Healthpeak Properties Inc (PEAK) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 HCP earnings conference call. My name is Chanelle, and I'll be your Operator for today. At this time, all participants are in listen-only mode. Towards the end of the conference, we will have live audio questions. As a reminder, this conference is being recorded for replay purposes.

Now, I would like to turn the presentation over to your host for today's conference, Senior Vice President, John Lu. You may go ahead, sir.

Thank you, Chanelle. Good afternoon and good morning. Some of the statements made during today's conference call will contain forward-looking statements including the statements about our guidance. 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 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, John. Welcome to the 2011 first-quarter conference call for HCP. Joining me this morning on the call are Executive Vice President, Chief Financial Officer, Tom Herzog, and Executive Vice President, Chief Investment Officer, Paul Gallagher. Let's begin with a review of our first-quarter results and for that, I turn the call over to Tom.

Thank you, Jay. There are 3 topics I will cover today. First, our first-quarter results and investment activities. Second, our financing activities and balance sheet. And third, updates to our 2011 guidance.

Let me start with our first-quarter results and investment activities. We reported FFO of $0.40 per share which reflected a $0.16 negative impact from HCR ManorCare merger-related items including $0.13 of negative carry resulting from debt and equity issuances that pre-funded the transaction and $0.03 of transaction costs primarily related to the amortization of bridge loan fees net of other miscellaneous items. Excluding these merger-related items, FFO as adjusted for the quarter was $0.56 per share and FAD was $0.49 per share. Our operations exceeded plan with first-quarter year-over-year cash same-property performance growth of 6.8%. Paul will review our performance by segment in a few minutes.

In January, we closed the acquisition of our partner's 65% interest in Ventures II. We paid $136 million and assumed our partner's share of $650 million of Fannie Mae debt with an average rate of 5.66%. We made additional investments totaling $120 million, of which $100 million related to acquisitions of 1 MOB and 4 life science assets representing 332,000 square feet in aggregate with the remaining $20 million related to construction and other capital projects.

Turning now to financing activities and balance sheet. During the first quarter, we completed 2 capital market offerings generating $3.7 billion of proceeds which consisted of $2.4 billion of senior unsecured notes in January with a weighted average maturity of 10.3 years and a weighted average yield of 4.83% and $1.27 billion of common stock in March at a price of $36.90 per share. Proceeds from these offerings were used to fund a portion of the HCR ManorCare acquisition including $852 million used to substitute all of Carlyle stock consideration for cash which resulted in a $68 million benefit to HCP net of transaction costs.

Also in March, we renewed our revolving credit facility in favorable terms. The new $1.5 billion revolver has a 4-year term plus a 1-year committed extension option and a current rate of LIBOR plus 150 basis points. At the end of Q1, our financial leverage and secured debt ratio were 40.9% and 10.5% respectively. We expect on a full year normalized basis, fixed charge coverage between 3.0 and 3.3 times and net debt to EBITDA between 4.8 and 5.1 times. Our improved credit profile has lead to 2 upgrades from the rating agencies. In January, Moody's upgraded our rating from BAA3 to BAA2 and in April, Fitch raised our rating from BBB to BBB plus.

Third, updates to our 2011 guidance. Based on stronger than forecasted performance to date, including leasing results in our MOB and life science segments and a working capital adjustment related to our November 2010 Sunrise transition, we are raising our full-year cash SPP growth to a range of 2.75% to 3.75%, up 50 basis points from our February guidance of 2.25% to 3.25%.

As a reminder, we raised our FFO and FAD guidance in March to reflect the net impact of several items including the prepayment of our Genesis debt investment and placement of our service loan on non-accrual status. We're updating our FFO guidance to range from $2.47 to $2.53 per share which is $0.02 lower than our March guidance of $2.49 to $2.55 per share. This change is driven by several items not contemplated in our last guidance including -- a negative $0.03 due to closing our HCR ManorCare Real Estate acquisition 6 days later than previously assumed; a negative $0.01 from our $95 million investment in HCR ManorCare's operations due in part to the accounting treatment for the long-term lease of the underlying real estate, partially offset by a positive $0.01 from increased same-property performance; and a $0.01 benefit resulting from paying Carlyle $852 million cash in lieu of 25.7 million shares of stock.

Merger-related items reflected in our full-year FFO guidance totaled $0.145. This includes the $0.16 in Q1 that I discussed a couple of minutes ago, partially offset by a positive $0.01 of items that were incurred in the second quarter. These second-quarter merger-related items consist of $0.05 related to a $23 million gain which represented the difference at closing between the fair value and carrying value of our existing HCR ManorCare debt investment and several other small items, partially offset by $0.03 of direct transaction expenses and $0.01 of negative carry resulting from our pre-funding activities.

Excluding the merger-related items, we expect 2011 FFO as adjusted to range from $2.62 to $2.68 per share which is unchanged from our March guidance. We're updating our FAD guidance to a range of $2.06 to $2.12 per share which is $0.01 higher than our March guidance of $2.05 to $2.11 per share. The increase is driven by the same $0.02 benefit mentioned in FFO guidance resulting from increased SPP and substituting Carlyle stock consideration for cash and $0.01 accretive effect from our $95 million investment in HCR ManorCare's operations, partially offset by $0.02 negative impact due to the timing of transaction close and other miscellaneous items.

A quick item of note. Effective January 1, 2011, we instituted a policy change that expanded the population of our same-property portfolio. Going forward, real estate assets accounted for as direct finance leases are now eligible for inclusion in our same-store population. This change was reflected in our original guidance set forth in February and is expected to have a negligible impact in 2011. I will now turn the call over to Paul. Paul?

Thank you, Tom. HCP's portfolio continued its excellent performance in the first quarter across all 5 sectors, which is reflected in strong, same-store growth. The portfolio experienced increased occupancy in senior housing, stable cash flow coverages in the hospital and post-acute sector, and strong leasing activity and retention in the MOB and life science sectors. Now, let me break down that 2011 first-quarter performance in detail.

Senior housing. Occupancy for the current quarter in our same-property senior housing platform is 86.5%, a 30 basis point sequential increase over the prior quarter and a 100 basis point increase over the prior year. Facility rates and margins for our senior housing portfolio continue to improve and cash flow coverage is up slightly to 1.19 times. Current quarter year-over-year same-property cash NOI growth for our senior housing platform was 9.5% driven primarily by the properties transition from Sunrise to new operators.

Working with the Environmental Protection Agency and various senior housing associations, our capital asset management team assisted our operators in providing data which was instrumental in developing a new category for Energy Star related to senior housing properties. This new category was effective March 21 and we had 4 properties that earned this designation in the quarter.

Hospitals. Same-property cash flow coverage decreased 8 basis points to 4.65 times. Year-over-year same-property cash NOI for the first quarter increased 16.8%. The growth continues to be driven by the Hoag lease at our Irvine Hospital.

Post-acute, skilled nursing. Our owned post-acute, skilled nursing portfolio year-over-year cash NOI for the first quarter and our same-property portfolio increased 2.4%. Cash flow coverage is strong at 1.61 times.

Subsequent to quarter end, HCP received $330.4 million in proceeds from the pay off of its debt investment in Genesis Healthcare, which were acquired at a discount in September and October of last year for $290 million. The prepayment at PAR resulted in an annualized IRR to HCP of 40% on our investment. Also subsequent to quarter end, HCP converted at PAR its approximate $2.1 billion debt investment acquired at a $230 million discount to PAR into real estate in HCR ManorCare. HCP acquired 334 of HCR ManorCare's post-acute, skilled nursing and assisted living facilities subject to a long-term triple net lease for $6.1 billion. The lease is guaranteed by HCR ManorCare. Simultaneously we exercised our option to purchase a 9.9% equity interest in HCR ManorCare for $95 million.

Medical office buildings. Same-property cash NOI for the first quarter was up 1.8%. The growth was due to normal rent steps and improvement in collections and continued success in our expense control initiatives which translated into $127,000 of operating expense savings versus the first quarter 2010. Our MOB occupancy for the first quarter was stable at 91% with strong leasing activity in California and Texas. During the quarter, tenants representing 573,000 square feet took occupancy of which 462,000 square feet related to previously occupied space. Our year-to-date average retention was up 81.2%, up from 78.9% in the first quarter 2010. Renewals for the quarter occurred at 1% higher mark-to-market rents with average term for new and renewal leases at 85 months.

We have 1,295,000 square feet of scheduled expirations for the balance of 2011 including 213,000 square feet of month-to-month leases. Our leasing pipeline related to these expirations totaled 740,000 square feet addressing 57% of our remaining 2011 rollover exposure. As we have highlighted in the past, our MOB sustainability initiatives continue to provide positive economic results. Utility costs on a same-property basis are down $265,000 versus 2010. In addition, we received confirmation from the US Green Building Council that our previously announced LEED silver designated MOB in Seattle is the first existing medical office building to receive the silver certification.

As discussed on our last call, on February 10, we acquired 132,000 square foot medical office building in San Antonio on our existing North Central Baptist Hospital campus for $31.2 million and a cap rate of 7.5%. The building is 100% leased.

Life science. Same-property cash NOI was up 5% for the quarter. This increase was largely driven by contractual rent increases that the burn off of free rent that existed in the first quarter 2010 and increased recoveries on expenses. Occupancy for the entire life science portfolio dropped 130 basis points during the quarter to 89%. The drop in occupancy was due to 2 additions to the portfolio. The first addition was the completion and conversion of office space to lab space on a to be leased 88,000 square foot building in Redwood City. Additionally, we acquired the 70% leased 200,000 square foot Nexus portfolio in San Diego for $67 million at a stabilized cap rate of 8.5%. With the completion of our Redwood City redevelopment, our life science development pipeline is reduced to 3 redevelopment projects totaling 204,000 square feet with the total redevelopment funding requirements projected at $29 million.

For the quarter we completed 232,000 square feet of leasing with a retention rate of 57% on expiring space. And if you include leases executed with new tenants, over 90% of expiring space were released without any down time. In the first quarter, we addressed 119,000, or 41%, of the 291,000 square feet left to expire in 2011. These remaining expirations represent less than 1% of HCP's annualized revenue. Jumping ahead to 2012, we have 218,000 square feet of expirations which represent only 0.5% of HCP's annualized revenue.

Subsequent to the end of the quarter, HCP acquired The Cove, a 20-acre parcel of land in South San Francisco adjacent to our existing 900,000 square foot campus anchored by Amgen. The Cove situated at the gateway to the largest life science submarket in the US represents an opportunity to deliver new Class A lab space to the land constrained peninsula market. The peninsula has recently experienced a significant increase in absorption driving direct vacancy in South San Francisco to less than 5% and total vacancy to near single digits when including subleased space. Rental rates have increased as much as 25% resulting from the ramp up of tenant demand from a cross section of industries including those in tech, life science and medical device sectors. Additionally with the sale of Mission Bay Land to salesforce.com, over 2 million square feet of life science developable land has been eliminated from the market, providing HCP with an attractive off market acquisition. Upon full build up, the site can accommodate up to 800,000 square feet of new lab and office space at an estimated 8.5% return on cost. With that review of HCP's portfolio, I'd like to turn it back to Jay.

Thank you, Paul. We've had an especially active start to 2011. Most importantly, our portfolio is performing extremely well, allowing us to raise our 2011 same-property performance guidance by 50 basis points after just 1 quarter of results for the year. Our January debt and March equity offerings were completed on particularly attractive terms and noteworthy in many respects. The $2.4 billion in unsecured debt issuance had an average maturity of 10.3 years at a blended rate of 4.83% and included a healthcare REIT first, a 30-year maturity tranche. The $1.27 billion equity offering, which was increased 44% in size to meet investor demand, allowed us to execute our option to settle for cash and arbitrage the HCR ManorCare stock consideration taken by The Carlyle Group. Superb execution on both the debt and equity transactions further enhanced the accretive impact of our HCR ManorCare transaction. In fact, our current FAD per share guidance of $2.09 for 2011 results in a 10.5% increase this year versus 2010 and assumes no additional acquisition activity for the remainder of the year.

Last Thursday, the Centers for Medicaid and Medicare Services offered 2 fiscal 2012 Medicare proposed pay out rules for skilled nursing facilities. One proposal was directed at reducing payment rates in response to the first quarter of data for the recently enacted RUGs IV reimbursement. I would note that as of March 31, 2011, HCP's post-acute skilled nursing portfolio enjoyed a coverage ratio of 1.61 times. Our HCR ManorCare underwriting excluded the benefit of any RUGS IV reimbursement to arrive at our previously disclosed 1.5 times coverage ratio. Both of these portfolio coverages are more than sufficient to withstand the most draconian of proposed reimbursement cuts. Please note that both these coverage ratios are computed after Management fees. HCP's disciplined underwriting of post-acute skilled assets and our exclusion of any RUGS IV benefit in these valuations drove 1, the strong credit support structure of our HCR ManorCare investment and 2, the decision to exit as opposed to expand our Genesis debt investment and achieving a 40% annualized IRR.

Last quarter brought an end to an amazing multi-year period of credit activity both investing in and issuing of debt by HCP. As it relates to credit investment activity, HCP acquired $2.4 billion of debt investments throughout the downturn in the economy and disruption in the credit markets. At its peak, these debt investments amounted to 13% of HCP's balance sheet. As the capital markets improved, HCP monetized these portfolios for cash or reinvestment into owned real estate, capturing almost $300 million in value for our shareholders. Today, our debt investments represent less than 1% of HCP's balance sheet. If it is a good time to be investing in debt, then it is generally not a good time to be issuing debt. Fortunately for HCP, our 4-year $1.5 billion line of credit was closed in August of 2007 and did not mature until August of 2011. In addition, we had minimal debt maturities during the disruption in the capital markets. As such, the credit market downturn was a significant period of prosperity for HCP.

With liquidity returning to the markets and an attractive interest rate environment, HCP reinitiated a substantial amount of credit issuance in the past quarter closing on $2.4 billion of term debt and a new $1.5 billion line of credit on especially attractive terms. This opportunistic activity and the Company's continued strong same-property performance enabled HCP to emerge from the countries difficult recessionary period as a much stronger entity. The recent rating agency upgrades from Fitch and Moody's are further confirmation of the success.

On our November 2009 call, 18 months ago, I predicted that 2010 healthcare real estate transactions would exceed the cumulative 3-year total of 2007, 2008 and 2009. The next day, one sell-side report characterized this prediction as "investment hype". The $12 billion of deals announced in 2010 for healthcare real estate did in fact exceed the 3-year total of 2007 through 2009. On our last call, I predicted that 2011 deal volumes would exceed the levels of 2010. As we sit here today, I anticipate approximately $15 billion of announced transactions in the healthcare real estate sector in 2011, representing a 25% increase over 2010's record volumes.

Finally, this is Tom's last quarterly report as Chief Financial Officer of HCP, and I want to acknowledge and thank Tom for his contributions to HCP and extend our wishes for good fortune to him and Sarah in the future. At this point, we would be delighted to take any questions you might have. Chanelle?

Thank you. (Operator Instructions) Adam Feinstein with Barclays Capital.

All right, thank you. Good quarter here. Just wanted to just get some more details on update thoughts on ManorCare, Jay, maybe you could just talk a little bit about the future development opportunities that you guys have talked about. So just curious as you're looking at additional deals in the future and having ManorCare manage those assets and just what are your thoughts in terms of just those growth opportunities?

Yes, well first of all, we believe that HCR ManorCare is the best-in-class operator in the post-acute skilled sector. We are obviously delighted with our current investment into real estate. We are delighted with our investment in the operating business. We think that provides some very nice alignment. And as you know when we enter into transactions that represent something other than a 100% ownership stake in real estate, it's very very important to HCP that we have optionality in those non-100% owned real estate investments. You saw that very recently here with some of our debt investments where we after making them, notwithstanding they were very attractive in their own right, we had the ability and then in fact did monetize those for either cash in the case of the Genesis and the HCA debt investments or conversion into property in the case of HCR.

You've also seen that in our joint venture, some of our joint venture investing, where we've recently acquired the 65% stake in Ventures II at attractive terms. So optionality, when we get into non-100% owned real estate owned transactions, optionality is very very important. As we sit here and look at our stake in the operating business of HCR ManorCare and you kind of project out over the next couple years, I think 3 obvious scenarios would be either to sell that stake for cash that would include either selling that stake for cash, contributing that stake in support of HCR ManorCare as part of a larger strategic transaction or swapping the stake for additional real estate. So I think we've got-- we're very pleased with what we've got and we're very excited about what that particular investment might result in down the road. So that's I guess how I'd respond to your question, Adam.

Sure, sure and definitely. And clearly you guys bought the gold standard there and just an absolutely great asset. As you just think about other opportunities there's other assets for sale right now in the space, clearly ManorCare stands out as just having better quality than everyone else but would you be looking at some of those other assets as well?

Yes, oh sure. We look at everything just because I think that's a good way to stay current. I would suggest that the-- last Thursday's news would probably put a little bit of cold water I would think on some of the potential transactions, some of which were formally announced and some of which were kind of in process but not formally announced yet in terms of the sellers intent to explore those alternatives so we'll have to see. If anything we'll probably benefit from this from a standpoint of what it might result in in terms of sellers' expectations or ultimate valuation for transactions. But again I think right now, with the options-- with the 2 options they put forth as opposed to 1 proposal and the fact that there's such a wide spread between those 2 options up 1.5% in option 1 and down 11% plus in option 2, that spread is I think it's going to be challenging for buyers and sellers to agree here until there's probably some resolution. Not impossible but I think that's probably going to cool things off a little bit.

Sure, no definitely. Okay, thank you very much and since this is the first quarter since ManorCare closed, just want to say congrats on what's a great deal. Thank you.

Thank you very much Adam.

Michael Bilerman of Citi.

Yes, hi, good afternoon it's Quentin Velleley with Michael. Jay, you just commented in your prepared remarks about the $15 billion or thereabouts of potential transactions this year. I'm just wondering if you could comment on the types of assets that you think they'll comprise and whether or not or sort of maybe a break down of where you think it's coming from whether it's from private equity versus public companies?

Quentin, it's going to be a mix across all the properties, we were in 5 property sectors, we see activity in each of those 5 property sectors and we see them involving both public and private opportunities. So I think for the most p+art, given the cost of capital advantage that the larger healthcare REITs have, I think private equity is probably more of a source of transaction flow at this point as opposed to a competitor of-- for transaction flow. So I think it's-- but again it's broad based both in terms of its property type as well as the public versus private.

I will say I think 1 thing that's different than say as recently as 6 months ago and thinking back into the throws of the recession, we see very little in the way of debt opportunities. I think that space with the improvement in liquidity in the capital markets and the alternatives that a lot of our operators or tenants have, I would not anticipate a lot of debt investment, at least from HCP's standpoint as being able to kind of clear the bar from a return standpoint at this point.

And maybe if you could just comment on what you think HCP's share could be of that transaction volume?

We really-- we kind of traditionally steer away from guidance relative to acquisition activity. We've obviously-- let me answer that question this way, we think there's a very very attractive opportunity with respect to the private situations. If you think about a private company whether it's owned by a private equity firm or some concentrated ownership, the alternative to those folks today to the potential sellers today of taking that portfolio or that Company public, that's going to involve-- the buy-side appropriately is going to want to have some discount to NAV that if you look at the last 6 to 12 months of IPO pricing that's averaged somewhere between a discount of 5% to 7.5%. If you further load transaction costs on top of that, you get a valuation result and if you compare that to what the larger publicly traded healthcare REITs can do in terms of their cost of capital, you really almost have the mother load of all arbitrage there because that's a very very wide window that-- of value that I think the larger healthcare REITs can realize hopefully a good portion of that yet still provide a superior result to the sellers from a go public transaction.

So if you think about the transactions we've done in the last 5 years, there's really essentially 3 of them. One being the CNL, 1 being (inaudible) and 1 being HCR ManorCare. All 3 of those were private situations, so-- or non-listed situations. So that's really kind of where we like to kind of focus our efforts and we think we have a particularly attractive-- we can create a particularly attractive result for our shareholders benefit.

And Jay, it's Michael Bilerman speaking. Just a quick question. Just now having a 10% stake in HCR ManorCare on the operating side both in terms of positives and negatives, should there be a draconian situation and should there be significant pressure on cash flows at the operator side, I guess how do you recuse yourself being the landlord of the assets but also being in a owner of the operator at least in a minority position, how do you sort of deal with those potential conflicts?

Yes, I don't think we'd want to be doing any recusing, Michael. In a situation where we had a more draconian reimbursement again, I think that's going to set up as a very attractive investment opportunity for HCP and HCR. If you go back and remember, this is a Management team, Paul Ormand, Steve Cavanaugh, Steve Guillard, they've been battle tested for 2 decades. I mean they've gone through all sorts of ups and downs with respect to reimbursement to changes both proposed and actual. They've morphed their platform over time in terms of acuity mix and this as Adam has just referenced, this management team-- we almost-- I personally would prefer a more challenging sort of environment because I think that would allow for the HCR team to really extrapolate some additional value and hopefully with our existing investment in their real estate portfolio as well as our alignment through OpCo, we would benefit proportionately from that. So we're very very comfortable and look forward to the coming 12 to 18 month period with-- aligned this management team.

Thank you.

Suzanne Kim of Credit Suisse. Suzanne, your line is open.

Hi. I was just wondering about your acquisition of the land in Oyster Point. I mean you briefly talked about the opportunities there, but are you seeing some larger tenants or opportunities there that sort of have driven you to look at developing more on Oyster Point?

Well let me say a couple things. One, let's start out at 30,000 feet from our life science portfolio. What's standing between our existing occupancy and 100% is now down to about 750,000 square feet and that's really 6 buildings. And we've got significant interest on at least half of those in terms of dialogue right now, so put a box around that. Now put a box around the fact that as Paul indicated, the actual vacancy now has dropped down in the Bay Area in general in the South San Francisco submarket to 5%. In addition, you've had a large development parcel, one standard deviation over in terms of the submarket over in Mission Bay go away, and so all those things combined with the fact that you've got this push up from the South with the tech business. You're starting to see in our most Southern submarket Mountain View. You've got Google in there, you've got Linked in there, you've got a lot of tenant demand push coming up from the tech sector from the south. So you put all of that together with the fact that we're constantly looking at buy versus build opportunities, I suspect you'll see some deals in the not too distant future but buy opportunities, or announced buy transactions, that will be in the mid to high $600 a square foot zone. So when you think about that, that provides a very very nice pricing umbrella for us to be thinking about development.

Now, I would quickly add that I don't envision this sort of activity as being widespread across either our life science portfolio or our overall HCP portfolio, but what we've got in this South San Francisco submarket is very significant market share with our Amgen and our Genentech campuses and now with this parcel of land, it's the last large parcel of land. It's 20-acres that's available and it's right at the gateway to Oyster Point. It sits right there off the 101 exit. We've got an opportunity here to, and as a result, we're going to move very quickly on it, to prepare that for what we expect will be an attractive supply/demand dynamic in South San Francisco. But again, I'd encourage everybody to think about this as more of a pure play South San Francisco and maybe immediate adjacency sort of opportunity as opposed to some broader development play across the entire Company portfolio.

Great. Thank you. That's helpful.

Jay Haberman of HCT.

Oh, hi. It's actually Jay Haberman of Goldman Sachs. But--

Good morning, Jay, we're trying to keep that news quiet for another day or two.

Thanks, I appreciate that. Just switching to life sciences, can you guys give us a little perspective on what you're seeing? I mean you mentioned the occupancy 89%, and I know there's some planned vacancy as part of that, but can you give us a sense of maybe underlying trends and just activity right now?

Yes we're actually seeing good proposal and activities in the marketplace, as Jay has mentioned, some of the vacancy that we're looking at in our portfolio we've had very good activity. And in certain markets down in the Redwood City area, we've seen very significant rent growth and overall we've seen anywhere from 15% to 20% rent growth in the marketplace, so we're seeing some good signs there.

Okay. And Jay, this is probably the first time in a while we've seen the tenant diversification list look obviously much much better and clearly improving the risk profile, how do you think about this over time, whether it's growing through acquisitions or existing tenants today that perhaps continue to shrink? I mean how do you see that completion changing over the near term?

Now we're talking your comment is specific to life science, Jay?

Oh, sorry. This is just a broad comment. If you look at page 9 of the supplemental, your operator/tenant diversification.

Yes, I think the answer is we've got our, and I don't think there's a call in the last several years that I haven't referenced this, but we think there are 3 criteria, well let me rephrase that, we know there are 3 criteria that the folks that we want to have as partners in our portfolio have. One is quality outcomes. A second is efficient operations, interpret that to be attractive margins. And the third is critical mass, interpret that to be market share in a specific area, either a local area or regional area. So when you think about the folks that we have introduced to the portfolio in the last several years, HCA in a big way, HCR ManorCare in a big way, Brookdale in a bigger way, Genentech and Amgen. Those are operators or tenants that we believe have those 3 criteria (inaudible). And when you think about folks that we have peeled off or have created opportunities for us profitably by the way to divest of that, you would find those folks not checking the box on one or more of those 3 criteria, so that really drives our thought process.

As we head into, there's a lot of activity, I referenced some of the deal volumes that was unique to healthcare real estate, I'm probably remiss in not acknowledging that there's an awful lot of deal activity away from healthcare real estate within healthcare, both at the operator level and some of the other situations. So we think in the next couple years, it's going to be because of concern over healthcare reform or potential entitlement changes or whatever. There are going to be some catalysts here and the winners will be those folks that consistently can create quality outcomes, maintain efficient operations and have critical mass. Again at 30,000 feet, I think I'd anticipate some of the folks in our portfolio getting significantly larger, probably at the margin, having their margins squeezed a little bit but because they've got quality outcomes, efficient operations and critical mass, having the resultant cash flow and net income coming off those platforms being materially higher and therefore from our standpoint very good candidates for us to be doing more transactions with. So we really-- we believe we're dealing with a flush hand right now in terms of the tenant composition of our portfolio and we're excited about what all that could bring and quite frankly, it's one of the critical reasons why we've gotten our balance sheet to be as liquid and as conservative to be capitalized as it is today.

No, that's very helpful. And then just part of this $15 billion of transactions you talked about, I mean I assume that continuing to pick up the right tenants is driving that and how do you think about that sort of pipeline even as you extend beyond sort of the current year?

In terms of a dollar amount, Jay or--?

Are you-- yes, just in terms of the total transfer of assets whether it's from the private equity or private entities into obviously the public re-enhance?

Well I mean I think recent transactions have created an investor preference for I'll use the term generically, kind of PropCo/OpCo sorts of structures, they can come in various flavors and have various risk reward features to them ranging from a bullet proof, triple net lease structure through a (inaudible) structure in some of these sectors through an actual operating ownership stake in others. So there's all sorts of flavors and things to think about.

In terms of, I know Jerry Doctrow put out a piece, I think it was last week, that he looked at the potential pipeline, now this was just in senior housing, he looked at a potential pipeline and quantified that at I think he did $24 billion or $26 billion. Now that wasn't a prediction for 2011 activity, that was just a review of senior housing portfolios that are potentially out there and in play. And I think directionally, Jerry's correct. When and the pace at which those portfolios get monetized, I mean that'll be-- that remains to be seen. But we have a consolidating industry both at the landlord level and at the operator/tenant level, it's driven by some external shocks right now, and notwithstanding that, it's still a very very fragmented industry. The amount of real estate in healthcare-- healthcare real estate in the United States that sits on the balance sheet of the healthcare REITs is still quite small. So it ought to be a very attractive time here in the next couple years, at least that's what we anticipate.

Thanks, Jay, and best wishes to Tom as well. Thanks.

Thank you.

Thanks.

James Milam of Sandler O'Neill.

Hi, guys. I was wondering if you could talk about the ManorCare operating investment and just the accounting is obviously fairly complex, but if you could just talk about how you underwrote sort of a return expectation so that we could compare that to what you get on your real estate investments for example?

I think first off it's quite a small investment in the context of HCP overall and we viewed it as very attractive and further aligning ourselves with the management team at HCR ManorCare and I think this is absolutely kind of a step one to some future steps down the road. What those specific steps are as I've alluded to, we think there's very nice optionality in that investment. But how that plays out over the next year or two remains to be seen, but we like any and all of those potential scenarios, so that's how I'd comment on that. With respect to the specific accounting, I don't know Tom, if you want to--?

No, I didn't mean to get into the accounting, it was just more of a question if we should think of it as a strategic investment or if it's-- you looked at it as a 12% IRR versus 7.75% going in for the real estate.

We looked at it as a strategic investment that was economically attractive to us. That's how we looked at it.

Okay, thanks. My second question is just Jay, can you give us a little color on your thoughts for the CFO search? I know the Board appointed Scott to be the interim-CFO, is that something that's on a trial basis for him or are you interviewing other candidates and just sort of what the timing is for us to think about a permanent replacement coming on board?

Yes, unless Scott and I know something that-- I don't think the Board appointed him as interim-Chief Financial Officer, I think they named him interim-Principal Officer. So-- but the CFO search is well underway. It's well along, it involves at this point I would say it involves a number of very highly qualified professionals with experience in both public and private real estate roles, so very excited about that process and we will obviously update you as appropriate.

Okay and just my last one is just more of a modeling question. It looked like the TIs were a little bit lower in terms of sort of what we were expecting on a quarterly basis, was that just a result of better retention in the first quarter or was that something you think will ramp up as the year goes on?

Yes, that's just timing as far as the number for the first quarter.

Okay, so--

The projection for the year hasn't changed.

Okay, so it's something more like $15 million a quarter still makes sense?

Yes, somewhere in that range.

Okay, that's it for me, thank you.

Jerry Doctrow of Stifel Nicolaus.

Well first, Jay, thanks for plugging my research, so I appreciate it. Just one or two things here. I was curious a little bit more on just your view of sort of TRS RIDEA investments, and you kind of mentioned that as sort of your one alternative for doing kind of OpCo/PropCo, but it seems to me that there's a few things in your portfolio that might reasonably convert, like the HCP Ventures II portfolio, maybe your Sunrise, maybe there's some others, so just curious to whether that's something you're thinking about?

Well, sure. When we look at these, we look at all the opportunities and then we risk adjust them and determine which way we want to go. To date, as we've looked at these transitions and we've done, let's face it, we've done a lot of transitioning, we've transitioned some tenant hospitals, we've transitioned some previously managed Sunrise portfolios. So as we look through this to date, when the dust settles on a risk adjusted basis, moving these to triple net structures at very very very attractive annual rent bumps either in the case of the Irvine Hospital being taken over or by Hoag or some of the Sunrise transitions we did last year, that's been the winner, as we've kind of crunched the calculus.

But every situation is different. The opportunities in these portfolios is sometimes different. Sometimes it's more of a cost reduction which can be easily quantified and agreed to between the 2 parties on either side of the transaction. Sometimes it's a revenue upside opportunity, which even if it is readily agreed to by the 2 parties, that the timing of when that might drop could differ. And so that might point you down or point you away from a triple net structure to maybe a RIDEA structure or things like that, so-- but we absolutely have that under active consideration on some of the opportunities that you mentioned.

And all else being equal would you want to be investing more sort of outside skilled nursing or post-acute given the-- you've added a lot of that with ManorCare?

Yes, I think it's going to be we're the risk adjusted returns shake out and so we'll see.

And just lastly for me, I just want to be clear on ManorCare you talked about the lease coverage, so your view is that basically the lease coverage is based on pre-RUGS IV numbers, so even if the CMS cuts are implemented, your lease coverage basically is unaffected?

Yes, again just to be clear on that, when we underwrote ManorCare, HCR ManorCare, sorry Paul, we specifically excluded the RUGS IV benefit in determining that and again that got us to the 1.5 and again I know there's a lot-- there's some difference in terms of how these coverages are communicated, ours is after an adjustment for Management fee. If you were to pro forma, how about this, Jerry, if you were to pro forma for the first quarter of 2011, the rent payment that would have come from HCR ManorCare to HCP, keeping in mind that that transaction, Jerry, didn't close until April 6 or 7, that coverage for the first quarter would have been 1.67.

Okay.

Okay so again, we've got ample coverage both with respect to our HCR ManorCare portfolio as well as the legacy HCP post-acute skilled portfolio. So again this is-- we believe this is set up potentially more as an opportunity that once there's some resolution to this issue.

Okay. Okay, thanks.

Yes.

Jana Galan of Banc of America Merrill Lynch.

Hi, good morning. Just a quick question on the senior housing portfolio coverage. It looked like 2 of the operators fell below one-times on the EBITDAR coverage and was just wondering if that was just specific to this quarter or if this is something to be watching going forward?

Well, normally that's going to occur with respect to rent bumps and things of that nature especially given what's going on with the market there. We monitor all of those various different operators so we have a good handle as far as what's going on both at the property level and at the manager level.

So the rent bumps generally drop in the first quarter?

It depends on when the lease was signed typically.

All right, thank you very much.

Rich Anderson of BMO Capital.

Thanks and good morning out there. Can you remind me with Ventures II, the buyout of Ventures II, was that a situation where you, that the buyout was put to you or did you instigate that transaction?

Well, neither. Our partner had come to us, our partner had come to us looking for liquidity. They had made other investments in the middle part of the last decade that had some specific issues there that might involve capital calls and things of that nature, and our portfolio had performed well both in an absolute sense and a relative sense. So they came to us and indicated that they were interested in having a liquidity event and from a timing standpoint if that could be agreed to prior to year end, that would be helpful. So that was the back drop, Rich, of what then involved the closing of the ultimate transaction.

Okay, so in your mind, I mean obviously you priced it according to what you would or wouldn't have done had that conversation not have happened. But it does have a little bit of a challenged past, I mean what is your view of that portfolio today relative to some of the issues that were present over the past couple years with Horizon Bay?

Well, I would entirely rejection a notion this has a challenged past. I mean this a portfolio that had $68 million of NOI in 2006 and in 2010 had $64 million, so it's down $4 million. It's largely an independent living portfolio. It had an operating platform that did not provide for much, if any in the way of ancillary revenues. And basically it's a situation where the annual lease bumps ran away from the operations, they were very aggressive lease bumps in that portfolio, I think they were what 3.5 or 3.75?

3.75.

Yes, so you compound that for 4 years during the recessionary period that the lease payment ran away from the operator. But in terms of an opportunity I would put this opportunity at the absolute top of the opportunities in terms of attractiveness of things that we're working on right now, Rich.

Okay so you're having to stop straight lining the rent you don't think was a function of a portfolio that was a little bit questionable?

Absolutely not. I think it's a function of the fact that the annual lease escalators ran away from the cash flow of the operations. So we think we've been able to structure the 65% buyout on very attractive terms and I think we're going to do extremely well on this portfolio in the years to come.

Okay, and then the second question is on Genesis and how you characterize that as decision to exit that investment. I'm just curious, I mean was it your decision or I mean it seems to me there was a bunch of parties involved obviously and ultimately it turned out to be a fantastic return for you, but I mean are you saying there was no interest in you being the buyer of that portfolio at any point in time?

At the right price, sure. But first of all let me answer your first question. Both the investment to acquire the debt in-- during the last week of September and the first week in October and the decision to exit the debt investment, those were absolutely our decisions. So that answers one of your questions. But again, we look-- the beauty of our platform is that we can look across 5 property sectors and up and down 5 different types of investment vehicles and we are constantly sourcing opportunities and then evaluating and ranking the risk adjusted return opportunities and at the pricing that the sellers expectations there, we were very pleased to have recorded the 40% return and added $330 million of cash to our balance sheet last month.

Was there-- I don't-- maybe I don't know this, was there an interim buyer between you selling that and HCN buying that debt or retiring that debt?

Our transaction closed as part of the sale last month.

Okay, so I'm still not quite sure how it was entirely your decision because there was--

We could have rolled that debt investment.

Okay, that you could have done.

Into a larger transaction as we did in HCR ManorCare or we could have taken the exit, that was our decision.

Okay, fine.

We decided to take the exit.

Thanks. I appreciate it. Thanks for the color.

Dan Cooney, KBW.

Hello, good morning, guys. On the 9.5% same-store NOI growth in the senior housing segment during the quarter, I was hoping that you'd be willing to kind of give us a break down between the portfolios that were transferred from Sunrise and maybe the rest of the segment?

Yes.

Do we have the split of the-- so in other words to get to that overall number, the split between the non-Sunrise and the Sunrise?

Yes, exactly.

Yes, we can do that. The number for the Sunrise came in at 7.9%. We had some strong performance in one of the portfolios that bumped it up beyond the normal expected growth. And for the non-Sunrise, which includes the 3 portfolios that have been transferred over the last couple years, the Eden II Aureus and the Sunrise 27, that sums up to 10.1%, and so those 3 portfolios would have added a fair amount to the growth. And in addition to that, there was a working capital adjustment on the most recent Sunrise transition that bumped up the growth quite a bit as well. But those are the components.

And then the fourth portfolio that we transitioned, Tom, that wouldn't show up in same-store until later this year, right, the PC7 acquisition?

Right, until it's been in the population for a year.

Right, and that would have been-- that would have had an annual escalator contribution, will have an annual escalator contribution of just under 6%, but gives you some flavor as to where those different portfolios drop in.

Okay, great. And then on the life science side, I think last quarter you guided to roughly flat NOI growth for the year. Is that really just a function of kind of the tough comp in the second quarter and should we look for kind of comparable growth in the balance of the year relative to kind of what the first quarter was?

A lot of what that is is we had some free rent back in the first quarter 2010 with a tenant that has since burned off and it's no longer in the same-store number.

The tenant burned off.

The tenant free rent burned off.

Okay. And then finally, just if we could just get an update on the [Cyrus] loan, I know it's placed on non-accrual status but maybe just kind of a time frame on when you might think you get fully paid off on that loan?

Yes, I mean it's basically kind of an orderly liquidation. There's I think half a dozen or so individual portfolios rolling up to that and there are offers on several of them at this point, we're waiting to close on some of those. And I expect if things go according to plan you'll start to see some significant repayment in the second half of 2011. That's the plan.

Okay, great. Thanks a lot, guys.

All right, thank you.

Rob Mains of Morgan Keegan.

Yes, good afternoon.

Good afternoon.

Tom, just one thing I think I've got this straight but when I'm looking at your sort of normalized FFO, that does include the gain from the Genesis debt but not the ManorCare debt, correct?

The normalized FFO is going to-- can you repeat that, I'm sorry.

Yes, you're saying that you're counting the gain on the ManorCare debt to folding that into transaction costs that you're excluding or transaction gain that you're excluding?

That's right we're backing that out.

Right, but the Genesis gain is included in the current quarter?

Right.

Okay, just want to make sure I had that straight. And then just follow up on the question on the impact--

I'm sorry, Rob, it's going to be included in Q2.

Genesis?

Based on the timing.

Yes, yes. Okay, got that. And then to follow up on the question about the impact of Sunrise. You have Sunrise is having an impact on your SPP for senior housing and Hoag is in hospitals, if I were to exclude them, would you-- would both of those fall sort of within your general guidance range? I'm looking for a normalized growth rate for those once the positive impact of those particular leases burn off.

Yes, you're saying the Hoag for hospitals once that's burned off would the SPP look more like the normal rent bumps that you'd expect? In part we've got 2 different leases in hospitals that are driving some of that outsize growth and one of them is the Rockwell lease and the other one is Hoag. So if you excluded those two then you'd get something to look more normal.

Okay and then same question with senior housing, if I include-- excluded everything in Sunrise, would that also be more around the 3% range?

Let me just look quickly. Yes, you'd be more in that same range.

Okay. All right, thanks a lot and thanks for all of the help with clarifying the numbers in your time with HCP, Tom.

You bet, Rob.

Todd Stender of Wells Fargo Security.

Hi, thanks. My question revolves around life science. As of today and incorporating the new life science facilities you acquired in San Diego, how do you feel about your critical mass in the San Diego market? And if you would also comment on your critical mass in the South San Francisco market and how your new development on The Cove parcel might impact that as well.

Well, I think if you'd take a look at our life science portfolio, it's-- in contrast to the other 2 portfolios that are out there, it's narrower and deeper, okay? It's really with the exception of-- it's really kind of a 2 market portfolio, Bay Area and San Diego and it's quite a bit deeper. If you were just to look at those 2 markets, it is the largest amount of life science real estate of owned by any of the healthcare REITs. So we like those 2 markets. We'd like to meaningfully get into critical mass to answer your question in the Boston Cambridge market. We have a property there that we're excited about but it's by no means represents how we would define critical mass. I think we have critical mass in both, excuse me, the Bay Area and San Diego and I think we opportunistically when attractive situations come up, we want to add to that critical mass. The Nexus portfolio in San Diego and The Cove opportunity, land opportunity in South San Francisco are very very good examples of how we intend to kind of further penetrate what we've already have in our portfolio.

Are there any numbers you could wrap around that market share just to give us an indication of your presence?

Well again, if you take a look at just those 2 markets, we are by a significant amount the largest owner of life science real estate in those 2 California markets. We have to date not shared market share but we could evaluate that. I think we disclose square feet by submarket, so I think-- I don't know if that's in our supplemental or not, but you might, Todd, my suggestion is take a look at what's in the supplemental which I think is pretty good and to the extent that we can attempt to enhance that discussion, we're certainly willing to evaluate that.

Okay, thank you. And this question is for Paul. I think you mentioned on the new portfolio, it's currently 70% occupied and a stabilized cap rate is in the 8.5 range. What is a stabilized occupancy do you think for that portfolio?

Taking that up to about 90%, 95%.

Okay, and what are your expectations, how long do you think it'll take to get there?

We think that we should probably be able to do something in 2012 there with occupancy.

Okay, thank you.

Omotayo Okusanya with Jefferies & Co.

Yes, good afternoon. Jay, first of all thanks for the details about the underwriting of ManorCare in light of the CMS stuff, I think that's very helpful. We just have 2 more follow-up questions about that. I think the general idea of the adjustment is to basically create budget neutrality such that (inaudible) different from the old RUG system, but I'm just wondering when you specifically look at ManorCare and the RUG [codes] that they have the most exposure to whether there's have any negative impact that this cut may (inaudible) create even though it was not meant to do that?

Well first of all, let me say again remind you, it's HCR ManorCare.

Yes.

I think if you take a look at the proposal, you got to look at-- you got the 2 options. There's a potential for that proposal to go even beyond budget neutrality, so-- but what happens when it happens, I think there's a lot that's been written in the last couple days and again, we think at the margin, this sets up as an opportunity for HCP more than anything else.

So you don't see any risk that-- because when you look at all of the different RUG categories and the cuts they're expecting to make to them, all of the rehab and therapy categories seem to have much higher cuts, there's no risk factor, ManorCare has meaningful exposure to those categories and you end up with a large cut as a result of it, or larger than you expected, 11% average cut?

I mean look there's risk in everything, but again we've just got a proposal out there that won't be resolved any time soon. And-- but more importantly, we've got a Management team that for over 20 years through-- I think what you're asking is if you were to take the more draconian cut and apply it all else things being equal would that be a negative? I guess if that's the scenario we're in, I can assure you that Paul Ormand and his team will not have an all things status quo being equal sort of response, so. But they've done this for 20 years and you can go back and look at the track record and the results of this Company through very challenging periods of time in terms of reimbursement. It was the only Company to maintain its investment grade credit rating back as you recall in late 1990s. So again, when you've got a platform like this that's been battle tested through several cycles, it's an opportunity to add to what is already a very very attractive investment, and that's why in part we've decided to exercise our option in OpCo.

Okay, if you were a betting man what do you think ultimately happens when the final rules come out?

My guess is it'll probably be something in between.

Okay.

My guess would probably be something in between and they'd push it out a year. That would be my guess but I don't-- that's how I'd respond to that question.

Great, appreciate it. Thanks so much. And Tom, best of luck in whatever you decide to do going forward.

Thank you, Tayo.

Michael Mueller with JPMorgan.

Hi, most of the things have been answered but real quick on the first quarter working capital adjustment that pushed up the same-store NOI comps for senior housing, how significant was that number?

It wasn't a very big number, a couple million bucks.

Okay, great and good luck, Tom. Thanks.

Thanks.

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

Thanks, Chanelle. Thank you, everyone. Have a good rest of spring and we'll see most of you in New York City for NAREIT in June. Take care and thank you for your interest in HCP.

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