77 million. Do you have an update for us on G&A, maybe?

The G&A, Ross, is unchanged. We incurred heavier litigation costs in the first half of the year than we expect in the second half. That's the reason for the disparity between the numbers you are looking at, and then seeking to do a run rate, but the $77 million is still the number.

The $20.5 million in Q2 is going to drop pretty meaningfully?

Yes.

The other question I have is on the MOB portfolio. If I am looking at page 16 in the supplemental -- if I exclude the lease termination fees that you guys have booked in the year ago quarter, it looks like same store revenues would have been ever so slightly down, and I am trying to reconcile that against the fact that occupancy looks flat, leasing spreads look slightly positive, you have contractual rent growth -- and how would same store revenues have gone down even marginally year-over-year?

You're looking at -- let me make sure the item you are talking about. You are talking about the termination fee that was recorded?

I am looking at the combination of related revenues and the lease termination fee.

Keep in mind that that's a noncash item, so from a cash perspective we're at the 2.4% year-over-year, and that's going to be based on organic growth. There is nothing additional going on in there from a cash perspective, and from a GAAP same property performance perspective, which is what you would be referencing, you're going to see the GAAP FPP be quite a bit lower at 0.4% year-over-year, and that's going to be due to a couple of those noncash items like the one you just referenced.

Okay. Thank you.

Your next question comes from the line of Daniel [Greenberger] of [GM Realty].

Hey, guys, I was just wondering what the operating margins were for the Sunrise portfolio this quarter?

We don't disclose that.

What's your outlook on operating margins improving over the back half of the year, then? Do you have any conviction that the manager is improving the property level operations there?

I am sorry. Are you talking about HCP or one of our five property sectors? What are you talking about?

The Sunrise managed portfolio.

Sounds like we have a Sunrise shareholder on the phone here. Again, we -- I wouldn't comment any further on that.

Thanks.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to your Chairman and CEO, Jay Flaherty.

Shanelle, as always, a great job. Thank you, everybody, for your interest in HCP. Hope we will see some of you in Chicago at NIC in September. Have a good rest of your summer. Take care.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.