Healthpeak Properties Inc (PEAK) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 HCP earnings conference call. My name is Chanel, and I'll be your coordinator today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session toward the end of the conference. As a reminder, this conferences is being recorded for replay purposes. Now, I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President.

You may go ahead, sir.

Thank you Chanel. 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 beliefs 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.

Thank you, John.

Welcome to our third-quarter 2011 earnings conference call. First, let me say that we understand the unexpected nature of yesterday's storm. We all have family members in the Northeast and are very aware of the serious implications in the days to come, and our thoughts and best wishes are with you.

Joining me today are Executive Vice President and Chief Investment Officer, Paul Gallagher; and Executive Vice President and Chief Financial Officer, Tim Schoen. HCP's unique 5 by 5 business model continued to generate outperformance this quarter, allowing us to again raise our 2011 guidance for same property performance, FFO as adjusted, and FAD. We will begin with Paul providing the details behind these strong results.

Paul?

Thank you, Jay. Let me go straight to the 2011 third-quarter portfolio performance.

Senior Housing -- occupancy for the second quarter (Sic) in our same property senior housing platform was 85.3%, a 40-basis point sequential decrease over the prior quarter and a 20 basis point decrease over the prior year. Overall, facility rate increases and margin improvements in our transitioned portfolios offset these slight occupancy declines, and cash flow coverage for the portfolio remains steady at 1.19 times. Current quarter year-over-year same property cash NOI for our senior housing platform was up 7.8%. This growth continued to be driven by properties previously transitioned to new operators and by improvements in the retained Sunrise portfolio.

On September 1, 2011, HCP closed a strategic venture with Brookdale Senior Living in conjunction with Brookdale's acquisition of Horizon Bay. Previously, Horizon Bay operated 37 HCP-owned senior living communities. Brookdale assumed the existing triple net leases on 9 of the communities, assumed management contracts on 3 communities, and signed a new lease for 4 communities, and entered into a RIDEA joint venture to manage the remaining 21 communities. Under this RIDEA joint venture, Brookdale acquired a 10% ownership interest in the assets and HCP reinvested these proceeds into Brookdale stock. With the closing of this RIDEA joint venture, operating assets in HCP's senior housing sector represent 4% of HCP's total investment portfolio.

Post-acute Skilled Nursing -- our post-acute skilled nursing portfolio continues to benefit from Medicare reimbursement rates under RUG IV. For the trailing 12-month period ended June 30, 2011, HCR ManorCare's fixed charge coverage ratio was 1.60 times, a 3 basis point increase. For our same-store skilled nursing portfolio, cash flow coverage improved to 1.78 times, a 9 basis point increase over the prior quarter, and a 30 basis point increase over the prior year. Year-over-year same property cash NOI for the third quarter increased 3.6%, driven by normal rent steps.

Hospitals -- same-property cash flow coverage declined 60 basis points to 4.08 times. This decline was driven by the inclusion of Hoag Hospital's operational results to our same property portfolio as this is the first quarter with 12 months available data. Hoag opened the newly renovated facility in the third quarter of 2010 and has made significant progress ramping up operations. Cash flow coverage for Hoag for the trailing 6 months ended June 30 was 1.58 times. Excluding Hoag, our same-property hospital cash flow coverage improved by 7 basis points to 4.75 times. Year-over-year same-property cash NOI for the second quarter decreased 1.5%. The decline was driven by the funding of property level expenses for a rehabilitation hospital in Plano, Texas, where HCP is in the process of replacing the existing operator.

Cirrus -- through its merger with CNL, HCP acquired a senior secured loan to an affiliate of Cirrus. The loan is collateralized by partnership interest in the operations of 8 ambulatory surgery centers and surgical hospitals, as well as the assignment of management contracts. Cirrus owns the operations of these facilities in syndication with local physicians. In the third quarter HCP recognized an impairment of $15.4 million, reducing the carrying value of the loan to $75.7 million, as a result of continued delays in the sale of collateral and the decline in operating performance of certain hospitals.

4 of the 8 facilities in the collateral pool represent 85% of the total collateral value, and operations at those facilities continue to perform well. The other 4 facilities have struggled; and in certain cases, are currently being subsidized by Cirrus' partnership distributions from the 4 performing facilities. In the third quarter, the potential sale of 1 of the hospitals, representing 45% of the total collateral value, was delayed when the CEO of the acquiring hospital was terminated for reasons unrelated to the sale. Cirrus has since received and is evaluating a backup offer for its equity interest in the hospital.

While the loan is in default, HCP continues to work with the borrower to achieve an orderly liquidation of the collateral. The liquidation has been complicated by disruptions in the capital markets, the impact of healthcare reform on physician-owned hospitals, and the lack of liquidity for Cirrus' partial ownership interests. All have contributed to the uncertainty surrounding the eventual timing of the liquidation of the collateral. However, we are encouraged by the level of interest in Cirrus' performing hospitals. Cirrus is in negotiations to sell 2 of the 4 performing hospitals, representing 70% of HCP's collateral pool.

Medical Office Buildings -- same-property cash NOI for the third quarter was up 3.3%. The growth was due to normal rent steps and expense controls, resulting in $500,000 of operating expense savings versus third quarter 2010. Our MOB occupancy for the third quarter remained steady to finish at 91%, with the majority of the leasing activity in Houston, Louisville, Dallas and Nashville. During the quarter, tenants representing 381,000 square feet took occupancy, of which 277,000 square feet related to previously-occupied space. Our year-to-date retention rate was 78.1%. Renewals for the quarter occurred at 0.7% higher mark-to-market rents. We continue to have success extending the terms on leases. For the 9 months ending September 30, our average lease term on new and renewal leases was 68 months, a 23% increase over the same period in 2010. We have 444,000 square feet of scheduled expirations for the balance of 2011, and have already executed leases representing 175,000 square feet for those expirations.

We are in active negotiations with existing and prospective tenants, representing an additional 579,000 square feet. Our ongoing sustainability initiatives have resulted in a reduction of utility expenses on a same-property basis of $440,000 versus 2010. During the quarter, we received 4 Energy Star labels, 3 at MOBs in Houston and 1 at a Life Science property in San Diego. Jay will have more to say about our commitment to sustainability in a minute.

Life Science -- same-property cash NOI was up 3% in the third quarter. This increase was primarily driven by contractual rent increases. Occupancy for the Life Science portfolio increased 80 basis points during the quarter, to 90%, driven by leasing in Utah and the Bay area. During the quarter, HCP acquired a 53,000 square foot lab building in Durham, North Carolina, for $9.8 million. The building is 100% leased to Duke University through 2024. The lease was structured to provide HCP with a 10% return on the acquisition, and subsequent redevelopment costs.

The Life Science redevelopment pipeline now consists of 4 redevelopment projects totaling 253,000 square feet, with the total remaining redevelopment funding requirements projected at approximately $23 million. For the quarter, we completed 249,000 square feet of leasing, bringing the year-to-date total to 500,000 square feet, with the retention rate of 46.5% on expiring space. Including leases executed with new tenants, over 92% of the space was re-leased without any down time. The Life Science portfolio has only 148,000 square feet of scheduled expirations for the balance of 2011, including approximately 33,000 square feet of month-to-month leases. We are currently tracking over 700,000 square feet of requirements in HCP's various Life Science markets, and are working closely with a number of existing tenants and potential new tenants to address vacancies in the near term.

Subsequent to the quarter close, HCP signed a definitive lease agreement with LinkedIn to expand and extend its existing lease for their corporate headquarters at HCP's Shoreline campus in Mountain View, California. The agreement initially expands the company beyond its current 144,000 square foot facility into an additional 159,000 square feet. The new 11-year lease, effective at the start of 2012, produces an immediate positive mark-to-market of existing net rental rate over the entire 303,000 square feet of 71%, with fixed rate annual increases thereafter.

Further, HCP will commence construction of a new 70,000 square foot build-to-suit office building for LinkedIn, which upon completion in the second quarter of 2013, will be added to the LinkedIn lease, bringing their total leased square footage to approximately 373,000 square feet, and provide HCP an 11.3% initial return on cost on the new building.

With that review, I'd like to turn it over to Tim.

Thank you, Paul.

For the third quarter, we reported FFO of $0.63 per share, which included a $0.04 non-cash impairment pertaining to our Cirrus loan that Paul just mentioned. Excluding this, FFO as adjusted was $0.67 per share, and FAD was $0.53 per share.

There are 2 items I'd like to point out. First, the results from our first full-quarter ownership of the HCR ManorCare portfolio acquired in April. Second, the same-property portfolio continued to perform well, generating 4.5% cash NOI growth, compared to the third quarter of 2010. The combination of the accretive HCR ManorCare acquisition and strong same store growth has led to year-over-year third-quarter increases of 24% and 18% respectively in our FFO as adjusted and FAD per share results.

Turning now to our balance sheet. During the quarter we repaid $292 million in senior unsecured notes that matured in September, and paid $102 million for compensatory damages to Ventas, resulting from the 2009 jury verdict; thus ending the quarter with $375 million drawn on our revolver. We ended the quarter with $1.2 billion of immediate liquidity from our revolver and unrestricted cash, and no remaining debt maturities in 2011. Our 2012 debt maturities are $325 million, of which $215 million relates to unsecured bonds maturing in June of next year. Our financial leverage remained in line with our long-term target of 40% at quarter end. Trailing 12-month adjusted fixed charge coverage reached 3.1 times, a multi-year high, and is expected to increase further, as this metric continues to benefit from our April 2011 HCR ManorCare acquisition.

Finally, our 2011 guidance. Based on stronger than forecasted portfolio performance to date, primarily in our Senior Housing segment, we are raising our full-year cash same-property performance guidance to a range of 3.25% to 4.25%, up from 3% to 4% previously. We expect full-year FFO to range from $2.46 to $2.52 per share, which is down $0.02 from our last guidance due to the negative $0.04 third quarter impairment previously mentioned, offset in part by a positive $0.02 from increased same-property performance and several other items. We are raising our 2011 FFO as adjusted guidance, which excludes the impact of impairments and merger-related items to range from $2.65 to $2.71 per share, up $0.02 from our previous guidance. We are increasing our full year FAD guidance by $0.02, to a range between $2.11 and $2.17 per share.

1 item of note -- to kick off next month's NAREIT conference in Dallas, Green Street and HCP will be hosting an investor property tour at our Medical City Dallas, campus the morning of Tuesday, November 15. Please contact your Green Street sales professional for details on this event.

With that, I'd now like to turn the call over to Jay. Jay?

Thanks, Tim.

For those shareholders attending NAREIT that have not seen HCP's 1.7 million square foot Medical City Dallas campus, we will be hosting this property visit at the brand-new Children's Hospital Tower, recently completed by HCA on our campus in the Park City section of Dallas.

RIDEA -- this quarter's closing of our senior housing joint venture with Brookdale Senior Living provides an opportunity for us to drill down with you on the specifics of this transaction. But first, let me discuss HCP's philosophy of incorporating RIDEA structures in our go-forward deal activity. We view RIDEA as a structure to be used on properties that present attractive valuation entry points, where repositioning with a new operator that is aligned with HCP can bring scale, operating efficiencies, and/or ancillary services to drive growth. Otherwise, in the current projected low growth economic environment, we believe that a triple net execution will provide risk adjusted returns that are superior to RIDEA structures.

Selecting between triple net and RIDEA alternatives involves many factors, aside from where we are in the cycle for senior housing real estate. Specific RIDEA issues include -- 1, is the operator properly aligned with the real estate owner to drive NOI growth? Executing on a high growth platform requires incentive compensation to the manager. Alignment is created through an ownership stake in the real estate, and incentive compensation over NOI performance thresholds.

2, is the operator profitable? If the manager does not have scale, the management fees may not be sufficient to cover the cost of the management platform, diluting the real estate owner's returns. 3, in RIDEA, the obligation for CapEx is shifted from the manager to the owner of the real estate, which can reduce returns to the real estate owner by 75 to 100 basis points. And finally -- 4, are there operating efficiencies and ancillary services opportunities a new operator can bring to drive revenue growth?

Now, let me turn to our Brookdale transaction. In the first quarter of this year, HCP acquired 100% of the economic interest of 25 Horizon Bay real estate assets that it did not previously own. As Paul mentioned, 21 assets were structured using RIDEA, and the remaining 4 stabilized assets were structured as a triple net lease. During the 3 prior years, in the midst of the Great Recession, this independent living portfolio experienced a 440 basis point decline in occupancy, from 94.3% to 89.9%; and a 400 basis point decline in operating margin, from 40.3% to 36.3%.

HCP negotiated the buyout of our joint venture partner's 65% interest at a 7.7% cap rate, based upon these diminished operating results, substantially averaging down our basis in the portfolio. Horizon Bay was a quality national operator, but it did not have significant market concentrations, and no meaningful ancillary revenue platform. In other words, of HCP's 3 established criteria for ideal operating partners -- 1, quality outcomes; 2, critical mass; and 3, efficient operations -- Horizon Bay was 1 for 3. By aligning with Brookdale, HCP shareholders will, 1, continue to have a quality senior housing operating partner; 2, benefit from the robust ancillary revenue platform that Brookdale has built out; and, 3, achieve margin expansion for the real estate portfolio by virtue of the adjacent communities that Brookdale already manages.

This combination of revenue and margin upside, as opposed to the cost reductions we successfully achieved by transitioning our previously-managed Sunrise communities, was an important element in our decision to move forward and transition the Horizon Bay portfolio to Brookdale in a RIDEA structure. The timing of where we are presently in the cycle for senior housing supply and demand was further justification to move forward in a RIDEA structure at a projected 200-basis point premium to a triple net execution.

The final consideration for HCP to enter into RIDEA transactions is alignment with our operating partner. We incorporated 4 specific elements of mutual alignment between HCP and Brookdale, including -- 1, Brookdale buying in to a 10% ownership stake in this real estate at the same valuation HCP had achieved on its 65% joint venture buyout; 2, HCP's redeployment of these proceeds into an ownership stake in the common stock of Brookdale; 3, a sharing of the CapEx and transition costs by Brookdale; and 4, an incentive management contract for Brookdale to operate the 21 RIDEA communities. At quarter-end, we determined it was appropriate to mark the September 30 $12.54 per share closing price of Brookdale to market, via an offset to the equity account on HCP's balance sheet. To sum up, our Brookdale joint venture transaction achieves each of the criteria HCP has established for moving forward with RIDEA structures.

Sustainability -- in recent years, outperformance has been a trademark of HCP's sustainability initiatives, as well as the performance of HCP's real estate portfolio. Importantly, as you heard in Paul's reference to the attractive reductions in HCP's utility costs, green business is good business, and it permeates HCP's portfolio. Since becoming an Energy Star partner with the US Environmental Protection Agency in 2005, the Company has earned 43 Energy Star labels across its Medical Office Building, Life Science, and Senior Housing sectors. In fact, in the Medical Office Building sector, HCP has earned Energy Star labels at 23 properties, the leading performance in the Medical Office Building sector.

Building upon this momentum, HCP is delighted to accept the Better Buildings Challenge set forth by President Obama and endorsed by NAREIT. I have asked Executive Vice President Tom Klaritch to oversee HCP's ongoing sustainability efforts. Tom is an 8-year veteran of the Company, having joined HCP as part of our MedCap acquisition in 2003. Of note, Tom and Mike McElwain, who leads HCP's Capital Management function, have worked together in Nashville for over a decade, including prior careers at HCA.

We will look forward to updating you on HCP's continued sustainability successes in forthcoming quarterly briefings.

With that, we are pleased to take your questions. Chanel?

Thank you. (Operator Instructions). Your first question comes from the line of Adam Feinstein with Barclays Capital.

Thank you. And I have Brian Sekino here also. Jay, just maybe a starting point is just with a lot of the dislocation in the markets these days, you guys have done a good job in the past of finding opportunities to invest in assets that maybe people hadn't thought about like when you bought the ManorCare debt or the HCA debt and opportunities like that. I guess, in the current environment, do you see those opportunities, is there something different this time that would keep you making those types of investments? Just curious to get your thoughts in terms of just some of those debt investments that you guys have made in the past and whether you see those opportunities.

Well, no I mean, I think this is a little bit different this time around, but we are clearly -- we benefit from having our 5 by 5 built out model that sources -- opportunities not only across all 5 sectors but up and down the capital stack. So, you specifically asked about debt. I will tell you that debt opportunities were a little more interesting in August than they are today but we're active across each of our targeted boxes, if you will, within our 5 by 5 model, spending a lot of time on that, actually.

Okay.

This is Brian. Just appreciate your comments on the RIDEA structure and the criteria you have to choose that. As you think about your investments there and as they mature do you see this RIDEA structure as more a temporary thing and the potential for those facilities to turn into triple net investments?

Are you -- when you say mature I'm not sure I understand what you mean by our existing investments maturing.

As we get into a different point of the cycle and NOI on a RIDEA investment, the growth year-over-year doesn't improve as much as it does right now, do you view that as transitioning to triple net?

Oh, sure. At that point, it's got to be a win-win for our operating partner. There could be very well a situation where as part of some additional CapEx that's been identified to expand the reach of a particular community or communities or as part of a pairing with an operating partner to acquire more properties, there's always those opportunities, sure. Again, the sound bite is RIDEA to us is an interesting technique in our tool kit. We believe it has a higher risk component to it than a triple net execution. Therefore, on a risk-adjusted basis, our shareholders deserve a premium in terms of return for RIDEA, for us entering into a RIDEA structure, as opposed to triple net. We kind of took you through with a fair amount of detail the thought process that went into our RIDEA 1 transaction.

All right. Thank you very much, Jay. Great quarter, as always.

Thank you.

Your next question comes from Paul Morgan of Morgan Stanley.

Hi, good morning. Jay, you have expectations about the type of growth you think you can see over the next year or 2 from the Brookdale assets relative to where kind of they are on a run rate basis right now?

Oh, absolutely. I don't think over the next 18 to 24 months. I believe with very modest growth assumptions -- let me define that for you. Say 3.75% would be our top line underwritten revenue assumption, we think it's eminently doable over the next 18 to 24 months to return this portfolio to the high water occupancy mark of 94%-plus and the high water operating margin mark of 40%. Those are not baked into our core underwriting assumptions. Our core underwriting assumptions are much more conservative than that.

With what Brookdale brings to the equation here, both in terms of their ancillary revenue platform and the fact that they've already got communities that are configured around these 21, I think it's eminently doable that you could see a return to those sort of operating metrics and obviously if that's the case there's a tremendous amount of incremental cash flow and, therefore, value that both Brookdale and HCP will participate in.

That's great color. And then on the -- just on the new Medicare reimbursements, do you have any color on how the efforts have taken place in terms of ability to mitigate the costs and just implementation under the new reimbursements?

Well, I can speak probably most directly to what's gone on in Toledo, Ohio with HCR ManorCare. They've taken very significant actions to reduce costs, to partially mitigate those rate changes that were announced in August and became effective October 1. So, they were -- they had their action plan set up, and depending on the outcome of that CMS directive, and when it was communicated, they went into implementation mode immediately. I think in fact, I think almost all those measures were put in place with an effective date of September 1st. So, they were all over this and we continue to have great confidence that HCR ManorCare will adapt and be able to grow market share in this sort of environment.

Okay. Just last question on the range of guidance that's left for the rest of the year, any key drivers other than maybe acquisitions that would produce kind of the high or the low end of the range?

We have no acquisitions, Paul. We never forecast acquisitions. So, that guidance that Tim took you through is kind of steady state, so obviously if something were to occur it would be additive to that.

The biggest piece is the growth in our same store portfolio.

Right.

Okay. Great. Thanks.

Your next question comes from Michael Bilerman of Citi.

Good morning. Quintin Velleley is on the phone with me as well. Jay, as you look at your 5 by 5 investment strategy, where do you think the most activity from an investment standpoint is going to come over the next call it 6 to 12 months and which ones would be at the sort of lower end in terms of new dollars?

Well, if you want to talk the -- going across the top row, there's 5 property sectors and there's 5 product types. If you want to deal with property sectors, I would tell you that hospitals is likely to kind of be bringing up the rear in terms of incremental investment. I would tell you that the other 4 could be anywhere from active to very active. We have obviously got very interesting development opportunities in the life science portfolio. I think you should expect to see us act on those over the next 12 to 24 months. I think in medical office, we've got real solid growth there, real nice momentum on occupancy. Got nice momentum on occupancy by the way in life science as well, but we expect those occupancy increases in both of our office sectors, life science and medical office, to continue to go northward. There's certainly some MOB opportunities out there.

I think post acute as I said on the last call, my guess is that the fourth quarter for the space will be focused on proving out the operating changes that were made to the respective business models because of the CMS decision and there's likely to be a little bit more news coming out of what -- depending on what the super committee does. I do believe starting the first quarter of next year you're going to start to see some consolidation activity. So, I think that's a very real possibility. And senior housing, there's a lot in play there as well. I think my guess is that, Michael, that 4 of our property sectors will be anywhere from active to he very active at this point. Which of those 4 move ahead of 1 another will be depending on kind of sector specific issues, how they play out in the next 6 months. I think the hospital sector, I believe, will continue to be slow, at least from an HCP standpoint.

When you think of it, your transaction activity specific to HCP, how are you finding the market in terms of people bringing stuff, either portfolios or companies versus you going out and sort of making transactions on your own?

Our business model really differs from our peers. The last time we acquired any properties in a full-on auction was CNL 5.5 years ago. So, we tend to kind of take advantage of the relationships and the investments that we've made. If you just go back and look at the last 12 to 18 months, the debt that we purchased at discounts in the capital structures of Genesis and HCA and HCR and then the conversion of the HCR Propco debt into the real estate, Sunrise transition to portfolios that Paul and his team have done I think 4 now. The tenant-hospital conversion to Hogue Hospital, the joint venture buy-out, the Medical City Dallas acquisition, the RIDEA 1 joint venture, those were all negotiated transactions.

As you heard me speak before in this format, in healthcare, buying rights is very, very important. There's less you can do with portfolios and properties after you acquire them if they're subject to long-dated leases. So, buying rights, very, very important and that's our model and it's been successful to date and I don't anticipate us moving away from that sort of operating track record, Michael.

It's Quintin. In relation to HCR ManorCare, can you just give us an update in the terms of some of the mitigation initiatives they've been doing to boost profitability and coverage in a lot of the CMS reductions?

I think they're the normal sort of cost reductions. Recall, when the government put RUGS 4 -- they announced RUGS 4 I guess it was the summer of 2010 and it became effective on October 1st of 2010. The easy way to answer your question, Quintin, is to go back and look at what the industry as a whole did, kind of in the couple of months leading up to October 1, 2010, which was an awful lot of FTE additions. Particularly, in areas of therapy and things like that, to be in a position to work within the new regulations.

I think it's not well understood that this was no freebie from the government, that a tremendous amount of costs had to be adding to these operating platforms leading up to the start of the RUGS 4. Obviously, less than a year later, 10 months later, the revenue benefit was removed and therefore the play book I think by and large on the part of the sector was effectively to kind of go back and undo what had been done in the July, August, September 2010 time frame.

Thank you.

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Hey, Jay, good morning. Maybe just following up on that theme in terms of the budgetary cuts and the super committee, can you just give us some updated views on the potential disruption that you might see next year or thereafter? I'm just thinking along the lines, maybe you mentioning buyers that perhaps overpaid in the past cycle and not seeing the rent growth take place, even some private equity exits that may take place over the near term but maybe some updated thoughts in terms of opportunities you see from disruption?

Again, I think there's kind of probably 1 more reimbursement related card to play out in calendar 2011 that will be observing what if anything this super committee of 2012 produces. But away from that, you go back to our -- the 3 criteria that are so important for profile of the operating partners we want to do business with, quality outcomes, efficient operations and critical mass. I think in particular, efficient operations and you should interpret that to mean operating margin and critical mass and you should interpret that to be market share at the local level, those 2 factors I think will really drive consolidation. Here again, we benefit from this amazing operating platform that is HCR ManorCare, low cost provider across a wide variety of post-acute patients that require short-term rehabilitation. Particularly with the government's financial situation being what it is, the ability to be the low-cost provider and provide quality outcomes.

I think you've heard in the past me describe what I think is going to happen in healthcare and make the analogy of what happens in the aerospace defense industry in the late 1980s where with President Reagan's success in ending the cold war and the Berlin wall coming down. You went from 30-plus publicly traded aerospace defense contractors in a couple of years down to a single digit number and a whole bunch of those programs were cut and then the programs, that remained the government decided they didn't need 5 and 6 contractors. They would have 2. And so the good news, if you were 1 of the 2, your odds of winning a particular project were 50%. The bad news is, the government was going to get more involved in terms of the economics of the reimbursement and they were going to be very transparent.

Here again, as healthcare reform plays out in the second half of this -- the middle of the second half of this decade, I think it will play out more in the marketplace as opposed to government mandated. But the winners are going to be those operating partners that can produce quality outcomes, have efficient operations, and have critical mass, particularly at the local level. And that's why we love partners like HCR ManorCare, HCA in the hospital space, Brookdale and Emeritus in the senior housing space, in the nonprofit space obviously Hogue Hospital, what they're doing down in Orange County is absolutely amazing. That's kind of how I see this playing out over the next several years.

Okay. That's helpful. In terms of I guess perhaps 2012 and specifically same-store NOI growth can you talk about I guess what's left to potentially transition, i.e. in the senior living portfolio or other portfolios that could impact the pace of NOI growth, relative to what you've achieved so far this year. What factors could drive NOI growth above or beyond?

Let me point out that the way that same store calculation works, we won't pick up the HCR ManorCare until I think it's going to be the second quarter of 2012, second or third quarter, because we acquired that portfolio in the first week of April of this year. So, you won't see the benefit of those 3.5% bumps in the first quarter plus until we hit the 1 year anniversary of that. Let me just say that. But away from that -- actually, if you take a giant step back and look at HCP's portfolio, I think it's interesting to note that 96% of our portfolio is effectively stabilized. We like the occupancy in life science and medical office to be higher. Sure, are we making great strides there? You bet. You heard about the LinkedIn lease that we just signed up, up in the Bay area on life science and we've had, again, steady increases in occupancy in medical office. But if you think about that 96% of the portfolio that is effectively stabilized, that is currently yielding 8%, current.

Now, it's interesting to look at the remaining 4% of HCP's portfolio. By the way, that would be about $800 million of value. That's currently yielding just under 3%. So our ability to move the 4% of the overall HCP portfolio up 500 basis points from, say, the current call it 3% up to where the rest of the portfolio, the 96% is cash flowing at an 8% current yield. That's 500 basis points. I mean, that could generate meaningful incremental cash flow. Now, so then you've got to look at what is the profile, I think, of the assets that are in that 4%. And they include obviously land holdings down in Poway and Carlsbad in San Diego County, the land holdings we have in the Bay area, most notably The Cove which we acquired last quarter in South San Francisco and Cedar Point. You've got our OpCo equity interest in HCR ManorCare and now a very modest investment in Brookdale's common stock. You're got our Cirrus loan.

So, our ability to either monetize those assets for cash and redeploy the cash or retain those assets and then move the current return up from the current 3% to something that approaches the rest of the portfolio, that's real value added. The majority of which is -- a lot of that's going to drop to the bottom line. Paul has an action plan for each of those assets. I think some of those are going to be actionable in 2012. I think some of the developments where we're seeking entitlements and things like that are probably more 2013, 2014. But there is -- there remains a very attractive pop, if you will, in terms of cash flow to HCP's shareholders that, if the management team continues to stay focused and has the success in converting those assets, that we've enjoyed in the past couple years, that could be quite significant.

That's helpful. Lastly, in terms of demand from tech-based companies I guess for the life science portfolio, are you still seeing additional demand from the tech industry, i.e., the LinkedIn type deals or I guess what sort of demand do you see from traditional life science tenants?

Let me have Paul Gallagher take that one, Jay.

In the Southern part of the peninsula, Redwood City and Mountain View we're still seeing quite a bit of activity and it's pushing up in where office tenants are actually demanding the space in the life science areas. We're also still seeing good life science activity in those markets. The one market that has probably slowed down just a little bit would be South San Francisco.

Thank you.

Your next question comes from the line of Jeff Theiler of Green Street Advisors.

Good morning. Appreciated the RIDEA commentary. One item you talked about that I don't think is focused on enough is the CapEx obligation. I wanted to get your thoughts on what the baseline CapEx do you think is necessary to drive inflationary-type growth in RIDEA senior housing assets and what kind of capital you would anticipate putting in above and beyond that CapEx? Thanks.

Let me have Paul speak to that with one just opening comment I would like to make. I think you need to distinguish between a senior housing either community or portfolio of communities that is built out. I think the answer to your question in that case is going to be one number. And then I think you need to distinguish the profile of something that's built out versus kind of what we're cooing in we're doing in our what we call RIDEA 1, our joint venture with Brookdale. Where what's going to happen there is there will be some funds expended to convert some of that independent living portfolio such that it will be able to work with what Brookdale calls its ISC or their ancillary services platform. It's not 1 size fits all. It's going to have to be very specific in terms of what the strategic opportunity that the real estate owner and the operating partner have targeted. And within that context, I'll kind of turn that over to Paul.

Yes, Jeff. It's a more complicated answer in that, whether you're independent, assisted or memory care, you're going to have different types of costs associated with each of those. But by and large, the way the way we look at it is we break it down into 3 different buckets if you will. There's going to be the regular ongoing kind of deferred maintenance that you're going to perform, and we actually have a group in Nashville that goes through and determines useful lives and comes up with budgets that say how much money do we have to spend on an ongoing basis? Then you're going to have the FF&E type expenditures, and that's going to be dependent on the size of the complex and things of that nature as far as how often you need to spend those dollars. We typically look at doing refreshes on properties in about the 5-year type range

The final bucket that you have is really kind of the revenue generating CapEx where what you're doing is you're modernizing the facility, you're converting IL wings to AL wings. You're converting AL wings to memory care and things of that nature, and so when we roll it all up, it doesn't come out to the $500 or $700 that a lot of people typically look at. It's usually substantially higher than that and that's why we go through and break it down in the various different buckets.

Right, so when you roll it all up, what kind of numbers do you come up with, if it's not the $500 to $700?

Substantially higher than that.

That's helpful. Thank you.

By a factor of 2 to 3 times, Jeff.

Yes. Okay. Great. Thanks.

Your next question comes from the line of James Milam of Sandler O'Neill.

My first question, can you dig in a little bit more on the MOB occupancy drivers, if that's large tenants or small tenants, if you're seeing new practice formations or taking tenants from other buildings, that kind of thing?

Actually, it's interesting. We're seeing a lot of -- a lot more of the larger physician practices and hospitals taking over space, so we're actually seeing a lot more of the larger tenants. It's also had a double-edge sword wherein, there have been some of those folks that have relocated to other buildings of their own either on campus or off campus.

Okay, but you guys -- are you seeing a larger sustainable demand or is it just kind of flat demand but you guys are getting more than your fair share?

We've seen a fairly consistent amount of demand over time. It doesn't move that terribly much. We've got between 75% and 85% retention in the portfolio. Occupancy has been stable in that low 91% range.

We did -- I guess it's fair to say we had less expirations of space this year than we did last year.

And a lot of that's driven because we're extending the amount of term of the particular underlying leases.

Okay. Great. Thanks. And then my second question, on the Cirrus loan is there any other -- sounds like you guys are working with them to sell some of these assets. Is there any -- I guess you don't see any opportunity for you to take control of the assets and either bring somebody else in to operate them or force a sale more quickly from your end?

Since these are physician indications, and partnership interest anywhere from 20% to 60%, it makes the most sense for the existing borrower to really work the various different assets to maximize value.

Okay. And then last one quickly. Do you guys are have an updated TINLC guidance for the rest of 2011 and if you think that's a good run rate, is it around $10 million or so?

No, for the year you should look in the $50 million to $52 million range for second generation FAD capital.

That's full-year.

Full-year.

I think was asking about -- you asked about the remaining 2 months, right, Jim?

Yes, so if it's -- I guess if you're saying $52 million then it looks like the fourth quarter should be higher than the $11 million you had in the [third] quarter.

There's a little seasonality that number. We spend a little bit more in the fourth quarter generally.

Thanks, guys.

Your next question comes from Jerry Doctrow with Stifel Nicolaus.

Thanks. Just to follow-up on that, I think you have in there $19 million or $20 million of CapEx for the fourth quarter. Is the $50 million, $52 million a good number for 2012 as well or will it ramp up more with some of the RIDEA stuff?

We look forward to taking you through all that detail, Jerry, on our February call when we talk in detail about our 2012 guidance.

Okay. And then the other item on the guidance was sort of the DFL interest accretion, looked like that was also jumping a bit in fourth quarter if we were reading this right. Just any color as to what's going on there. Are we understanding the guidance right?

No, that's -- there shouldn't be any volatility in that number.

So the third quarter would just stay stable?

Yes.

Okay. And then Jay, shifting back to ManorCare, the other piece of their business --

HCR ManorCare.

HCR ManorCare, sorry. The other piece of their business is the assisted living dementia care where I think we noted the occupancy was only about 82%. Is that -- any color what's gone on there and is that sort of an upside opportunity because it's somewhat below industry averages?

It's a pretty typical run rate for that particular portfolio, Jerry. It's -- again, it's largely memory care type portfolio. So, we haven't seen any driver that's caused it to be adversely impacted.

Remember, Jerry, most of those communities, I think you've seen the one we did the property tour outside of Chicago, they're located on campuses at HCR, so it's part of an overall continuum of low-cost healthcare that HCR is providing to the patients.

Okay. And then last thing I have just to come back, I think you maybe all touched on this, Jay you touched on it earlier. In terms of ramping up particularly the life science development, you scheduled out deliveries sort of into 2012. It sounded like you're not going to see a big jump in terms of deliveries until later because of the entitlements and stuff I think you said were going to take into 2013, 2014, just any color on sort of the ramp on that stuff?

I think we would be real specific on the campuses. The Cove, we're in entitlement process now. I think we said that was going to be 12 months from the time we started that which was middle of 2011. Hopefully we'll be out of the entitlement process with the City of South San Francisco mid-year next year.

The LinkedIn, that's a build to suit, so we're moving on that. There's a lease that's been executed. That ought to be delivered in 2013. Mid-2013. Sierra Point which is the other campus setting we have, just across the Bay from South San Francisco in Brisbane, and Carlsbad and Poway we're doing work on. At the present time we don't have a plan to deliver those parcels.

Okay. And so Cove where you entitle in 2012, it would take another year or so to build buildings out so we could start seeing a ramp-up in actual deliveries in 2013?

Yes, those are still frame buildings so they'll take probably 18 months from the time we complete the entitlement process.

Okay, thanks. Great. That's all from me.

Your next question comes from Rich Anderson, BMO Capital Markets.

Thanks. Sorry to keep this going. Just a couple of quick ones. First, I know this is small, but on the mark-to-market of Brookdale shares I think it's about $5.6 million. That's in both measures of your FFO, as adjusted, and of course the conventional FFO, is that right?

No. As I mentioned, what we did there, was we marked the September 30 closing price for Brookdale to market. That price was $12.54, which is obviously significantly below today's stock price, but we marked that through a contra equity account. Much the same way we had marked the markets on all the HCA title notes that we owned, so that gets marked. We've marked it that way and we marked it at the September 30 price of $12.54.

So it's not in other income?

It's an account, Rich, as I mentioned, it's in an account called OCI which is effectively is a contra equity account. It's an offset to the --.

I understand.

account of HCP's [value]. That's what I was taking you through in the formal remarks.

Okay. And then my only other question is on the coverage, 1.6 times for HCR ManorCare and 1.78 I think you said for the rest, using RUGS 4. Do you have an estimate of what those coverages will be when you kind of fully apply the 11.1% average cut from CMS? Have you done that calculus?

Well, sure. I think the easy way to think about it is the legacy portfolio, the non-HCR ManorCare post acute skilled portfolio that we have, we've obviously had that for a longer period of time. That's at what, 1.78.

Yes.

So, I mean, my guess is, you'll see both of these come down. That will end up being above 1.5, because it's starting out above 1.5. If we had to cuff something today and it's early days in terms of the results from the mitigation that has gone on effective September 1st in Toledo, Ohio we would anticipate that portfolio being back around plus or minus 1.5, because as you know, when we underwrote that portfolio, we specifically excluding any of the benefit from RUGS 4.

Okay. But does that include some sort of efficiency measures done at the property level, or is that just pure looking at the cuts relative to where you underwrote it, and all the rest?

Again, we're not going to talk about projections for 2012 until our next call, but I think suffice to say we feel very, very good about that portfolio as well as our legacy post acute skilled portfolio.

I do have one other one. Do you plan to take any type of reserve relative to any type of future event that might happen with the Ventas litigation?

Again, as I said on our last call in August, the litigation's been expensive. It's been distracting and we would prefer to settle that matter if reasonably possible. Other than that, it's just not appropriate for me to comment on pending litigation, Rich.

Okay, fair. Thanks very much.

Your next question comes from Todd Stender of Wells Fargo.

Hi, thanks. What's the initial lease yield expectation on the LinkedIn build to suit?

The initial new lease?

Yes.

$2.65 triple net.

Did you want the yield, Todd?

Yes, the yield on the new building for 10 years.

That's -- well, the going in return on cost is 11%.

That's build to suit.

That's right.

About 3,000 that was marked up to 71%.

Okay. Had that been a life science tenant, signing the same lease, what would that yield look like?

Apples and oranges. You've got different build-outs for the 2 different types of tenants.

You would have a different TI package, right?

That's exactly right.

How do you evaluate the risk I guess when you're looking at a technology company versus a lab science company, how do you evaluate the risk and kind of what's deviated from core netting of healthcare.

The jumping off point, Todd, is the location of that real estate portfolio. Okay? That was something that we did this month when we did the LinkedIn lease execution. That was everything we did back in the middle of 2007 when we took a look at this real estate portfolio that is book-ended to the North and South San Francisco with our Genentech campus and to the south in Mountain View, home of Google, Facebook, LinkedIn. As a real estate -- as a substantial real estate neighborhood, it just doesn't get any better than that, so there are various things that are going to go on in that book-ended real estate corridor, if you will. You've got the tremendous driver for multiple sectors. So, with that -- that was the key strategic decision that we made when we took that portfolio down. Within that, I might have Tim speak to some of the other things, because we do have a smattering of technology companies within that portfolio.

Yes, we have -- down in the south end we've got obviously the technology companies, as you move up the peninsula in Redwood City, we've got the device companies, as you get into South San Francisco, the more traditional life science, biotech.

In general we stay away from the venture capital-backed tenants, Todd. We like large, public where possible, very well-capitalized companies and from that standpoint, things like leases and master leases and corporate guarantees with counterparties that have substantial financial wherewithal. But that's no different than what we're doing in our MOB space, or what we're doing in our senior housing space or what we're doing in our post acute space.

Most of that space is generic in nature so if one tenant has a lease expiration, we can plug a new tenant in.

Didn't you take -- as part of the lease with LinkedIn aren't you taking -- we're taking an existing tenant out of that space?

Right. Todd, it's only $10 in TIs for a long-term lease, so it's very generic for that space.

How about the lease structure, it's 10 years. Are there annual escalators in there?

Yes.

They're fixed?

Yes, 6 months, each year.

Thank you for that. Looking at the Brookdale deal I think Jay you mentioned it was a 7.7% cap rate. Just in general, are you able to quantify what the premium that you require to enter a RIDEA versus, say, if you take the same group of assets and acquire them as a triple net lease.

In that particular case, we project that it's a 200 basis point premium, Todd. More generically, I would tell you that all other things being equal, we would be looking for a premium in order to move forward on a RIDEA execution versus a triple net of between 150 and 250 basis points, which is going to be a function of what's going on in that particular portfolio, where it is performing versus where we think it could perform with a new operator, things like that.

Okay. Thanks. We do have -- in your disclosures you show the average occupancy. Is there any facilities within that there's lease-up opportunities or anything in the 80% occupancy where there's pretty significant upside?

Are you talking about the specific -- the 21 properties in the RIDEA?

Yes, the averages looks like 90.2%. I wondered if there's any opportunities in there of lower occupancy?

Yes, I would say roughly about half the portfolio you have the ability to move occupancy relatively significantly.

Okay. Thank you.

Your next question comes from Rob Mains, Morgan Keegan.

Good afternoon, or I guess good morning your side of the country. Just have a couple clarifications, today. The discussion you had about CapEx under RIDEA, I assume that's an all in CapEx number that can be split between operating expenses and capital expenses?

The CapEx that I was specifically talking about in the 3 various different buckets, those are normal capital expenditures over and above ongoing operating expenses.

They would reside then on the CapEx line for modeling purposes?

Yes.

Okay. And then going back to discussion about the 5 by 5, Jay, other than the ManorCare deal we haven't had a lot of new investments this quarter or this year-to-date or other than HCR ManorCare. Would you attribute that to kind of normal sort of the way the market works, or do you think there's specific economic and/or reimbursement overhangs that are slowing down deals in 2011?

I think probably a little bit of both. We're very pleased with -- let me say we're very pleased that the -- we're ecstatic with the transactions that we've closed to date. Let me start there. Moving away from that, volatility is the enemy of transaction volumes. I think it's very instructive to look at the M&A revenues that in the most recent quarter, they've reported their September 30 quarter result. The commercial and investment banks have reported, you're seeing specific revenues for M&A transactions and M&A volumes in terms of lead table credit, stuff like that, that's all down. That's largely a function of volatility.

It's tough for principals to kind of cut a deal, when stocks are up 5%, down 5% the next day. I think that's probably contributed here in the last quarter or 2, to some additional slowing down in activity. But there are certainly no shortage of transactions and willing sellers and willing buyers across -- I think I mentioned earlier on this call -- 4 of our 5 sectors and you've got a little bit of price discovery going on and things like that. I think things will remain active over the next 12 months.

Okay. That's helpful. Thank you.

Your next question comes from Tayo Okusanya of Jefferies.

Good afternoon, everyone. Jay, thanks for taking my question. I know it's been a long call. Just a couple of questions. With HCR ManorCare, and again just trying to get a better understanding of the reimbursement issues, I mean, the latest thing that people have been trying to figure out is the therapy reassessment. I think we've seen some other skilled nursing operators come out with numbers recently, about what the impact of that would be. Could you talk a little about how HCR ManorCare's looking at that, and potential ways to mitigate that?

No. They're doing a great job and they're watching to see what happens in DC later this year, and when all those cards are played out and they've sorted it all out, I have every confidence in the world that they will have a very attractive response, and things will go forward and everything will be just fine, and you'll see some consolidation there. Beyond that, it would be I think inappropriate and actually irresponsible for me to be speculating on that kind of stuff.

Okay. And then the same store NOI guidance, the increase of 25 basis points, is there a particular property type that's generating most of that increase in same store NOI guidance?

Yes, primarily the senior housing portfolio.

Okay. So it's really the senior housing side. Okay. That's helpful. And then the 7.8% same store NOI growth in senior housing, and the large increase there, is a lot of that the transition of the Sunrise portfolios? Is that really what's going on over there?

Yes, that's the biggest chunk of it.

Okay. And Emeritus side, transition to Emeritus?

I'm sorry, the question again?

The transition to Emeritus from Sunrise. Is that the biggest?

It's a combination of all the transitions, Paul and his team transitioned I think 4 separate portfolios. They didn't all go to emeritus.

Emeritus is the most recent one.

It's a combination of all of them?

Yes.

Lastly, again, I appreciate you taking the time, the LinkedIn deal, could you give us a sense of the 71% increase in rents, if you could quantify what that dollar value is?

The expiring rent was $1.55 a square foot and it's going up to $2.55.

Are you talking about annual rent, Tayo?

Yes, please.

It's about $4 million a year.

Okay. So $4 million.

In increased NOI.

Increased NOI. Great. That's very helpful. Congratulations on a great quarter.

Thank you.

Your next question comes from the line of Karin Ford of KeyBanc Capital Markets.

Hi, good morning. Jay, wanted to see your view on the likelihood that the super committee comes up with a plan that is palatable to Congress, or whether you think we're likely to be headed toward sequestration and a 2% Medicare cut later this year?

Karin, I have no idea. Again, I -- we're set up to respond through our operating partner regardless of the outcome and we'll just wait for those cards to be played and move forward and take advantage of it.

Okay. Just one other. You said there was some price discovery going on in the deal marketplace today. Can you just talk about general trends you're seeing in cap rates, and once the deals restart, where you think pricing will have changed from where the levels were we saw earlier in the year?

I think probably -- it's probably most appropriate just to wait and see where these transactions fall out. You've got a lot of different considerations going on, on the part of both buyers and sellers and where these deals get cut. We'll -- time will tell.

Okay. Thanks.

Your final question comes from Michael Bilerman of Citi.

Yes, just wanted to come back to 2 things. One, just on Brookdale, obviously you bought about 1 million shares, I guess to more align your interest with your operator as well as being the landlord. I guess stock was bought at $23, $24 up in June. As you watched the stock fall did you become at all more inclined about putting more capital to work in Brookdale?

Michael, by the way it was lower than the price you just mentioned, $23, $24, which was down considerably from the price in the high 20s earlier this year. Our thought there was really not so much speculating on the stock price of Brookdale, but we had the proceeds coming back to us from Brookdale, and we just thought it was -- there was some real benefit of aligning ourselves and having a modest position in Brookdale. We watched that. I've shared with you the accounting treatment that we've deemed to be appropriate as of September 30. I don't think much like the equity investment we have in HCR ManorCare is up, I don't think you should expect those to be major drivers or major activities that this management team is going to consume itself with.

It's a very small -- you own less than 1% of the Company. I just didn't know if it was something that you sort of set your eyes towards in terms of a larger transaction given the fact that -- I mean, the stock was $23, $24 in June, so if you got in a little bit lower then I apologize but that's what it shows on the screen. I guess from the standpoint of whether -- obviously, you perceived it to be good value or you wouldn't have bought the stock. I'm trying to figure out where it stands.

We think it's very good value. We have no doubt that we'll do very well on that investment. But again, at the end of the day, I think our shareholders predominantly want us focused on buying income-producing real estate. So, to the extent that investment, not unlike the OpCo investment in HCR ManorCare are pieces to a bigger puzzle that play out, that ought to be the way you think about it. At the end of the day, you heard me talk before about our 5 by 5 model. Eventually we would like everything on that top line, which is fully leased up cash flowing real estate. Based on where we are in a cycle, based on what market opportunities present themselves, oftentimes we'll take a detour through a joint venture or through a piece of debt that we acquire at attractive terms, and things like that. At the end of the day we would like to get everything -- and we have just about everything income producing wholly-owned real estate.

Didn't know if you wanted to become a little bit more -- obviously Brookdale does still own a lot of assets in addition to being an operator, whether there was some thought about trying to move -- almost trying to be a little bit of a nice activist and trying to push a transaction and accumulating a bigger stake.

Again, I stand by what I said. We're predominantly focused on acquiring attractive income producing real estate.

Just want a clarification on the HCP-Ventas lawsuit. You said on this call that you prefer to settle. Maybe just clarify the process. Has HCP actually proposed a settlement amount to Ventas?

Let me try this one more time. As we said in our August call, the Ventas litigation has been expensive and distracting and we would prefer to settle the matter if reasonably possible. Other than that, it's not appropriate for me to comment on pending litigation.

I know you prefer to settle. Which is what you've said. I'm trying to understand the process of whether there's a settlement process in play upon which there will be a resolution to this or whether we should expect it to go back through the courts.

Three times a charm. We do not comment on ongoing litigation, other than what is set forth in our SEC filings, Michael.

Okay. Thank you.

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

Okay, everybody. Have a good rest of the day. Trick or treat and hopefully for the people that are disadvantaged with yesterday's storm, hopefully you can get your power restored soon. And for those of you that will be attending NAREIT in Dallas in 2 weeks I guess, we'll look forward to seeing you then. Thank you again for your time today.

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