Healthpeak Properties Inc (PEAK) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first-quarter 2012 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.

(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. And welcome to HCP's 2012 first-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 our first-quarter release of this morning and for that I turn the call over to Tim.

Thank you, Jay. Let me start with our first-quarter results. Our real estate portfolio performance exceeded plan, generating same-property cash NOI growth of 4.7%, compared to the first quarter of 2011. The results were primarily driven by contractual rent increases and a one-time rent payment of $4 million from Google. Paul will review our performance by segment in a few minutes. We reported FFO of $0.64 per share, which included a nonrecurring charge of $0.03 per share in conjunction with the redemption of all outstanding preferred stock with a weighted average dividend yield of 7.15%. The redemption charge pertained to the non-cash write-off of the original issuance cost. Excluding this charge, FFO as adjusted for the quarter was $0.67 per share, and FAD was $0.54 per share, representing year-over-year increases of 20% and 10% respectively, primarily driven by last year's HCR ManorCare acquisition and strong 2012 cash same-property performance. During the quarter, we made investments of $40 million to fund development in other capital projects and sold one medical office building for $7 million, recognizing a gain of $3 million.

Turning now to financing activities and balance sheet. On the capital markets front we were active during the first quarter and raised $809 million, consisting of $450 million of seven-year senior unsecured notes with a coupon of 3.75%, and $359 million of common stock at a price of $39.93 per share. Proceeds from these offerings were primarily used to clear out the revolver balance at year end, and redeem all outstanding preferred stock at par. On April 23 we retired our Series E and Series F preferred stock for a total of $296 million. Going forward, this equity for preferred swap will be accretive to FAD in 2012 and further strengthens our fixed-charge coverage ratio. In addition, during the quarter we improved the terms of our revolving credit facility that included lowering the funded interest cost by 55 basis points and extending the maturity one additional year to March 2016. Our undrawn revolver provides up to $1.5 billion of immediate liquidity at a current rate of LIBOR plus 1.075%. Pro forma for the cash used to redeem the $296 million of preferred stock in April, we ended the quarter with $50 million of unrestricted cash. Our remaining 2012 debt maturities total $317 million, of which $250 million relates to the 6.45% senior unsecured notes maturing next month.

Finally, updates to our 2012 guidance. Based on stronger than forecasted performance to date, we are raising our full-year cash same-property growth to a range of 3.25% to 4.25%, up 25 basis points from our February guidance. We are updating our FFO guidance to range from $2.68 to $2.74 per share, which is $0.02 lower than our last guidance. This change is primarily due to the $0.03 first-quarter preferred stock redemption charge mentioned earlier, less an additional $0.01 for several small items, offset by a positive $0.02 from an insurance recovery of $7 million received in the second quarter for past G&A expenses and increased same-property performance. Excluding the preferred stock redemption charge, we are raising our 2012 FFO as adjusted to range from $2.71 to $2.77 per share, which is $0.01 higher than our previous FFO guidance. We are also raising our 2012 FAD guidance to a range of $2.16 to $2.22 per share, up $0.02 from our last guidance. The increase is driven by the same $0.01 net benefit mentioned in FFO as adjusted and a $0.01 accretive impact from redeeming the preferred stock with equity and the improved revolver pricing.

Finally, a quick note on guidance regarding comparability for our next quarter's results. Recall that we recognized a gain of $35 million or $0.09 per share from our Genesis debt investments in the second quarter of 2011, which will result in some lumpiness in our year-over-year earnings comparison next quarter. Excluding the $0.09 Genesis gain last year, our updated 2012 FFO as adjusted and FAD guidance at the midpoint are projected to grow by 5.4% and 6.8% respectively. With that, I'll now turn the call over to Paul. Paul.

Thanks, Tim. Now let me review HCP's first-quarter portfolio performance.

Senior Housing. Occupancy in our same-property Senior Housing platform was 85.7%, a 20 basis point sequential increase over the prior quarter and a 60 basis point decrease over the prior year. Same-store cash flow coverage for the portfolio declined 3 basis points to 1.15 times, driven by outsized fixed rent bumps on our transitioned assets. Current quarter year-over-year same-property cash NOI growth for the Senior Housing platform was up 1.9%. Growth was driven by normal rent steps including higher rents for assets transitioned to new operators, offset by a decline in working capital recoveries, collected from transitioned assets. Net of the effects of working capital, NOI increased 3.5%. In our RIDEA portfolio, occupancy decreased 100 basis points sequentially to 88.5%. Rates increased 4% over the first quarter 2011, and margins remained strong at 41% with a portfolio performing at budget.

Post-Acute Skilled Nursing. Coverages in our Post-Acute Skilled Nursing portfolio metrics now reflect one quarter of lower reimbursement rates under CMS's 2012 final rule for therapy. HCR's fixed-charge coverage ratio was 1.53 times, a 13 basis point decrease for the trailing 12-month period ended December 31, 2011. Adjusting for nonrecurring expenses in the fourth quarter 2011, the fixed-charge coverage for the same period was 1.57 times. Preliminary results for the first quarter 2012 are consistent with the fourth quarter 2011. Cash flow coverage in our legacy portfolio was 1.64 times, a 20 basis point decrease over the prior quarter and a 3 basis point increase over the prior year. Year-over-year same-property cash NOI for the first quarter increased 3.3%, driven by normal rent steps.

Hospitals. Same-property cash flow coverage increased 23 basis points to 4.52 times, driven by strong fourth-quarter performance at our Medical City, Dallas, and Hoag Irvine hospitals. Year-over-year same property cash NOI for the first quarter increased 3.8%. In March 2012, HCP reached an agreement with the principles of [Delphus] and Cirrus Health regarding guarantor collateral securing the Delphus loan. In the aggregate, HCP received $6.5 million in cash and other consideration which was applied to the carrying value of the loan, reducing the carrying value from $75.7 million to $69.2 million. We continue to work with the borrower towards the orderly liquidation of the primary collateral. Cirrus is in negotiations to sell three of its performing hospitals, with projected net sales proceeds in excess of HCP's current carrying value of the loan.

Medical Office Buildings. Same-property cash NOI for the first quarter was up 3%. The growth was a result of normal rent steps coupled with expense controls resulting in over $500,000 of operating expense savings versus the first quarter of 2011. Our MOB occupancy for the first quarter decreased 30 basis points to 91.2%, leasing activity improved in Minnesota, Virginia, and Kentucky. During the quarter, tenants representing 440,000 square feet took occupancy of which 376,000 square feet related to previously occupied space. Our year-to-date average retention rate was 81.4%. Renewals for the quarter occurred at 0.8% higher mark-to-market rents with the average term for new and renewal leases at 58 months. We have 1.39 million square feet of scheduled expirations for the balance of 2012 including 235,000 square feet of month-to-month leases. Our leasing pipeline includes new and renewal prospects totals 1.12 million square feet addressing 81% of our remaining 2012 rollover exposure. During the quarter, we executed leases totaling 68,000 square feet at our Knoxville and Alaska redevelopment projects, bringing the total leased occupancy to 60% for both assets. On February 29 we sold our Southwest medical MOB in St. Louis for $7 million, at a sub-6% cap rate generating a gain of $3 million.

Life Science. Occupancy for our Life Science portfolio decreased 80 basis points to 89.1%. The decrease was due to the completion of two redevelopment projects that were placed into the operating portfolio. Same-property cash NOI was up 10.9% in the first quarter. This increase was driven by a nonrecurring rent payment of $4 million associated with Google's lease amendment as well as contractual rent increases. Absent the one-time Google rent payment, NOI for the quarter was up 3.5%. As mentioned in our last call, 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 included an upfront cash payment of $4 million, and an extension of the term for 124,000 square feet of existing space to 2022 to be coterminous with the expansion. Google's total lease commitment is 290,000 square feet, or 37% of our 100% Mountain View campus. HCP completed the redevelopment of a 97,000 square foot Life Science campus in south San Francisco which is 28% pre-leased to a new portfolio tenant, Counsyl, a genetic testing company. Additionally, we completed the conversion of our 53,000 square foot project in San Diego from office to lab for Cibus, a bioagricultural company who now leases 100% of the project.

These completions reduced our Life Science development pipeline to two redevelopment projects and one development project, totaling 198,000 square feet. The total funding requirement for the development pipeline are $32 million. For the quarter, we completed 289,000 square feet of leasing with a retention rate of 82.3% on expiring space. The Life Science portfolio has only 127,000 square feet of scheduled expirations for the balance of 2012, including approximately 29,000 square feet of month-to-month leases. To address these expirations we have over 300,000 square feet of activity on this space. We are beginning to see supply inventories in the Bay Area and San Diego decrease, driven largely by improved office fundamentals as well as an increase in clean tech and traditional R&D requirements. We continue to focus on high-quality prospects and believe our campuses are well-located to capture opportunities in both current vacancies and near-term expirations.

Sustainability. As a result of HCP's sustainability initiatives, utility costs continue to yield positive economic results. On a same-property basis, utility expenses were down $460,000 versus the first quarter of 2011. In addition, we received another 10 Energy Star labels during the quarter, 6 of which were in our MOB portfolio and 4 in our Life Science portfolio. This brings HCP's total Energy Star labels to 68 across MOB, Life Science, and Senior Housing portfolios. With that, I'd like to turn it over to Jay.

Thanks, Paul. We are in an exceptionally nice spot right now. First, our portfolio continues to outperform, allowing us to raise our same-property performance and FAD guidance for 2012 after just one quarter of results for the year. Secondly, with the very active quarter of financing, our balance sheet metrics are their strongest in history. Third, our sustainability initiatives continue to produce successful outcomes. And finally, our five by five business model is sourcing a significant level of high-quality acquisition opportunities. With that summary, Paul, Tim, and I are delighted to take your questions. Anita?

(Operator Instructions)

Adam Feinstein, Barclays Capital.

Bryan Sekino here also. Jay, maybe just a starting point. Maybe talk a little about the deal environment and clearly you guys have a very strong balance sheet and lot of opportunities for deals but just curious to get your thoughts in terms of just the types of deals that you're seeing and I guess with the financing markets being very strong, I guess just what are the implications and so just -- I guess a bigger picture question but just curious in terms of what your updated thoughts are about the deal environment.

That's great. I would say we're in a funny period right now and probably it's most analogous to the six months that existed prior to the passage of healthcare reform. And Adam and Bryan, if you recall, for those six months the fourth quarter of 2009 and the first quarter of 2010 we saw a complete absence of acquisition activity. And then with the March 2010 passage of healthcare reform, it was as if -- almost as if a whistle blew to start the football game. What a game it was, with the ensuing 12 months of transaction volumes exceeding the prior three years combined.

Fast forward to now. You have the likely June 2012 Supreme Court ruling on the validity of the healthcare reform bill. You've got sequestration at year end which is likely to give rise to the mother of all lame duck sessions. You've got pending CMS reimbursement rulings. You've got the November presidential election. And if that's not enough, you've got the European economy, largely in a recession at this point, continued Middle East tension, and a subpar US economic recovery. In anticipation of this very significant ramp in transaction activity, I don't think there's any real mystery as to what we've been doing. We've simplified and strengthened our balance sheet. We've repriced our $1.5 billion revolver on very favorable terms. We've banked some excess cash. And we made sure that for our existing portfolio, all the trains are running on time so that we have minimal distractions going forward. So that's how I'd -- that's the observation I think I'd make, Adam.

Okay. That's very helpful. Maybe one quick follow-up question.

Jay, just if I could follow up on the acquisitions or investments that you guys are seeing in your five by five model, maybe if you could provide us with some additional color on the types of investments that you're seeing, be it similar loan-to-own strategies that you've done in the past or some loans for CapEx that you've done with Brookdale, if you could provide us any color there, that would be helpful.

Again, I think if you -- understanding our five by five model, the way you guys do, which is to say that while there may be 25 hypothetical areas for us to focus on, there really are less than half that. The interesting thing right now is that we've got very significant dialogue across each of those 10 or 11 target areas. So it certainly includes the ones that you indicated but it's broad-based and my experience and Paul's experience, the best leading indicator, if you will, is to -- what acquisition volumes you end up closing at a given point in time is absolutely the quality and the intensity and the breadth of the dialogue and that's quite strong right now.

All right. Very good. We'll get back in the queue here. Thank you, Jay.

Derek Bower, UBS.

Just a follow-up on the acquisition commentary. Just in light of the prior comments, just given that you've been pretty quiet on the deal front over the last few quarters, especially compared to your peers, could you just comment if that's more of a reflection on your view of private market valuations or if perhaps there's more larger deals on the table that may be occupying your investment team's time, just if you could comment on that.

I'd just reiterate, Derek, my earlier comment, that within the context of our five by five model we've got extremely active dialogue right now.

Okay. Fair enough. Just on the RIDEA operating margins, the 41%, is there a seasonal benefit there in the 1Q that we should be thinking about and how do you expect that to trend for the remainder of the year?

We probably expect it to trend over the course of the year up a little bit but probably no seasonality in that particular number.

Okay. Got it.

If you go back -- Derek, if you go back to the high water mark of that portfolio, which I guess would have been about three years ago, I think at one point those margins touched 42%. So again, this is -- we're pleased with -- we're early days still. We've only got I guess two quarters in the books, but we're pleased with the performance of that portfolio, with what Brookdale's doing there and very much validates our approach on that particular portfolio to use -- to move away from a triple net structure and use RIDEA there.

Right. Got it. Just lastly, the 4.7% cash NOI growth, what would that number be excluding the Google lease?

Excluding the Google lease for Life Science, that would be in the 3.5% range.

Do you know what it would be for the entire portfolio in.

Actually, it would be -- I'm sorry, for Life Science it would be closer to 3%. For the entire portfolio, on a normalized basis, it would be around 3%.

3%. Got it, okay. Great. Thank you.

[Derrel Giloti], Morgan Stanley.

I wanted to get some clarity on Paul's comment regarding the 1Q '12 HCR ManorCare fixed coverage ratio. Paul mentioned that the results were consistent with 4Q. Does this mean that the coverage ratios for 1Q '12 are expected to be 1.57 times?

No, the 1.57 Derrel, is a 12 month. We had disclosed on the -- that's a 12 month.

Yes.

Fourth quarter was the first quarter of the roll-down and the RUGs-IV benefit. Paul said the first quarter of 2012 which is actually the second quarter of activity without the RUGs-IV benefit is consistent with the fourth quarter.

Okay. But no -- I guess there's no coverage ratio that you announced as of now for that?

Right, we -- we just said it's consistent, so we typically show our quarterly coverages in our triple net lease portfolio on a trailing quarter basis.

Okay. The other question I have is given that the cuts have been in place for about six months now, do you feel comfortable with the post cut 1.5 times fixed-charge coverage ratio that you suggested for HCR ManorCare previously?

I suggested for it. We are very, very comfortable with how HCR has made the transition to the new cost environment. In part, they've done it by cost reductions but their real focus has been maintaining and increasing their capability to care for complex patients and they've got the largest share of that resident population and we expect that share will grow here over the next 12 to 18 months.

All right. Thank you.

James Milam, Sandler O'Neill.

Just wanted to follow up a little bit more on the acquisitions. I guess two things. One bigger picture and I know, Jay, you've touched on this a couple times but are there specific portfolios or assets that you guys have your eye on in case there is maybe a disruption of the capital markets given the risk that you presented? Second, can you just talk a little about the buyer of the St. Louis MOB and what type of institution that was and if you think there are more buyers out there willing to pay what seems like low yields to us just given I guess the search for yield in the environment that's going on right now?

Yes, sure. Let me take the second question first. The buyer of that MOB was actually the hospital system. So as is often the case, we've talked about this in the past with the advent of increasing technology, medical office buildings which maybe five, six, seven, eight years ago were primarily used for office visits. With the technology advances, you're now seeing noninvasive procedures that don't require a stay in the hospital moving into the Medical Office Building portfolio. So this hospital had a strategic interest in acquiring that and that's what happened. So that's -- I think that's one of the benefits of having on-campus Medical Office Buildings, quite frankly.

With respect to your first question, in terms of the acquisition activity, again, the dialogue we have within our five by five model now is -- relates to very, very specific transaction opportunities and so they certainly include some of the ones that you've alluded to.

Okay. Great. Thanks. And then just a quick one on the ManorCare, HCR ManorCare OpCo coverage, so it sounds like some of the reason why that fell a little bit more relative to -- or I guess for one-time items in the quarter, are those things like severance costs and just things that had to do with dealing with the impact of the Medicare cuts? Is that the right way to think about that?

The fourth quarter of 2012 was the first quarter of a lot of the reductions in cost structure they put in place but you've also got some normal -- at least normal for HCR fourth quarter true-up things relating to insurance reserves and things like that.

Okay. And would you guys be willing to provide an annualized number off that fourth-quarter result or do we need to wait and see how the full-year impact comes in?

We can provide anything you want. I'm not sure that would be terribly relevant because I think you'll see HCR performance continue to improve as they fully have now transitioned to the new environment. And so we can do anything you want, you can do anything you want with numbers but I think their core business platform is performing nicely but more importantly from our standpoint, it's gaining momentum.

Okay. Great. Thanks, guys.

Jeff Theiler, Green Street Advisors.

I have a question relating to Senior Housing. One of the more successful areas of Senior Housing over the past couple years has been memory care. But when I talk to people in the industry at conferences and so forth, seems like there's a lot of interest about development and redevelopment of assisted living facilities into more memory care type units. I was curious as to what your thoughts were on the memory care space in particular, and then what you're seeing in terms of overall development activity in Senior Housing more broadly.

Well, I think we're big proponents of the memory care. In fact, we've funded a number of expansions for redevelopments, if you will, of our existing independent living and Senior Housing to position our portfolio for that. In fact, that was one of the key reasons we went with Brookdale on the RIDEA joint venture we have. That was a central thought there, in terms of the A, the opportunity, but more importantly, Brookdale's ancillary revenue platform. So that's absolutely a trend that we like, a trend that we've taken advantage of and a trend that we anticipate will continue going forward. I don't think we're in the camp where we would want to develop our own standalone memory care properties, Jeff. I think we view that as again, part of a continuum within either an actual CCRC sort of setting or effectively a virtual CCRC setting when you've got operators that are in the process of putting critical mass into local markets.

With respect to the second part of your question which was development, realize that we've got about five or six community development program right now that we talked about, Paul talked about in some length on the last call. That is going well. We're ahead of where we thought we'd be. But I think we're going to be very moderate and disciplined in terms of ramping that up. I could see us continuing to grow that. But I don't think you should expect that to be doubling or tripling in terms of the shareholder capital that we deploy to that opportunity.

Okay. Just in terms of competition from other people on the supply side, are you seeing that pick up yet or not so much?

There's some new supply but it's minimal. I think one of the things we benefit from is it's still the construction financing made available by the banks is still quite minimal. My guess is if you start to continue to see some improvement in the US economy, I think that will probably increase a little bit, at which point you could see some additional supply. But for now, we're in a nice spot, given our cost of capital advantage and our ability to deploy that with the sort of program that we've got going right now.

Right. Great. Thank you.

Daniel Bernstein, Stifel Nicolaus.

Jay, I just wanted to go back to your original -- your first comments about the risks that are coming in the economy and Congress and the election. If you had to rank in order your concerns, what would they be? Is it all of it together concern you? Or are there certain items within that that are causing you to be concerned?

Well, I don't really view them as concerns, I view them as catalysts for some opportunities. I think our drop -- our stepping off point is that the portfolio that we have constructed right now is -- if not bulletproof, extremely well protected to whatever might come our way. If you're at 3.5% to 4% same-property performance cash for this year, next year, the year after, and you lever that 40 parts debt, 60 parts equity, that gets you to plus or minus 6% of FAD growth with not a lot of things that are going to go bump in the night. So that's our starting off point which was the last part of my comment that right now in addition to the moves that Tim and Matt have made with respect to the balance sheet and the revolver, Paul's got the portfolio really humming, which is nice, because we don't have to spend time or allocate resources, time resources to things that aren't humming along. So that's very good. I think that's the most important part from HCP shareholders standpoint.

I think going forward, I think a lot of this stuff is more not that there's going to be necessarily a good result or a bad result, but it'll just be the uncertainty will clear. That's why I made the analogy to the March 2010 passage of the healthcare reform. A lot of the deals that ensued for the next 12 months, the economics didn't necessarily change a whole lot because the healthcare reform, it was just that the uncertainty was removed and I think that's a little bit of what's going on with that. I would say the most -- absolutely the most important of the issues that I flagged there is the pace of the US economy and then related to that, the US housing market and the unemployment. I think those are the three things that we watch the most.

Okay. And you refinanced a lot of I guess the preferreds and you fixed your balance sheet this quarter. Looked like there was some debt in the JVs that were also higher cost? Is that correct? Is there any opportunities to refinance some of the debt in JVs and maybe get extra cash flow out of those?

The big near-term opportunity of course is next month's $250 million of 6.45% debt. Obviously, you can see in terms of where our existing debt trades, that's a very significant opportunity. Away from that, there is certainly some secure debt in the joint ventures. For the most part, I think the make whole penalties and things like that make that relatively unattractive from our standpoint. We prefer to be taking that capital and growing the portfolio by external acquisitions. Tim?

Dan, on a pro rata basis our share of that JV debt's only about $9 million for 2012.

In terms of what's maturing.

In terms of what's maturing. It's a very small number the next couple of years. It's actually $11 million, $12 million over the next couple years.

And then the other question I had is on the RIDEA assets, the occupancy was down 1% in the quarter, obviously there's always seasonality in 1Q. Your same-store occupancy on the leased assets was up. So if you could talk about maybe the differences in those portfolios and what may be causing that difference, is it asset type, geography or --?

I think you should view that portfolio as not stabilized right now. Remember, we're affecting with our operating partner, Brookdale, a fair amount of change there. We're repositioning some of those communities. We're expanding some of those communities. We're putting some memory care in some of those communities. We're putting like in Houston, we're doing a very large dining upgrade. So I think notwithstanding that, we've had a nice move on rates and the margins was what it is. Again, this completely validates our thought process there that we would have a better economic return for our shareholders by positioning that with a quality partner like Brookdale in a RIDEA format as a triple net. That will continue to perform well and increase its performance over the next 12 months.

But I shouldn't play too much on quarter-to-quarter?

I think the better thing would be to look out 12 months and then look back. Remember, when we bought the joint venture out I believe we talked about the fact that while we had bought it with -- at a cap rate of 7.7% in terms of trailing 12 months in place income, we felt that with what Brookdale could do with their model over an 18- to 24-month time frame, that you could see that adjusted cap rate reset from 7.7% up to 9% and we still feel good about that opportunity, Dan.

Okay. That's good for me. Thank you.

Rich Anderson, BMO Capital Markets.

Just a couple of quick questions and then a bigger picture question. I guess to Tim. Was the insurance recovery that you're expecting in the second quarter and the $4 million Google payment in your previous guidance or are those new additions to the new guidance?

The insurance recovery is new. The Google payment was in our guidance.

Okay. That's what I thought. Okay. Thank you. And Jay, just maybe to refine the acquisition question a little bit for you, what of the five by five matrix that you talk about, what property type within that do you think fits best in an environment that you're describing with a lot of uncertainty, that you would be -- would say this is maybe the least risky or the best fit in the environment that you're in right now?

Well, if you want to call the ballgame based on lowest risk, that would probably be --

I think risk is part of the conversation.

I'm just taking your question. You defined the question in terms of risk. If you want to know what the lowest risk piece of our economic business model is, it's probably on-campus Medical Office Buildings where the hospital is the number-one and number-two market share hospital system in a growing area. But that would -- from our standpoint, we wouldn't stop there. That would be an important input, but the opportunity to increase cash flow once a property or portfolio of properties is acquired, the valuation, there's a whole lot of other elements that go into that decision to pull the trigger.

Okay. But so you -- what would be some of those other elements where you would pull the trigger in this environment?

Valuation, condition, i.e., fiscal obsolescence, CapEx obsolescence of the portfolio that we're acquiring, quality of the counterparty both from a standpoint of -- you've heard me talk forever about we want to have counterparties that have three criteria, quality outcomes, efficient operations, and critical mass. So those are -- it's a whole -- it's kind of a -- it's a large algorithm that comes into play.

Do you think Life Sciences is well placed right now in this environment?

I think Life Science located in one of the four or five concentrations that are the recipients of the NIH Grants is how I'd start that discussion. However, then you have to get and look at the characterization of the tenants. Are they more DC-backed private companies that are working one or two drugs through a Phase I, Phase II, Phase III, ultimately FDA approval process, that would have a lot of risk associated with it. Or are they very substantial companies like Amgen, like Genentech, like Takeda, like Pfizer, like Google, like LinkedIn, that would have a different element to it. I think you really need to think about -- this isn't going to impact anything in terms of 2012, 2013, and we could have blinders on because we're sitting out here in what used to be known as the golden state. But if the US -- over the next several years, if because of fiscal policy, monetary policy, the US economy as a whole begins to look like California, then I think we need to be cognizant of the country losing its leading position in Life Science expertise.

I think you folks have probably seen the net move-outs versus move-ins in the state of California. There was a piece over the weekend that now even indicated that we've got reverse migration out to Mexico, which is a huge sea change for the last couple years. So if a lot of those things continue to not be addressed by Washington and effectively the can is kicked down the road, at some point there's going to be an impairment, I think, in the nation's global leadership position in Life Science. So that's something that we watch, again, that's not going to change overnight but I think we've got to be thinking about that.

And then lastly, just more of a comment. I think your coverage or your unwillingness to provide an outlook on full-year coverage including all of full-year CMS cuts on your HCR ManorCare portfolio, I think it's probably fairly easy math. I don't think anyone thinks there's going to be an absolute disaster with that quality portfolio but I think maybe if you provided some color like many of your peers are doing, that would relieve some tension in my opinion and I'd just offer that and hopefully you can reconsider and provide us a number in the next conference call.

We'll certainly take that under advisement. As you know, there's not a lot moving around, but we like to give guidance on our Company's results. We think it's a little inappropriate for us to be giving guidance on other Company's results, particularly when they have their own strategic plan that they're --

You could take their results out of it and just say what happens to your results in terms of coverage. Anyway --

We're certainly willing to take a peek at that.

Okay. Thanks.

Quinton Falelli, Citi.

Just in terms of I guess some of the uncertainty that you've been speaking about in the US and the pause in transactions that have occurred in the US, have you been spending some more time looking at overseas or global markets as a place of investment?

Again, Quinton, I think we take a look that everything's moving around. Some of that is with an eye of potentially making some investments, some of it is with an eye towards getting up-to-speed and learning about different markets. So that's just a constant -- that's a constant part of our -- of Paul team's acquisition thought process and it doesn't go up or go down because things are slow or not slow. As I mentioned, dialogue-wise, things are quite active right now. But that's certainly in the mix.

Okay. Thank you.

Jana Galan, Bank of America.

I was wondering, can you break out the 2012 guidance for same-property performance by segment or maybe just talk to which segments you think will outperform that range?

Sure, we did all that in the last call. Tim, do you want to review that for Jana.

Yes. In terms of segments, it's actually similar to what I gave in my February 2012 guidance to give you a shorter answer. The two areas that are up are Senior Housing portfolio and our Life Science portfolio and both of those are up in the order of magnitude, 20 to 30 basis points from the last February guidance.

So Senior Housing should pick up from the first quarter?

From my last guidance, Senior Housing and Life Science are the drivers there.

Thank you. And then maybe just to talk about the expense savings, if that $500,000 in the MOB portfolio, could we do that going forward or is part of that a little bit of seasonality or better weather?

I think you've got a couple things going on there. Most of that savings was coming off our sustainability initiative that Tom Klaritch has done a great job on. By the way, as an aside, I congratulate NAREIT. They've really set the bar out there in terms of establishing metrics and working with Washington and things like that to make this very important initiative to incorporate that into all of its member companies. But a big chunk of that was the sustainability. There was a little bit of seasonality in there. But we've had now for several quarters, thanks to Tom Klaritch and his team, very nice gains relative to cost savings, energy savings, because of that sustainability commitment that HCP has made.

Great. Thank you very much.

Nicholas Yulico, Macquarie.

I just wanted to stay on the Medical Office side with cap rates coming down so much and you keep hearing about new pension funds, interest in the sector. Does it make sense for you guys to think about exploring doing another institutional fund?

We think about that as part of our calculus. Our stepping off point, though, is that the economics have to clear the bar for a 100% owned portfolio. There was some companies in some other sectors that got a little sideways back three or four years ago when they were moving forward on acquisitions in a joint venture format that they really needed the extra juice from the joint venture in order to make the math work. So from our standpoint, we would certainly consider that. We have -- obviously have a very meaningful platform in that regard. But the extra juice would be gravy on top for our shareholders. We wouldn't use that to justify doing a JV.

Okay. And then back in fourth quarter I know you gave the actual calendar fixed-charge coverage of 1.37 for HCR ManorCare. Were you saying earlier today that that coverage is very similar in the first quarter when you were talking about a similar coverage level?

I think Paul's words were very consistent.

Okay. And then just lastly, also on HCR ManorCare, is there any reason to think that the coverage decline that has gone on has at all been due to leverage picking up at the OpCo at all?

No, absolutely not.

Okay. Thanks.

Todd Stender, Wells Fargo.

Jay, just circling back to your comments on California and really looking at the Life Science specifically, what are your tenants saying? Really better yet, what are they doing? The brand-name biotech companies or really the tech companies, are you seeing them expand? Are they going into other states, maybe a little more business-friendly like South Carolina or Texas, just seeing what you're seeing from the tenant perspective.

I think not only is that an interesting question. You qualified it the right way. Forget about what they're saying. Look at what they're doing. I think it was Google or Apple, someone just made a very significant decision to put a number of its employees down in Austin, Texas. So one or two decisions does not a trend make, but I think the state of California, and then going forward I think the country as well needs to keep an eye on that. It's early days. We're watching it.

Again, from our standpoint, it really -- it doesn't impact our existing portfolio, given the quality of the tenants we have in our Life Science portfolio and the fact that we're at approximately 90% occupancy with very long-dated leases, very little lease roll and we're grand total I think of 750,000 square feet of leasing from taking the -- making the entire portfolio 100% leased. It really impacts, Todd, more of our thinking in terms of whether we want to go bigger or not into the space and that's the context in which I presented that.

Okay. Thanks Jay. Really it's a highly specialized space with high barriers to entry. How long would it take for new supply to come into the market, really from breaking ground to being open? What kind of regulatory overhangs?

I think I'll cut back to our former head of Life Sciences. Tim?

Assuming you have the land entitled, like we do, you're talking depending on the build-out 18 months for device type use and 24 months up to a more intensive biology or chemistry use. That will hopefully capture it for you.

That sure does. And I guess just looking at the direction of the rent renewals in the quarter, any drivers behind that or really does Life Science have any seasonality if some of the rents came down in Q1?

No, we had a big renewal that was flat. It's really just one tenant that was driving that within our portfolio out of Hayward that's driving that negative mark-to-market. Only about 30,000 feet. It's sort of a small denominator problem.

Sure. Thank you.

Michael Mueller, JPMorgan.

This is actually Molly McCartan on for Mike. I just have a quick question and I believe you said on the last call you gave the average pre-leasing for the redevelopment projects was 33%. Do you have an updated number on that?

Yes, we do. It's up slightly, closer to 40%. It's in that 35% to 40% range, so -- but closer to 40%.

It's similar and there's a couple that are pretty high, and then there's some -- it's a wide range of pre-leasing?

Yes.

Okay. And then for the Life Science building that just went online in January, can you give a time frame for stabilization?

We continue to talk to tenants in those buildings all the time. It's about a third pre-leased. And we continue to have discussions. We like the size of that project. It's the reason we brought that project into the portfolio. It gives us 30,000 to 60,000 square foot, an opportunity to get the 30,000 to 60,000 square foot tenants within our portfolio and we didn't have that opportunity before. So it's pretty binary. We get another tenant and that project will fill up fairly quickly.

Okay. Great. And last question. For the same-store NOI guidance, what percentage of your portfolio is included in that this quarter?

Just over 60%.

Okay. Great. That's it from me. Thanks.

Philip Martin, Morningstar.

Question for you on your overall growth strategy. When you look at the overall growth strategy, can you characterize for us organic growth versus external growth and where those trends are going and how they may or may not have changed over the last 12 to 24 months?

Well, we can certainly with a fair amount of precision calibrate our internal and organic growth. The external growth as you know, we don't forecast that. But beginning this year, we have talked about an overall same-property cash performance of plus or minus 3.5%. Now, in fact, we're trending above that but again, if you go at 3.5% and you take our balance sheet metrics, which are 40 parts debt, 60 parts equity, that generates 5.5% to 6% FAD organic growth for this year, for next year, and for 2014. The reason we've got the ability to go out with that visibility in terms of length of visibility and precision is that the existing portfolio is largely contractual relationships with high-quality, creditworthy counterparties that has next to nothing in the way of any lease roll and we've got minimal and manageable debt maturities. So when you put it all together it's a relatively straightforward process to look at the organic FAD growth per share for each of the next three years including 2012.

Now, again, external I think I made some comments at the beginning here as to what we're seeing and why we're seeing what we're seeing. So that will be the wild card. I think you should read into the fact that we wouldn't have taken the steps we've taken with respect to strengthening our balance sheet, banking some cash, reducing the line, the economics in terms of our revolving line of credit were we not to anticipate a significant amount of ramp in the external acquisition. But that's just not something that we predict.

How about the makeup of the organic or internal growth? Certainly there's lease maturities and fixed increasers, et cetera, but how about in terms of value-add or redevelopment, repositioning. I have to assume healthcare systems as they look to reposition or reconsider their investment and growth strategies around their real estate portfolios may be coming to you, looking for ideas, et cetera. Just I'm trying to understand the makeup of this internal growth. If there's a little more on the redevelopment value-add and value-creation side of the business.

That's actually a very good question. And the makeup of that 5.5% to 6% FAD growth per year for this year, next year, and the following year is just to stabilize portfolio. On top of that, which we do not include in the organic growth rate, so this is further juice for the shareholders, is the fact that we've got 94% of our portfolio is stabilized. So that 94% is producing that economic return I just discussed, the 5.5% to 6%. However, we've got 6% of the portfolio and when you have a portfolio the size of ours, that's $1.1 billion that is currently yielding about 3%. So we've got 94% of the portfolio yielding approximately 8%, and 6% yielding 3%. You can do the math as well as anybody else. But if you move that other 6% from 3% up to 8%, you've got an enormous increase in cash flow.

Now, we're working on that hard but we don't predict when that drops. But just to give you a flavor for some of the assets that are in that 6%, that would include our land holdings down in San Diego county. It would include our land holdings up in south San Francisco, most notably the cove that we bought from Genentech last year. It would include our equity ownership interest in Brookdale and HCR. And it would include the remaining balance on our Cirrus loan that Paul had given you an update on. So all that, all those things which again is 6% of the Company, but more importantly $1.1 billion of value, when they stabilize would be additive to that 5.5% to 6%.

So really, when you think about growth drivers for HCP, and we'll be giving some -- a little more precision on this as the year evolves, you've really got three growth drivers. You've got the stabilized organic portfolio. You've got the non-stabilized portfolio that people are working quite hard on ramping that up. And then you've got external acquisitions. So it's a nice combination of growth levers. We're only out there talking about the first bucket. So if and when the second and the third buckets drop, you can rest assured we'll be talking about that as well.

Okay. I appreciate the -- I just wanted a little more clarity and level of magnitude and that helped. Lastly, and I'll yield the floor, when you look at your Post Acute and Skilled Nursing portfolio, over the last few years has this portfolio experienced any meaningful change in payer mix and/or margin, as health systems again reposition or integrate the care better, deliver the care in a different way, et cetera?

Well, you're talking about the Post Acute Skilled portfolio?

Really, the Skilled as opposed to the LTAC.

Well, remember, we don't include LTAC in Skilled, by the way. We really sold out of all of the institutionalized Medicaid-based Skilled Nursing properties. We did that back in '06. So what you have left is really two portfolios. One is what Paul referred to as our legacy portfolio in this space. And that's been cherry picked. That's the stuff we didn't sell. We liked it. We restructured it. We've got it master leased and that's clicking along at a coverage of what?

Hold on a second. I can give is to you. 1.64 times.

1.64 times. And if you were to take a snapshot of that portfolio and look at metrics like quality mix, margin, things like that, they would all be significantly higher than the large portfolio that we sold back in '06. So you draw a box around that. Then you move to HCR and there you've got another standard deviation or two move-up, both in terms of quality mix and in terms of margin because they've really distinguished themselves as the leader in that space. So you had asked a question over the timeframe of the last couple years. If you asked your question that way I think I'd point you in the direction of what we call our legacy portfolio, realizing that the HCR portfolio didn't come in to our Company as an owned portfolio until April of last year.

Exactly. Okay. Okay. With the Skilled Care portfolio's really looking at type of care that they've provided historically and their role, I've been interested to better understand the role of the Skilled Nursing community today versus five years ago, given the payer mix, given uncertainties with Medicaid, Medicare, et cetera, and it doesn't sound like it's a broad-based opportunity. It sounds like it's more of a system-by-system opportunity.

I'm not sure it's system-by-system. If you're talking about a portfolio or the sector that would be most consistent with what we've sold, I would tell you that that business is not going to go away. Recall that that's funded largely by the state. So you need to be very careful in terms of how the various states budget deficit and surplus situation is and is likely to be and then if in fact there's this big -- if you get something that starts to look like what Paul Ryan is talking about, a lot of that, forget about reimbursement and stuff like that, a lot of that is a shift from the federal government to the state government. So I think you need to think about that. But the -- I would say that the institutionalized Medicaid preponderance of Medicaid revenue, Skilled Nursing business is a business that's not going away. It's going to be a low-margin business and with the right capital structure and with the right operators, that's a legitimate business. I don't think that's going to go away.

I would agree. I would agree. Okay. I appreciate the time. Thank you.

Karin Ford, KeyBanc Capital Market.

Jay, the items of uncertainty that you listed earlier that is causing delay in some of the transaction activity, are those things concerning the sellers or are they concerning HCP as a buyer and causing sellers to be hesitant or you to be hesitant or both?

I think it's largely on the part of the sellers. Again, I think -- that's why I said, I don't think -- I think what needs to happen here is just some resolution of these issues. I think the -- it's the uncertainty that people tend to not like. People can make -- by the way, that's not to say there's going to be a complete absence of transaction activity for the next couple months because there are going to be some transactions and I anticipate we'll be involved in them. But a lot of what's going on here is that people want to know are we dealing with healthcare reform in 2014. Are we -- is that going away and then we're probably going to cut a market healthcare reform in the lame duck session later this year in large part because of the pressure coming from the aerospace, defense industry that does not want to see the sequestration occur.

There's a lot of things like that that are going on. I don't think -- I think some of those issues depending on how they drop might impact valuations but it's not at all to suggest that there will be an absence of transaction volumes going forward. It's just for now there's some period of uncertainty and people would rather -- sellers go to their Boards of Directors that are investment committees, they say what happens if this happens, and they say I don't know but in two or three months we'll know. They say, why did you wait.

Got it. Has HCP been close on any transactions this year that have fallen through?

Oh, we never as you know, Karin, we never comment on speculative deals, things like that. We confine our comments to deals that we've closed or signed.

Okay. Thanks very much.

Okay everyone. Thank you for your time and thank you for your continued interest in HCP. Take care. Have a good day.

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