Healthpeak Properties Inc (PEAK) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 HCP earnings conference call. My name is Anita and I will be your coordinator today. At this time all participants are in a listen-only mode. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

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, Anita. 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.

Thanks, John. Happy Valentine's Day everyone, and welcome to HCP's 2011 fourth quarter earnings conference call. Joining me this morning are Executive Vice President/Chief Investment Officer, Paul Gallagher; and Executive Vice President/ Chief Financial Officer, Tim Schoen.

Let us begin with a review of the fourth quarter results that we released this morning. And for that I turn the call over to Tim.

Thank you, Jay.

2011 was another strong and productive year for HCP. One -- we generated cash same-property growth of 4% over 2010. Two -- increased FFO as adjusted by 21% year-over-year to $2.69 per share, and FAD by 13% to $2.14 per share, both of which are at or above the midpoint of our last guidance and represented all-time highs for HCP. Three -- closed on $7 billion of investments, led by our $6.1 billion acquisition of HCR ManorCare's real estate assets, for which we replaced all stock consideration due seller, valued at $33.14 per share, with cash. Four -- transitioned 37 senior housing communities to Brookdale, including 21 under a RIDEA structure.

Five -- raised $3.7 billion in the capital markets and renewed our $1.5 billion revolver. Six -- improved our investment-grade credit profile, and received positive rating changes from all three rating agencies. Seven -- delivered 18.7% total shareholder return. And, eight, continued to be a leader in sustainability, as recognized by the US Environmental Protection Agency and NAREIT.

With that summary, there are several topics I will cover today -- our fourth quarter and full year 2011 results, our investment and disposition transactions, our financing activities and balance sheet, our 2012 guidance, and finally, our dividend.

Let me start with our fourth quarter and full year 2011 results. For the fourth quarter, we generated year-over-year cash same-property performance of 2.2%, which was negatively impacted by a working capital adjustment in the fourth quarter of 2010 related to the transition of 27 properties from a Sunrise to Emeritus. Excluding this, cash same-property performance increased by 3.1%. Paul will review our performance by segment in a few minutes. We reported fourth quarter FFO of $0.37 per share, which included a charge resulting from the settlement of all outstanding litigation with Ventas. Excluding this charge, FFO as adjusted was $0.67 per share and FAD was $0.50 per share.

Turning to our full year 2011 results -- 2011 cash SPP increased 4% over 2010, which was 25 basis points above the midpoint of our last guidance, primarily driven by improved fourth quarter performance in our senior housing segment. We reported full year 2011 FFO of $2.19 per share, $0.01 above the midpoint of our most recent guidance. The results included the fourth quarter litigation settlement of $0.31 per share, a third quarter impairment of $0.04 per share related to our Cirrus line, and HCR ManorCare merger related items of $0.15 per share. Excluding these items, FFO as adjusted for the year was $2.69 per share, which also exceeded the midpoint of our guidance by $0.01. And, FAD of $2.14 per share was in line with the midpoint of guidance. The results reflected several one time items, most notably a [$0.09] (corrected by Company after call) gain from the early par payoff of our Genesis debt investments in Q2.

Turning to our investment and disposition transactions, during 2011 we invested $7 billion as follows. $6.1 billion acquisition of HCR ManorCare's real estate portfolio; $560 million representing the buyout of our partner's 65% interest in Ventures II, inclusive of assumed debt; and $300 million for other real estate acquisition, development, and capital improvements. During the fourth quarter, we sold three senior housing properties for $19 million, and recognized gains of $3 million.

Next, our financing activities and balance sheet. In 2011, we raised $3.7 billion in the capital markets, consisting of $2.4 billion of senior unsecured notes and $1.3 billion of common stock. Proceeds from these offerings were used to fund a portion of our HCR ManorCare acquisition. In particular, $852 million of the equity proceeds, issued at $35.79 per share, were used to replace, at our option, all of the stock consideration due to the seller, valued at $33.14 per share, which resulted in a $68 million benefit to HCP. Also, last month we issued $450 million of senior unsecured notes, due 2019, with a coupon of 3.75%. The seven-year term fits nicely into our maturity schedule, and proceeds from the transaction were used to clear out the balance under our $1.5 billion revolver.

Our financial leverage of 41% remains stable and in line with our long-term target. Fixed-charge coverage was 3.1 times in 2011, up from 2.9 times in 2010. We expect trailing 12-month coverage to continue improving as we capture the first full-year ownership of our 2011 investments.

Switching to our full year 2012 guidance. Our guidance assumes no acquisitions or dispositions of real estate, and reflects the following -- cash same property performance is projected to range from 3% to 4%. It should be noted that on a full-year basis our same-store portfolio includes only 60% of the company's operating real estate. The remaining 40% principally relates to our HCR ManorCare and RIDEA assets, which are excluded from same store due to the timing of these acquisitions.

2012 FFO is projected to range from $2.70 to $2.76 per share, which at the midpoint represents a 1.5% growth compared to 2011 FFO as adjusted. The growth over 2011 reflects one additional quarter of our accretive HCR ManorCare acquisition, offset in part by the one-time Genesis gain of $0.09 recognized in 2011. Excluding the Genesis gain, FFO per share at the midpoint is projected to increase 5% over FFO as adjusted in 2011. 2012 FAD is projected to range from $2.14 to $2.20 per share, representing year-over-year growth of 1.4% at the midpoint, primarily driven by cash same-property performance and HCR ManorCare, partially offset by the Genesis gain. Excluding Genesis, FAD per share at the midpoint is expected to increase by 5.9% compared to 2011.

Let me quickly run through a few other detailed assumptions related to our guidance. G&A is forecasted to be $80 million inclusive of stock-based compensation of $22 million. Amortization of below market lease intangibles and deferred revenues of $4 million. Amortization of debt premiums, discounts, and issuance costs of $15 million. Straight line rents of $40 million. DFL depreciation of $13 million. DFL accretion of $96 million, which represents a $59 million recharacterization to income from joint ventures, due to our minority ownership in HCR ManorCare OpCo. Leasing costs and second generation tenant and capital expenditures of $58 million. Development, redevelopment, and first generation capital funding of approximately $155 million, including capitalized interest of $25 million. And, funding of $70 million during 2012 for five senior housing development loans under a participating mortgage program.

Finally, our dividend. In January, we increased our quarterly dividend from $0.48 to $0.50 per share, marking the 27th consecutive year of dividend increases for HCP. The indicated dividend of $2 per share represents an increase of 4.2%, or $0.08 per share, over 2011.

With that, I will now turn the call over to Paul.

Thanks, Tim.

Now, let me review HCP's portfolio performance. Senior housing -- occupancy for the third quarter in our same-property senior housing platform was 85.5%, a 30 basis point sequential increase over the prior quarter and a 70 basis point decrease over the prior year. Cash flow coverage for the portfolio remains steady at 1.19 times. Current quarter year-over-year same-property cash NOI growth for our senior housing platform was up 2.8%. This growth was driven by normal rent steps, including higher rents for assets transitioned to new operators.

Full year 2011 senior housing same-property performance was 6.6%. For 2012, we expect senior housing same-property performance to range from 2.5% to 3.5%, driven by contractual rent steps. The 21 RIDEA assets owned in a joint venture with Brookdale Senior Living, which closed September 2011, have been transitioned and integrated into the Brookdale platform. Quarterly same store performance data will be available in the fourth quarter of 2012 on the first anniversary of our contribution of the assets to the venture.

During the fourth quarter of 2011, HCP closed two senior housing development loans under a participating mortgage program we launched in the first quarter of 2011, bringing the total amount committed under the program to $101 million on five projects. HCP receives current income and participates in the project's appreciation, which, combined, is expected to achieve a low- to mid-teens unlevered IRR on each project. Upon stabilization, HCP has the option to purchase each of the properties. All five projects will be managed by Brookdale.

Post-Acute Skilled Nursing -- our Post-Acute Skilled Nursing portfolio metrics this quarter reflect a full year of RUG IV reimbursement rates for Medicare. For the trailing 12 month period ending September 30, 2011, HCR's fixed-charge coverage ratio was 1.66 times, a 6 basis point increase. For the fourth quarter of 2011, excluding nonrecurring expenses, HCR's fixed-charge coverage was 1.37 times, bringing fixed-charge coverage ratio for calendar 2011 to 1.57 times. For our same store Skilled Nursing portfolio, cash flow coverage improved to 1.84 times, a 6 basis point increase over the prior quarter and a 32 basis point increase over the prior year.

Year-over-year same-property cash NOI for the fourth quarter increased 1.5%, driven by normal rent steps. Full year 2011 Post-Acute Skilled Nursing same-property performance was 2.6%. For 2012, same-property performance for Post-Acute Skilled Nursing is expected to range from 2% to 3%.

Hospitals -- same-property cash flow coverage increased 21 basis points to 4.29 times, driven by improved performance at our Medical City Dallas and Hoag Irvine hospitals. Year-over-year same-property cash NOI for the fourth quarter increased 3%. Full year 2011 hospital same-property performance was 4.6%. For 2012, hospital same-property performance is expected to range from 2.5% to 3.5%.

Medical Office Buildings -- same-property cash NOI for the fourth quarter was up 2.4%. The growth was the result of increased base rent from occupancy and normal rent steps, coupled with expense controls, resulting in over $1 million of operating expense savings versus the fourth quarter 2010. Absent a one-time deferred revenue adjustment of $500,000 in 2010, normalized NOI growth was 3.5% for the quarter. Full-year 2011 MOB same-property performance was 2.8%. For 2012, same-property store growth expected to range from 3% to 4%. Our MOB occupancy for the fourth quarter increased to 91.5%, with improved leasing activities in California, Florida, Utah, and Arizona; and over 82,000 square feet of net absorption for the quarter.

During the quarter, tenants representing 593,000 square feet took occupancy, of which 420,000 square feet related to previously-occupied space, bringing total 2011 leasing to 1.9 million square feet. Retention for the quarter was strong at 86%, increasing our full-year average retention to 80.2%. Renewals for the quarter occurred at 0.4% higher mark-to-market rents. We continued to have success extending the terms on leases. For 2011, our average lease term on new and renewal leases was 66 months, a 22% increase over the same period in 2010. Looking forward to 2012, we have 1.871 million square feet of scheduled expirations, including 256,000 square feet of month to month leases. Our pipeline remains strong, with 220,000 square feet of executed leases that have yet to commence, and 721,000 square feet in active negotiations.

Life Science -- same-property cash NOI was up 1.1% for the quarter. This increase was driven by contractual rent increases, offset by vacancy and mark-to-market rent decreases. Full-year same-property cash NOI for the Life Science portfolio for 2011 was 1.1%. For 2012, same-property performance is projected to range from 4.5% to 5.5%. Occupancy for the Life Science portfolio decreased 10 basis points during the quarter, to 89.9%. The Life Science development pipeline consists of four redevelopment projects, totaling 253,000 square feet, and one development project totaling 70,000 square feet, with remaining funding requirements projected at approximately $42 million.

As we announced on our third quarter call, the 70,000 square foot development project is 100% pre-leased to LinkedIn as part of the larger 373,000 square foot lease transaction completed in the fourth quarter at our Shoreline campus in Mountain View. Construction activities have already commenced on the new building, with an anticipated delivery in the first quarter of 2013. Additionally, at the same Mountain View campus, and subsequent to year end, HCP entered into a lease amendment with Google to lease an additional 41,000 square feet at a mark-to-market increase of 17%.

The amendment includes a $4 million cash payment, extends the term for 124,000 square feet of Google space to 2022, and is coterminous with the expansion. This amendment increases Google's entire footprint to 290,000 square feet. Upon completion of the new building for LinkedIn in 2013, Google and LinkedIn will account for approximately 84% of the Mountain View campus' total square footage, all on long-term leases with annual contractual rent increases of 3% for Google and 3.5% for LinkedIn.

For the quarter, we completed 449,000 square feet of leasing, bringing total 2011 leasing to 949,000 square feet, with a retention rate of 61.2% on expiring space. Including leases executed with new tenants, over 88% of the expiring space was leased without any down time. Renewals for the quarter occurred at 30% higher mark-to-market rents, with an average term for new and renewal leases of 9.5 years. The Life Science portfolio has only 185,000 square feet of scheduled expirations in 2012, 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 current vacancies and near-term expirations.

HCP's tenants experience a strong quarter in their ability to access and raise capital. This effort was led by South San Francisco-headquartered Portola Pharmaceuticals, which raised over $100 million in two separate transactions, including a collaboration with Biogen Ide. Additionally, Onyx Pharmaceuticals, Pacira Pharmaceuticals, and Exelixis raised over $200 million in total. We continue to monitor the credit quality of our tenant base, and note that less than 1% of HCP's total revenues come from Life Science tenants with less than 12 months cash on hand.

Finally, let me recap same-property performance guidance by sector for 2012. Senior housing, at 2.5% to 3.5%; Post-Acute Skilled Nursing at 2% to 3%; Hospitals at 2.5% to 3.5%; MOBs at 3% to 4%; and Life Science at 4.5% to 5.5%, for a total HCP portfolio same-property performance for 2012 of 3% to 4%.

I'd like to turn it over to Jay now.

Thanks, Paul.

HCP moves into 2012 with tremendous momentum, following an impressive 2011 result, where we achieved total shareholder returns in excess of 18%. Once again, our real estate portfolio led the way, registering a 4% same-property performance increase, with each of our five property sectors generating positive contributions. Our balance sheet is strong, and we were recognized by each of the three rating agencies that rate our debt with positive rating actions in 2011. With HCP's credit metrics now tracking at single-A rated levels, our cost of capital is at an all-time low. And last month we issued [$450] (corrected by Company after call) million in seven-year unsecured debt at a coupon of 3.75%.

Turning to our operating environment -- recent improvement on the unemployment front, while remaining below historic recovery norms, is helping to change end user behavior for our real estate. This is most evident in our Bay Area portfolio where the demand from technology and social media companies is driving impressive gains at our Mountain View and Redwood City campuses. In our Senior Housing sector, recent NIC data has steadily improved, allowing us to launch a senior housing development platform which is currently sized at over $100 million. In addition, our primary care hospital partner, HCA, and our primary post-acute care partner, HCR, continued to perform well.

HCP's sector-leading sustainability initiatives, under the leadership of Executive Vice President Tom Klaritch, continue to garner well-deserved recognition and lower the company's carbon footprint. In November, we received the Innovator Award at NAREIT's annual Leader In the Light competition in Dallas. In addition, our North Suburban Medical Office Building campus in Denver, Colorado, won first place in the Medical Office Building category in Energy Star's national building competition. We received 20 additional Energy Star labels during the quarter, consisting of 14 Medical Office Buildings and six Life Science properties, bringing our total Energy Star labels to 58. Sustainability initiatives continue to deliver good economics to HCP, with a reduction of utility expenses for the year of over $1.4 million on a same-property basis versus 2010. We have now incorporated sustainability goals into each of our 2012 property sector budget plans.

The favorable earnings outlook for HCP over the next several years continues to provide for organic FAD per share growth of between 5% and 6%. Given this backdrop, last month HCP's Board of Directors increased the company's 2012 indicated dividend by 4.2%. This represents the 27th consecutive year that we've increased our dividend, a fact that S&P recently recognized by including HCP in its S&P Dividend Aristocrat Index. This select index includes just 10% of the S&P 500, and is comprised of companies in excess of $3 billion in market capitalization that have raised their dividend every year for 25 consecutive years. In 2008 we were very proud that HCP was the first healthcare REIT added to the S&P 500.

We are equally proud that HCP is now the first REIT in the world to be included in this index, joining such blue chip organizations as 3M, Coca-Cola, Exxon Mobil, Johnson & Johnson, Procter & Gamble, Walmart, and Walgreens. Reflecting back on the past quarter century of success at HCP, this significant accomplishment is the result of visionary leadership by our Chairman Emeritus, Ken Roath, the successful repositioning of our real estate portfolio in the mid to late portion of the last decade, and the out-performance of our company during the Great Recession. Recall that during the 2008-2009 recession time frame, many REITs were forced to reduce their dividend and/or adapt a policy of paying their dividend in stock instead of cash.

Now that we've been named to S&P's Dividend Aristocrat Index, we want to make sure that HCP stays there. Our portfolio's go-forward 3.5% same-property performance expectation, driven by contractual escalators and minimal lease expirations, levered at a ratio of 40% debt, 60% equity, will generate a positive 5% to 6% growth in FAD per share before external growth opportunities. With the strongest-rated balance sheet in the healthcare REIT sector, available to fund additional accretive acquisitions, incorporating attractive risk adjusted returns, we are in a good place.

Let me finish off with a couple of housekeeping matters. First, in light of the unusually strong reception we received from fixed-income investors last month, we have revamped our supplemental disclosure to incorporate the substance of our rating agency presentation, excluding all forward-looking information, on pages 5 through 7 of our supplemental. Our credit metrics have improved so quickly, especially our fixed charge coverage and secured debt ratios, that a number of fixed income investors encouraged us to be even more transparent with our disclosures in this area.

Second, for our East Coast-centric participants, we have three upcoming events organized by Institutional Investor magazine-ranked research analysts. On February 29, 2012, we will be in New York City for an investor dinner hosted by Adam Feinstein of Barclays. On March 1, Mark Streeter of JPMorgan will host a fixed income investor luncheon. And on March 12th and 13th, we will be in Palm Beach, Florida for Michael Bilerman's Citibank conference.

With that, we'd be delighted to take your questions. Anita?

(Operator Instructions)

Adam Feinstein, Barclays Capital.

All right, thank you. Good morning and congrats on getting added to that prestigious S&P index and also on a great year. Maybe, Jay, just curious to get your thoughts in terms of deal activity. Just obviously we hear about some of the public things that happen. But, just curious in terms of just things that maybe aren't necessarily in front of us, has there been an increase in activity?

I was thinking primarily in the Post Acute care space. Just in terms of maybe informal conversations you guys may be having. And, since you do have such a strong primary partner, as you mentioned, in terms of looking for opportunities, just curious in terms of whether there's things being shopped around and maybe we'll see an increase in the coming year.

Let me take the big picture and then I'll end on the Post Acute space, Adam. Thank you. I would make a couple of comments. One, looking back at 2011, we closed a large volume. But, if you actually think about our incremental 2011 commitments, so commitments that we initiated in 2011, and think about those in the context of commitments in excess of $100 million, we actually only made one.

And, that was of course our commitment to effectively buy back $850 million of HCP stock at a price of $33.14 and then refinance that out at a higher price. So, we've been very -- I think we've looked at everything, obviously, and we require, when we go forward with a transaction, we require that there's a positive spread to our weighted average cost of capital.

And, that incorporates reasonable underwriting assumptions, not seller provided assumptions. So, I think a lot of it, we kind of think about the Ted Williams quote that you've got to wait for the right pitch. So, that's a little bit of a looking back at 2011.

Moving to 2012, I would say that within our five by five business model, we have active discussions going on in each of our property sectors at the current time. So, I think there's absolutely an increase in chatter and dialogue. And, I think that's without a doubt the best leading indicator in terms of ultimate transaction volume.

So, that's how I'd talk about the macro transaction environment. With respect, Adam, to the Post Acute space, I would say that you obviously had a fourth quarter that was the first quarter of the RUGS IV benefit going away. So, for the most part, what we have seen with HCR and then more broadly within that space, we've seen people necessarily focused in the fourth quarter on the various cost mitigation strategies that they have put in place.

At this point, most of the heavy lifting is behind the sector. And, I think it's absolutely fair to say that as a result of that, coming out of the year end numbers, the accounting signoffs and the reporting out of those numbers, there's been an uptick in dialogue in the space. Now, let me also say, I've read a couple of sell side pieces that have come out in the past week or so talking about storm clouds parting in the skilled space and maybe things aren't as bad as they thought.

I would just say, that this is going to remain a challenging space with the political partisan reimbursement backdrop. But, we feel obviously very, very good with the operating partner that is HCR. And, we work with them very, very closely. And so, I'm optimistic that there will be some opportunities that present themselves that are good opportunities from a standpoint of HCR and from a standpoint of HCP.

Hi, Jay, this is Bryan Sekino, just a follow-up here. Given the favorable rates on your recent debt raise, do you see this as possibly giving you more cushion to go after some lease structures with more upside but risk as well? Or do you expect to protect the consistency of your rent increases with some of the triple net leases?

We don't -- that's a disconnect from the way we think. We think about -- when we think about acquisitions, we think about risk adjusted returns and, again, with reasonable underwriting assumptions. And, they've got to create an attractive spread to our weighted average cost to capital.

So, all other things being equal, which of course they never are, if you're alluding to the fact that our cost to capital's now at an all-time low, were the opportunity set that's out there to remain totally the same, then sure, that spread would have gapped out. But, as you know, the financing markets and the acquisition environment are, to a certain extent, inversely correlated.

In other words, the best time to make an acquisitions is, in our experience, the time when the financing markets are most challenged. And, you flip that around, when the financing markets are most frothy, oftentimes that's when it's tough with seller expectations to make the numbers. Again, that's how I'd answer that question.

We're not going to change our investment discipline because our cost to capital has gone down. We certainly incorporate that lower cost to capital in each of the opportunities that come before Paul's investment committee. But, that's how I'd answer that question.

Thank you. Look forward to seeing you February 29th.

Daniel Bernstein, Stifel Nicolaus.

Good morning, Jay.

Good morning, Daniel. You got your friend there?

I do not. He's in a different part of the office right now. Actually, just the senior housing development's not a really large part of your business but seems like you've made a strategic decision to launch a senior housing development platform. Wanted to get your thoughts behind some of that and is HCP going to be a larger developer going forward than buyer? Just get some of your thoughts on that.

Yes. Well, let me say -- let me take the macro piece and I can let Paul talk a little bit more about the specifics of the development program that we are now -- we've now rolled out and we're blowing and going on. From a senior housing standpoint, you've got some favorable tailwinds, those obviously include the aging baby boomer and the lack of new supply.

It's that point that our development platform is specifically targeted at. That said, it's for a different reason than I just alluded to in terms of some of the perspective that's out there that the worst is behind the skilled operators. You've got two major headwinds for the senior housing space that are going to be with that space for the foreseeable future.

One of which is affordability, in light of all that's gone on with senior's net worth and their incremental family obligations, and the other is CapEx. So, we think it's an interesting space. We've obviously done very, very well. If you take a look at our coverage ratios for our senior housing portfolio, they have, very impressively I think in light of the last three years' operating environment, gone up each year.

But, we do see an attractive opportunity to get some outsized economic performance in terms of unlevered returns. And, therefore, outsized spread over our weighted average cost to capital, with this development platform. So, with that, let me have Paul maybe elaborate a little bit more on what we're doing there.

Yes, I think one of the pieces of your question was it going to replace our acquisition, it's to supplement acquisitions of our senior housing projects. And, just a little bit of color as far as kind of what it is that we're looking at. These deals range in size from 75 to 100 units, primarily assisted and Alzheimer's.

We have one project that's a little bit larger that has a larger IL component. Property locations in Germantown, Tennessee, Olney, Maryland, Horsham, Pennsylvania, Houston, Texas, Roseland, New Jersey. What we've structured is we structured a loan for up to 85% of cost with the borrower putting in the first 15% in cash.

Our loans per unit is less than $200,000. And, interest, we receive interest payments. We participate in the value creation and we expect low to mid teens types of returns on these.

You're only doing the development with existing operators or are you looking to build new relationships?

No, we're concentrating -- the five that we've got up and running we're concentrating those with Brookdale. Again, that's another element of this when we take a look at where we want our partnerships. We want to concentrate, as we said before, with partners, whether that's in the acute care hospital space, the post acute space, the senior housing space, with operators that have quality outcomes, have efficient operations, and have critical mass.

One other question I have. Following up on the broad picture on the acquisition environment. When I look at the buyout of leases today, Brookdale announced the senior housing guys clearly want to own their real estate.

Where are the opportunities? We also know that you can grow without acquisitions. But, when you're looking at acquisitions, what spaces do you see acquisitions of scale available?

Like I said in answer -- in response to Adam's question, we've got, right now, within the context of our five by five model, we've got opportunities of size, we're in dialogue concerning opportunities of size in each of our five property sectors.

Thank you. Congratulations also on, again, the Aristocrat Dividends.

Thank you. Let me just say first of all, welcome in a primary coverage responsibility to the space. But, for those of you that don't know, Jerry Doctrow has announced his retirement effective March 1.

I'd just like to pass on to Jerry on behalf of HCP we want to congratulate you and thank you for multiple decades of quality support of the healthcare real estate industry. And, we wish Jerry, you all the best in your future endeavors.

Thank you.

Paul Morgan, Morgan Stanley.

Hi, good morning. Just two related questions. First, from the bigger picture, you gave 3% to 4%, I believe, 2012 same store NOI guidance for the portfolio. Admittedly, that's 60% of the portfolio right now. But, from a high level is that what you think given your current portfolio mix the company can generate on a same store basis?

Is that -- is there any reason to think that over the cycle that 3% to 4%, or a different number, perhaps, would be achieveable. And then, specifically on the Life Sciences portfolio, you had 4% to 5%. Just wanted to get a quick question about how much of that is driven by what really aren't Life Science tenants but the LinkedIn, Google deals, and maybe give a number absent those?

We don't have a number absent what's going on at Redwood City and Mountain View campus. It's all in the Life Science vertical. I mean, perhaps we should expand our model and add a sixth property type, technology and social media, so we'd have a six by five model instead of a five by five model. And then, perhaps we could get a social media valuation for HCP.

A multiple, there you go.

Returning to reality, I would say the following. If you go back and look at our initial guidance for 2011 on this call a year ago, Paul, we went out at 2.25% to 3.25%. So, we had a midpoint of 2.75%. We obviously ended up at 4%. If you take a look at the guidance for this year, we're at 3% to 4%. So, we're up -- that's materially higher than the guidance of a year ago.

You point out correctly that only 60% of the portfolio is included in the guidance that gets to 3% to 4%. So, those are a couple comments. Let me turn it over to Tim because I think he wants to maybe make a comment about the other 40% that's not in same property that eventually this year -- we wait -- on the first anniversary of our acquisitions that's when we place our properties into same property performance.

We're pretty disciplined on that. We don't deviate from that pattern. Let me have Tim pick up on a couple comments related to both that dynamic and also maybe the Life Science technology space.

Paul, to answer your question, for what's not included in our same store, you've got the HCR ManorCare portfolio that is projected to grow at 3.5%. So, that's within our range. And then, the RIDEA assets which would be at the midpoint of that range or at the higher end of the range. And, that would get you the whole pie.

With regards to our Life Science portfolio, the growth is really a combination of contractual rent steps. And then, the increased rents that we've seen down in our Mountain View and Redwood City areas. If you take those two combined, they're about equally weighted, that would get you to the 5%.

Great, thanks.

Jeff Theiler, Green Street Advisors.

Good morning. You've had a few months now to see how HCR ManorCare's handling these Medicare cuts. Any update on their mitigation efforts and what kind of mitigation results you'll expect to see in the future?

I think Paul took you through the fourth quarter results which is the first quarter, Jeff, of non-RUGS IV. I would add to that, if you want some color commentary, I would say that HCR feels they've made the transition to a new cost structure well. In part, that involved cost reductions.

But, perhaps more importantly, the real focus was on maintaining and increasing the capability to care for complex patients. HCR has the largest share of that market. And, I suspect you will see them build share here in the next 12 to 24 months. So, that -- the pieces are in place there.

Again, if you think back to the fact that HCR has been proven over many cycles to be the low cost provider for a wide variety of post acute care patients requiring short-term rehabilitation, that augers well for that platform. And, by extension our real estate portfolio. And, by extension our investment in OpCo.

Okay, great. And, just quickly, you sold a few senior housing facilities this quarter. Any additional information on why that was, just general pruning? Do you expect to do any additional pruning of the portfolio going forward?

Those two particular assets were turnaround assets that we moved to a new operator several years ago, gave them a way out of the money purchase option that they ultimately executed. The other asset was a $1.5 million asset as part of the Horizon Bay transition that we decided to sell jointly.

Okay, great. Thank you.

Ross Nussbaum, UBS.

Hey, guys, good morning. Here with Derek Bower. Jay, I just want to focus in on the same store NOI growth, specifically or the Life Science and the medical office. The guidance ranges you gave of, I guess, 4.5% to 5.5% for the Life Science is a pretty material pickup from the performance over the last year.

Can you help me understand what's the primary driver behind that level of growth? Is it occupancy? Is it you got some new higher lease rates coming in? What's driving that?

I think the most important thing is we finally got some top notch leadership in our Life Science space. But, other than that I'll turn it over to Tim.

Ross, it's really two things that make up Life Science. As I just said, it's the contractual rent steps associated with those leases. That's about half of it. And, the other half is the increased rents related to the Southern part of the peninsula in San Francisco, really our Mountain View campus, with the leases we executed with LinkedIn and Google.

On the MOB side, there's a little bit of a pickup there.

On the MOB side it's mainly contractual rent steps.

Ross, just again --

And, slightly higher occupancy.

Ross, at 30,000 feet from the Life Science standpoint, if you were to go back and take a look at our same property performance guidance for the Life Science sector a year ago on this call, we projected mark-to-market declines of, if my recollection is correct, somewhere in the 15% to 20% down. Where we ended up for the year was in fact up --

30%.

-- 30%, so, that's another way of looking at the swing there, just during 2011, Ross.

While we're on that topic, can we talk a little bit about the page nine in the supplemental, you've got quite a few Life Science and MOB assets under redevelopment. Can you give us a sense of where you are in terms of leasing or occupancy on, let's call it, what, nearly $250 million worth of investments there, give or take?

Yes. Why don't we -- you want to start, Tim, with the Life Science?

Yes. Looking at page -- the top of page nine, Ross, the Mountain View asset is 100% pre-leased to LinkedIn. The Modular Labs asset is about 28%. The Soledad asset is 100%. The 1030 Mass Avenue is 10%. The Durham Research Lab is 100%.

The Knoxville asset's about 22%. And then, the remaining MOB asset, there's about four there, those don't have any pre-leasing. And then, the Fresno, that's on the bottom, is 100% pre-leased. So, a fair amount of pre-leasing on those assets.

Any prospects down in Redwood City at the Saginaw asset that's already in service?

Yes, there's -- we continue to talk to tenants there. We've actually had a pickup in occupancy on that campus. We had a medical device tenant move into one of the three buildings here in the last couple of quarters. And, continue to talk to people about the 500 and 600 Saginaw building both on a medical device side and Life Science side.

It's possible, Ross, you'll see some people displaced out of the Southern part of our corridor given the demand from the technology and social media tenants. And, have those people migrate up to our Redwood City campus. So, it's got kind of a collateral benefit for us.

Do you have an update on what expected yields you're looking at on the -- let's say the $270 million on the top of that page, for development and redevelopment?

Incremental, probably in the low teens.

Okay, all right. That's it for me. I would just throw in it would be, I think, very helpful going forward if we can get those occupancy numbers. And, even, perhaps, date for when the occupancy is going to be commencing in those assets so we can perhaps model those in from a timing perspective a little better.

Got you. Thank you for the comment.

Thanks, guys.

Just as a follow-up, Ross, the pre-leasing percentages on the pipeline as a whole is about a third.

Quentin Velleley, Citi.

Hi, there, I'm here with Michael Bilerman as well. Just in terms of the potential acquisition pipeline, I know in the past you've given some goal posts or given a size or a potential size of what the pipeline might be. Could you give us a sense of what that might be?

I've never done that, Quentin. I've talked about the macro healthcare real estate sector in its entirety. But, I've never talked about, or quantified, our pipeline or given any acquisition specific targets.

Perhaps if you could give it for what the macro is or the entire healthcare real estate pipeline.

I think it's pretty substantial. I'd leave it at that.

Okay.

Jay, if I remember, I think you did when you gave [reyestac], I think it was two Januaries ago. You talked about the pipeline being bigger than the time prior to CNL. And, this was prior to doing HCR ManorCare so that would have implied a pipeline greater than $6 billion. At that point in time.

I may have given a relative comparison but never a specific dollar amount nor do I intend to do that this morning.

And then, if you look across your five sectors, you've spoken about -- it sounds like there's quite a bit of potential deal activity across those five sectors. But, if you look at the risk adjusted, or the potential risk adjusted returns, from each of those sectors, where are you seeing the best opportunities at the moment?

We've actually -- again, you've got to put this in the context of our five by five model. So, within a sector we can play a sector multiple ways but we've got interesting opportunities in each of our five property sectors. As I mentioned in response to Adam's question.

Jay, how do you think about -- and, you've never been shy to sell assets when you thought the opportunity was right and harvest some gains. Where do you see -- and, also in your comments about the best -- the weakest opportunity to buy is usually when the financing market comes back and that's what makes the acquisition market more difficult today. Are you more inclined to try to trim assets or pieces of the portfolio, I don't know if you look at selling Mountain View given what we have now with Google and LinkedIn, or are there pieces?

I think that's a smart observation. I'll say that. I'll also say that he we have absolutely zero in the way of dispositions included in our 2012 guidance. But, we're economic animals so we'll see.

I mean, it's a higher cost of capital to sell an asset relative to what's being implied by your equity or your debt. And, so I understand that that's --

Depends on what the valuation is on what you sell.

I mean, do you want to aggressively put things in the market in this environment or --? I recognize nothing's in guidance, but --.

Again, I think it's a very smart observation. We have no dispositions included in our 2012 guidance. And, we look at things both on the acquisition side and the disposition side based on our weighted average cost to capital and what we can do to create incremental shareholder value. We've got a track record of that and then if something comes out of that we will certainly keep you guys posted.

Okay. Thank you.

James Milam, Sandler O'Neill.

Hey, good morning, guys. I know Obama's budget was out this week and there are a couple of proposals in there that, obviously, I don't think the budget is likely to pass, but there are a couple proposals in there that keep coming up. I just wonder if you could give us some comments on first, what the potential impact of the bad debt reimbursement cut could be, and then second, if you think there's any possibility that down the road CMS actually is able to start targeting Medicare margins?

Look, I mean, I think I feel the same way that I did back in October, November when I think I got about 10 questions a day as to what was going to happen with the super committee. So, we're not in the business of handicapping what's going to come out of Washington given the partisan politics that are being played there.

But, I will say, again, as I made the comment a couple minutes ago, when I read a lot of sell side pieces in the last week or two that are unusually positive about maybe an easing government reimbursement environment or, I think, one was titled Storm Clouds Parting. I would say that this is going to continue to be a challenging space. I'd say that.

But, I think you've got to look at not just the potential challenges but there's a potential for some opportunities to come out of that, particularly for HCR. I think the one opportunity would be if CMS moves to a site neutral reimbursement protocol for patients that had a surgical procedure in an acute care hospital. And, make that discharge, whether it's to a rehabilitation property or an LTAC or a post acute property.

If they make that site neutral in terms of the reimbursement which is not the case today, that obviously, given HCR's low cost model, that would actually be a quite interesting development. So, again, we don't speculate as to what's going to happen. We're taking it all in and we will respond accordingly through our operating partners which in this case in the post acute space is HCR.

I guess just a follow-up, do you have any sense from HCR ManorCare what the impact on a coverage basis could be if the bad debt reimbursement goes from say 70% to 25%.

We have not asked them that specific question, no.

Okay. Thanks a lot, guys. Appreciate it.

Capital markets.

Hey, good morning, folks. Can you hear me?

We can.

Okay. Tim, did you say for -- same store run rate for the RIDEA was in the range of 4%? Is that what you said in your comments, responding to a question?

I said that the -- of the assets, actually, it wasn't specific to RIDEA, the assets that are not in our same store portfolio are within the range of our 3% to 4%.

Okay. So, could you have any commentary about how RIDEA's performing relative to your expectations? And, if you might reconsider your more conservative view on that structure relative to the portfolio as a whole?

I'm not sure I understand. You want us to -- we would reconsider our conservative --?

You've been conservative about using the structure. You've been the one outlier in terms of your hesitancy to use the RIDEA structure. I'm just wondering how it's doing relative to expectations and how that might have changed your view about the structure for HCP?

I don't think we've been he's taken hesitant to use the structure. I think we've been unwilling to move forward unless we have an appropriate risk adjusted return which, in our view, requires a premium to a triple net execution and not a discounted return to a triple net execution. That's our only hesitancy.

We found, with all the transactions we looked at, we found one of those that cleared that hurdle internally and that was a RIDEA one. It's early days. You've only got four months of actual operating results in there so far. And, ourselves and Brookdale are working through that.

And, we're pleased with the results so far. But, it's early days. We're repositioning some of those assets. We're putting some CapEx in to change a little bit of the profile for some of those assets so we feel very good about that.

Okay. Next question is on the HCR portfolio and specifically the cash flow coverage. Understanding you have your guarantee in place but can you give some commentary about where that is and where it might go based on the future?

Well, Paul took you through the -- we report our results one quarter in arears. So, Paul took you through a fair amount of detail which is also included in the supplemental for the 12 month period ended 9/30, September 30. And then, he also gave you the -- both the fourth quarter coverage ratio as well as what that would have meant for the entire calendar year. So, I think we've given you everything that we are in a position to provide.

Okay. I'm sorry, I might have missed that detail. Now, on to the Life Science portfolio and specifically what some might view as the blurring lines between the office business and the Life Science business. You've obviously made some good deals with LinkedIn and Google, but I'm just curious as what's creating that.

Is it a lack of opportunity or is it just Google and LinkedIn, these leasing opportunities are coming in and they're just too good to pass up? Just if you can give some [topsalay] view about the incorporation of more conventional office tenants into that portfolio.

Yes, well let me -- I'll have the specifics answered by Tim or Paul. But, I'd take you back, Rich, to the call we made when we announced the Slaw acquisition back in the middle of 2007. One of my first comments was that if you take a look at that Bay area portfolio, it is book-ended by Stanford University and Palo Alto to the south of our real estate portfolio there.

Which obviously includes -- didn't include then, includes now more of a technology focused component of tenancy. And then, to the north our Genentech campus up in south San Francisco. And, you've got a lot of real estate in between. That's a good location.

That hasn't changed at all. I think if anything, we're seeing the benefit of that. But, in terms of the specifics of the leases and stuff like that, Tim, do you want to take that?

Yes. Rich, it was just a -- we just evaluated the rent relative to the TI investment and given where office rents have gone, they're a much higher return for us. Those buildings can support both Life Science or technology. So, we just evaluate those -- that demand as it comes in.

And, this superior financial outcome for us was to continue to expand LinkedIn and Google on those campuses. Now, we do have a couple of remaining Life Science tenants on those campuses. So, like I say, we'll continue to evaluate the rent relative to the incremental TI investment and choose the best financial outcome.

Would you say the presence of Google and LinkedIn creates a draw that you might see more conventional office users versus Life Science users?

Sure, but l wouldn't limit your thought process to Google and LinkedIn. I'd add Facebook to that and any one of a number of other social media companies right now. It's a very hot space.

And, Rich, that rent dynamic has moved up substantially over the past 12 to 18 months from an office standpoint versus the lab space.

What do you mean it's moved up?

If you look back 18 months ago pure office space in that particular market was lower than where Life Science rents were.

Understood. And then, last from me. The FAD guidance implies, if I'm doing this right, about $245 million or $250 million of absolute dollars of either non-cash or CapEx.

And, I'm coming about $30 million or $40 million short in terms of the numbers that you provided. I have straight line CapEx, DFL income related to the capital lease accounting and other issues, and above and below market rents. What's in that other FAD adjustment line that you typically provide in your disclosure?

That other FAD adjustment line, that's the recharacterization of part of the DFL, Rich, from our DFL line item down to JV and other income because we have a minority ownership interest in HCR ManorCare OpCo.

Okay, so, could that be as big as $30 million or so for 2012?

It's actually $59 million.

I think Tim took you through -- Tim took us through in his formal remarks, Rich.

I'd be happy, Rich, to go through that in detail with you offline.

I'll do that. Thanks, very much guys.

Rob Mains, Morgan Keegan.

Thanks, guess still good morning out there. Just a couple odds and ends here. Tim, the $4.7 million mark-to-market on marketable securities, could you explain what that was?

Yes, that was our ownership in Brookdale stock.

Oh, okay.

The accounting regs there require you to take that at the quarter end price which was $17.40, Rob, which obviously the stock's higher today. But, that's what that is all about.

Okay, remind me then, is the rule then that you book -- you take -- you mark losses but you don't mark gains or am I wrong about that?

Until you actually realize the gain.

Okay, all right. Jay, you talked about the asset types that look good right now. Given where you see strategically the healthcare delivery system moving towards, are there any asset types that you're not interested? I think in the past you talked about for instance specialty hospitals.

Yes, specialty hospitals, LTACs. To be honest, acute care hospitals, but for a different reason. We're not concerned that acute care hospitals are going to vanish in the next round of reimbursement changes. But, we do believe that space is very, very operational intense. And, likely to become more operational intense, whether it's their cost structures with labor and union activity.

And then, the constant demand for more technology and then you've got the reimbursement environment. You've got the managed care providers who have become quite substantial in size. So, again, this is -- I preface everything by when people ask us about what sectors we're looking at, within the context of our five by five model.

I think we're more likely to do something incremental in the hospital space if that was more of a debt product as opposed to equity ownership. We love what we've got in acute care hospitals. But, I don't think you should expect to see us add materially to that from a standpoint of an equity ownership. So, that's how I'd answer some of those thoughts, Rob.

Great, and then, that's actually good lead in to my next question which is given the increase in complexity that acute care hospitals are facing and some of the ways that they're reacting to ACAs -- or ACOs and the like, I think this question comes up all the time. Starting to shake loose any of the Medical Office Buildings that they own, that arguably they shouldn't? Are you seeing any activity towards that?

That's the great hope, right, that the tax exempt markets continue to be challenged and the operating challenges in that space, that's the great hope. I think you've got a barbell effect going on there, not dissimilar to some of the other sectors which quite frankly you could include healthcare REITs as well. The strong are getting stronger and the folks that aren't so strong are likely to go away.

I thought I saw yesterday where HCA sold some new debt at a coupon that started with a 5%. So, they are certainly -- have access to very, very attractive cost to capital. So, I think, to date, you've seen one or two instances of a healthcare system monetizing some of its MOBs with an eye towards reinvesting those proceeds in their physical plant.

I would say, for the most part, that's been more of a defensive move by those hospital systems as opposed to an offensive, kind of a strategic call to say hey we're getting out of the bricks and mortars of MOBs. But, we'll see what happens here over the next year or two.

So, clearly this is not a trend.

At this point, I think, it is not a trend. All the elements, in terms of that it should become a trend, are certainly -- have been in place and remain in place today. But, you haven't seen much in the way of actual transaction volume to support the thought process.

Okay. Fair enough. That's all I had. Thank you.

Todd Stender, Wells Fargo Securities.

Hi, thanks. My question's related to Life Science, so probably directed to John. Just looking at the portfolio, how's it going to look five years from now? Is this, in general, a property type that offers good visibility on space demand? And, just geographically are we going to start to see the portfolio move away from south San Francisco and Torrey Pines and move towards markets like Utah?

Oh, gosh, no. No, I think if you think about Life Science, you want to be in the four, maybe five, geographic markets that are the largest beneficiaries of the NIH grants from the government. So, in ranked order those are number one, the Bay area, number two, Boston Cambridge, and probably number three, might be tied for the Maryland, Baltimore corridor and San Diego, and then probably five would be Seattle.

So, I think to the extent you see us do Life Science, it will likely be in those markets. So, that's how I would answer the geographic part of your question, Todd. With respect to what this portfolio looks like, I would say in addition to -- this is the -- of our five property sectors, this is the property sector that has the preponderance of land for future development.

So -- and we've got some of that in Northern California in the Bay area at the Cove which is in south San Francisco and our Sierra Point parcel which is in Brisbane which is right between south San Francisco and downtown San Francisco. And then, you've got some down in the San Diego area, most notably in Carlsbad and Poway. So, my guess is you'll see some activity on those parcels which could look like build-to-suit with pre-leasing commitments. Or could take other forms of monetization as well.

Thanks, Jay. And, just what are your tenants saying? Are the tenants, in general, willing to give out where they want to be three to five years from now? And, is that -- how does that relate to what they were saying, say, three to four years ago?

It really hasn't changed in the Life Science. That ranking that I just gave you, one through five, the Bay area, Boston Cambridge, Baltimore, Maryland, San Diego, Seattle, that would have been -- those who have been the same five markets five years ago. They might have been ranked a little differently.

I think San Diego five years ago might have been second and Boston Cambridge third. But, that really hasn't changed an awful lot. I don't know, Tim, if you want to add something.

Yes, Todd, I would guide you towards the investment that continues to happen in that space. There continues to be over the last three years a record amount of investment into the Life Science space, in the $65 billion range, primarily partnering with larger pharma with some of our Life Science tenants. So, the investment continues to be very robust in that sector.

Okay. Thank you.

Tayo Okusanya, Jeffries & Company.

Yes, good afternoon, everyone. Jay, I realize that most of your leases are triple net. But, just curious what you were hearing at this point about the potential for Prop 13 in California to start to exclude commercial real estate, just given you guys own so much commercial real estate in that state?

We've got -- I think I probably have the same answer Tayo that I gave to the request to have me comment on what might be coming out of either healthcare reform or the President's budget which was announced last night. We take that all in. We look at it. But, it remains to be seen what, if any of that, is going to end up being reality.

Tayo, it shouldn't impact any of our existing buildings. It's going to be a real factor on the acquisition of new buildings if for whatever reason your valuations have to go up. And, it's going to impact valuations. At that point in time we'll have to just assess it.

Okay. Fair enough. Thank you.

Thanks, Tayo.

Michael Mueller, JPMorgan.

Just have a quick follow-up on the senior housing developments. Was wondering what drove the decision to do construction loans as opposed to developing on-balance sheet and just leasing to Brookdale?

Could you say that again?

Yes. For the senior housing developments, what drove the decision to do -- to structure these as construction loans as opposed to developing on-balance sheet and ultimately doing a sale leaseback?

You currently have the income associated with the loans as opposed to the drag from development.

Okay. And how long will the loans be outstanding?

It's five year term.

Five year. Okay. Okay. Great. Thank you.

Nicholas Yuko, Macquarie.

Hi, thanks. Just going back to the development loan business, did you say it was $100 million is the commitment outstanding right now?

Is that the Nick Yuko?

That's me. Live and direct.

The Nick Yuko that is the author of the proprietary Macquarie sniff test? That Nick Yuko?

That's right.

You want to take the development question?

Yes, we've got $100 million commitment outstanding right now.

Okay. And, do you have the -- can you give the total unit side that?

I don't have that total number.

Five separate communities.

Five projects averaging in size between 75 and 100 units. So, probably close to 600 or 650 units -- or 500 units.

And, would these all fall into the Brookdale program ax process?

Well, they're all going to be managed by Brookdale. It's probably premature yet to see --

Remember, we're debt in this. There's a borrower here. So, Brookdale is managing and to the extent we exercise purchase options upon completion, then we would look at what type of structure we might have at that point in time. But, right now we're just purely a debt investor.

Okay. But, you said that there was a purchase option, right?

Yes.

That you guys have. Can you just talk when these facilities might get delivered and a little bit more about how the purchase option might work?

It's about an 18 month construction process. We have the ability to purchase upon stabilization or at the outset after the fourth anniversary of start of the project. And, we also have a first right of refusal if they look to sell the properties. So, we've kind of covered ourselves on both sides.

Okay, so presumably this could be used, this whole program could be used as a way to perhaps expand a RIDEA platform with Brookdale in the future?

Sure. I mean, we would look at that upon stabilization. And, we would make the same -- the same way we look at all these opportunities, triple net versus RIDEA, if there's a sufficient premium for a RIDEA structure we would certainly give that serious consideration.

Okay. Thanks, guys.

There are no further questions in queue. I would now like to turn the call back over to Jay Flaherty, Chairman and CEO.

Thanks, Anita. Thank you everyone. Happy Valentine's Day and we look forward to seeing you soon. Take care.

Thank you for your participation. This does conclude today's conference call. You maw now disconnect.