Healthpeak Properties Inc (PEAK) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 HCP earnings conference call. My name is Melinda, and I will be your coordinator today.

(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, Melinda. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations of our tenants. These statements are made as of today's date and reflect the Company's good-faith beliefs and best judgment based on current information. These statements are subject to the risks, uncertainties, and assumptions that are described in our press releases and SEC filings, including our Annual Report on Form 10-K for the year ended 2012.

Forward-looking statements are not guarantees of future performance. Actual results and financial condition may differ materially from those indicated in these forward-looking statements. Future events 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 on this call. We have provided reconciliations of these measures to the comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC, today, and are available on our website at www.hcpi.com. Also during the call, we will discuss certain operating metrics, including occupancy, cash flow coverage, and same-property performance. These metrics and other related terms are defined in our supplemental information package.

I will now turn the call over to our CEO, Lauralee Martin.

Thank you, John. Welcome to HCP's 2013 third-quarter earnings conference call. Joining me this morning are Paul Gallagher, Chief Investment Officer; Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations. Let us begin with our results; and for those, I turn the call over to Tim.

Thank you, Lauralee. Let me start with our third-quarter results. Our same-property portfolio generated a robust 3.7% cash NOI growth, compared to the third quarter last year. Led by contractual rent increases and RIDEA senior housing performance, this represents the second-consecutive quarter we achieved same-store growth at or above 3.5%, a trend we expect to continue in the fourth quarter.

For the third quarter, we reported FFO of $0.73 per share, which was impacted by management transition-related costs of $26 million, or $0.06 per share, including the acceleration of equity-based compensation and severance payments. Excluding these severance-related charges, we achieved strong results, generating FFO as adjusted of $0.79 per share, and FAD of $0.67 per share, representing year-over-year growth rates of 14.5% and 21.8%, respectively. The results included a $0.05 per share gain in the interest income from the par payoff of our two Barchester debt investments, which was $0.01 better than the prior forecast, due to a follow-on investment completed in August.

From a quarterly run-rate standpoint, and before taking into account the Barchester investment gain, FAD for the quarter would have been $0.62 per share, representing a 12.7% year-over-year growth. The double-digit per-share growth is jointly driven by our 3.7% cash, same-property performance, and accretive acquisitions completed during the second half of 2012, including a $1.7 billion senior housing portfolio, operated by Emeritus, and a $200 million mezzanine debt facility with Tandem Healthcare.

Turning to investment transactions and balance sheet, during the quarter, we made investments totaling $78 million that consisted of -- one, $55 million in fundings for development and other capital projects; two, a $15 million acquisition of an inpatient rehab facility as part of an asset swap transaction with Kindred Healthcare. In exchange, we sold a LTAC at a matching price, generating a gain of $8 million.

And three, a GBP5 million, or $8 million, follow-on Barchester debt investment, purchased at a 40% discount to par. In September, we received proceeds from the par payoff of our two Barchester investments, totaling GBP129 million, or $202 million, which was used to pay down our revolver. The Barchester payoff and related revolver paydown improved our financial leverage sequentially by 80 basis points to 39.1% at quarter end.

Our adjusted fixed-charge coverage reached a new high at 4 times during the quarter. In addition, we repaid $240 million of mortgage debt at a blended interest rate of 6%, reducing our secured debt ratio by 100 basis points from 8% to 7%. We ended the quarter with $1.3 billion of immediate liquidity from our revolver and cash balances. The improvement to all of our key credit metrics demonstrates our continued long-term commitment to a strong balance sheet. Debt maturities for the balance of 2013 total $414 million at a weighted average interest rate of 5.7%, including $400 million of senior unsecured notes due in December.

Finally, updates to our 2013 guidance. We expect full-year cash, same-property performance to remain unchanged at a range between 2.5% and 3.5%. We are revising our 2013 NAREIT FFO guidance to a range of $2.91 and $2.97 per share, due to the $0.06 per share severance-related charges in Q3, mentioned earlier, partially offset by a net positive benefit of $0.01 per share that I will discuss next.

Excluding severance-related charges, we are raising our 2013 FFO as adjusted guidance by $0.01 per share to a range between $2.97 and $3.03 per share. The increase is driven by the following items not contemplated in our last guidance. An additional $0.01 per share benefit from our follow-on Barchester debt investment in Q3 and a $0.01 per share gain from monetizing our investment in the Hyde Park senior housing development project in Tampa, Florida, in anticipation of a refinancing during the fourth quarter of 2013. These are offset, in part, by a $0.01 per share reduction, due to lower non-cash DFL income, as we placed a portfolio of 14 senior housing communities, operated by Sunrise, on a cash basis, effective this quarter.

We are raising our FAD guidance by $0.02 per share to a range between $2.48 and $2.54 per share, driven by the combined $0.02 per share benefit from our follow-on Barchester investment and Hyde Park refinancing I just mentioned. As many of you know, we place the most emphasis on FAD per share amongst our various reported earnings metrics. We believe FAD is an effective measure of cash flow and our capacity to sustain and grow our dividends. At the midpoint of our updated guidance, 2013 FAD per share is projected to increase by 13.1%, compared to 2012, improving our FAD payout ratio, from 90% in 2012, to 84% this year.

While the current-year FAD reflects the combined benefit of $0.09 per share from several favorable items, including gains from monetizing our Brookdale stock in Q1, Barchester debt in Q3, and refinancing our equity interest in Hyde Park in Q4. Excluding these favorable items, our year over year 2013 FAD per share growth remains strong at 9%, driven by the recurring benefit from cash, same-store growth, and accretive acquisitions. With that, I will now turn the call over to Paul. Paul?

Thank you, Tim. Now, let me review the portfolio's third-quarter performance.

Senior housing -- occupancy for our senior housing platform was 85.5%, a 20-basis-point increase over the prior year, and a 50-basis-point decline versus the prior quarter. The sequential decline is attributable to the lingering effects of a severe flu season. After reaching a low of 85.3% in April, occupancy has increased each month thereafter, reaching 86.3% for the month of August, a 100-basis-point increase over the April lows. Cash flow coverage for the portfolio was 1.12 times, unchanged from the prior quarter. Same-property performance increased 7.2%, driven by contractual rent steps, including higher rents for assets transitioned to new operators and strong performance in our RIDEA portfolio, where year-over-year occupancy is up 230 basis points, rates are up 3.2%, and margin is up 340 basis points.

Post-acute skilled nursing -- HCR's normalized fixed-charge coverage for the trailing 12 months, ended September 30, 2013, was 1.19 times, a decline of 5 basis points from the June 30, 2013 coverage of 1.24 times, reflecting the continued challenging rate and census environment for HCR's post-acute facilities, with increased admissions offset by a shorter average lengths of stay. Despite the shorter average lengths of stay, HCR's rehospitalization rate of 18% remains significantly lower than the industry average, demonstrating HCR's continued high quality of care. Although the outlook for reimbursement remains uncertain, effective October 1, the skilled nursing industry was the beneficiary of the first Medicare rate increase of 1.3% in 24 months, not offset by sequestration or other therapy-provider cuts.

Turning to our non-HCR, post-acute SNF portfolio, cash flow coverage was 1.51 times, an increase of 2 basis points over the prior quarter. Same-property performance for the non-HCR portfolio increased 4.6%, driven by rent steps and additional rent on capital improvements at our Covenant Care facilities.

In August, HCP acquired an additional GBP9 million participation in the Barchester mezzanine loan facility at 60% to par. In September, we received the par payoff of our aggregate GBP129 million participation and realized a gain of GBP16 million, or $24 million, related to the purchase discount, achieving an IRR of 53%. The Barchester debt investment provided HCP with three potential options. One, a pathway to the real estate; two, an amendment or extension of our debt purchase; or three, a payoff at par. While we were not able to convert the debt investment into a long-term investment, we were well compensated and gained further UK market knowledge.

Hospitals -- cash flow coverage was 5.87 times, an increase of 13 basis points over the prior quarter, driven by strong performance at our HCA hospital at Medical City Dallas. Same-property performance increased 4.2%, driven by increased cash rents on our recently repositioned Plano, Texas facility. During the quarter, we placed three of our hospitals in discontinued operations, pending their acquisition by Tenet Healthcare, under a fair-market-value purchase option, effective February 19, 2014. The Tenet facilities generate annual rents of $23 million, or 1% of HCP's annualized revenues.

In September, we acquired a 60-bed inpatient rehab facility, located in Houston, Texas, in exchange for a 62-bed long-term acute care hospital, located in Milwaukee, Wisconsin, both operated by Kindred. The swap resulted in improved cash flow coverage for our 12-property Kindred Master Lease without any impact on rent. All three of HCP's Kindred hospitals are now located in Kindred-designated key markets.

Medical office buildings -- same-property performance was up 1.4%, driven by rent steps, partially offset by a decline in occupancy of 170 basis points from the prior year to 90%, related to the relocation of two major tenants to their own buildings. Excluding these relocations, the same-property performance increased 3.5%. During the quarter, tenants representing 492,000 square feet took occupancy, bringing the year-to-date leasing total to 1.4 million square feet. The year-to-date retention rate is 70.2%, and the average term for new and renewal leases is 52 months. We have 528,000 square feet of scheduled expirations for the balance of 2013, net of 251,000 square feet of month to month leases. We have executed 360,000 square feet of leases that have yet to commence and have an active leasing pipeline of 1.6 million square feet.

Life science -- same-property performance declined 1.4%, driven by mark-to-market rent reductions and vacancy associated with the downsizing and consolidation of Takeda's south San Francisco operations into one of our San Diego properties earlier this year. Excluding these items, same-property performance increased 2.9%. Occupancy for our life science portfolio increased 70 basis points, from the prior quarter, and 210 basis points, from the prior year, to 92.3%. For the quarter, we completed 108,000 square feet of leasing, bringing the year-to-date total to 369,000 square feet, with a retention rate of 60.1%. Subsequent to quarter end, we executed an eight-year, 69,000 square-foot lease with a genomic diagnostic tenant, CardioDX, at our Redwood City, California life science campus. The lease with CardioDX will anchor approximately 75% of the redevelopment HCP repositioned in 2011.

The life science portfolio has 277,000 square feet of scheduled expirations for the balance of 2013, representing just 0.3% of HCP's annualized revenues. These expirations include 160,000 square feet in Redwood City that will be vacated by an office tenant and is currently being marketed for both office and lab uses. Additionally, 77,000 square feet expiring at our Durham, North Carolina redevelopment project has been 100% leased to Duke University for 15 years. The life science development pipeline consists of three redevelopment projects, currently 75% pre-leased, totaling 166,000 square feet, and a development project that is 100% pre-leased, totaling 115,000 square feet. Total remaining funding requirements for the development pipeline are $23 million.

Turning towards 2014, the life science portfolio has 373,000 square feet of scheduled expirations, representing just 0.6% of HCP's annualized revenues. We are presently on track to address approximately 45% of those expirations by year end through early renewals and leasing. Overall, we are seeing an increased demand across the entire portfolio, indicating our existing vacancies and landholdings are well positioned to capitalize on positive volumes and trends.

Sustainability -- we have incorporated sustainability reporting into page 2 of our supplemental. Sustainability highlights for the quarter include being named the CDP's Global 500 and S&P 500 Climate Disclosure Leadership Indices by attaining a score of 97 out of 100 and ranking in the top 10% of reporting companies. We were named global and North American leader for healthcare sector by the Global Real Estate Sustainability Benchmark and were ranked number one in the healthcare sector for the second-consecutive year. And, we were named to the Dow Jones Sustainability North American Index, ranking in the top 20% of the 600 largest North American companies in the Dow Jones Global Total Stock Market Index.

With that, I would now like to turn it over to Lauralee.

Thanks, Paul. I have had the opportunity to speak with many of you -- investors, analysts, and bankers. And, I would like to address what I've heard and provide my view on our conversations. First, accretive growth, when and how much, has been the priority question, and I can assure you it is a priority focus for us as well. Specifically, I've been asked, how will we continue to source deals? HCP has grown, over the last 10 years, through several large, transformative acquisitions, which today are the property categories of the five-by-five investment model. From our hospital origins, med-cap, added medical office, CNO retirement, expanded our senior housing and medical office portfolios, [Sousa] provided the premier life science platform, and HCR ManorCare brought post acute.

With these acquisitions also came tremendous talent, rich in relationships and expertise. This talent is ready and able to play a much greater role in acquisitions, without us missing a beat. HCP, today, is a capital leader in healthcare real estate and is regularly called on by operators, bankers, private equity firms, and brokers, as sellers look to monetize their properties and portfolios or existing owners seek efficient liquidity events. HCP differentiates itself from the competition with our ability to quickly respond to time-sensitive and complicated structures. Our deep bench of industry expertise means we understand the needs of our operators and tenants, making us a reliable capital source. And finally, my 35 years in real estate is blessed with long-term relationships, and quickly, these connections, both in the US and abroad, are focusing on healthcare assets as a relationship priority.

Second, there's a desire to better understand our view on international markets and the use of debt, particularly in the UK. We have now made two debt investments into the UK. We have one still outstanding, contributing nicely to FFO and FAD. And, most recently, as Tim and Paul have covered in their comments, we realized an attractive return from our Barchester mezzanine debt investment.

The European markets have lagged the US in dealing with its troubled debt portfolios, largely due to capital and bank markets lacking liquidity. This, together with demographics that track the US market for aging seniors, makes this a market worth seriously evaluating for investment potential. Because reimbursement policies are different from those in the US, our approach in this market has been consistent with the HCP risk-reward philosophy.

We are using debt, which is part of our five-by-five strategy, as it gives us a chance to take a safe look, with equity having the first loss in the capital stack, while we get smart on these new markets. As we underwrite, and then asset manage our debt position, we are able to gain a deeper understanding of the market, its operators, and property-performance dynamics. As you are aware, property acquisition pursuits are binary, win-lose, with both opportunity and pursuit costs.

Although we did not convert Barchester to property ownership with this mezzanine debt investment, we received a significant investment return while we learned a great deal about the market and its key players. Additionally, we have established solid relationships for future deal sourcing. With these investment returns, as well as the knowledge we gained, we still have potential property optionality in the future.

Debt is part of the HCP five-by-five investment strategy. As we evaluate each of the five-by-five property categories, we also look at where they are in the risk-reward cycle to determine the best approach for investment. For example, 30 months ago, we identified superior returns in senior housing development, over those of acquisition. The Hyde Park monetization, anticipated this quarter, validates this approach, as we achieved both an investment again while we still have an ownership position in the property for continuing FFO. So in response to the question, will the disciplines of HCP's investment strategy change? Let me confirm that the five-by-five strategy is both proven and flexible to provide us growth and performance in all types of markets.

Finally, many of you have asked for my perspective on our important HCR ManorCare investment. Although this investment was underwritten in anticipation that coverage would decline with the rugs for cut, the coverage has been further impacted by additional reimbursement reductions, lower hospital volumes, which have impacted the entire skilled nursing industry, and declines in average lengths of stay. However, we remain confident that our investment will continue to perform.

Let me reinforce why we are so confident. First, our relationship with HCR management is solid, characterized by open communication and alignment for our mutual business success. I have had the opportunity to meet with management and discuss, firsthand, the actions they are taking to address their business challenges. These include their focus on managing costs that include aggressive actions to take out permanent costs in response to a softer rate and census environment. HCR is all of also focused on enhancing revenues, such as initiating pilot programs with managed care companies and creating partnerships with hospital systems.

Second, as a leader in post acute, offering the lower-cost alternative to other post-acute settings, the HCR management team continues to strengthen their market leadership by investing in the business, and in particular, our real estate. These investments represent expansions that exceed what is required by our lease. These investments have resulted in an increase in admissions, over the prior year, and census higher than the broader market, demonstrating they are gaining market share. The investments are a demonstration of the confidence that HCR has in their own business, a confidence we share.

Third, for asset management purposes, the structure of four separate renewal pools in the Master Lease, each diversified by geography, quality mix, and property-level performance, strongly incents HCR to address individual property performance that may be a drag on overall lease coverage. We continue our close dialogue with them, as we mutually work to optimize how to enhance overall lease coverage.

In summary, after 3 weeks on the job, I am even more excited and confident about the opportunity and the potential of HCP. And finally, yesterday we received Jay's resignation from the Board of HCP. We thank Jay for his many contributions to the Company and wish him the very best in his future endeavors. This is the conclusion of our formal comments. Let me now ask Melinda to open the call for questions.

(Operator Instructions)

Josh Raskin, Barclays.

Hi, thanks, it's Josh here, I'm with Jack as well. I guess we had two quick questions for you. One, Lauralee, could you talk a little bit about the timing of investments that you're making? It's sort of a lower number in the quarter than we've seen in historical times. I'm curious if the management change had anything to do with that? Or, if it's just typically it's lumpy, and it comes in at different times, and there's nothing to read into it?

We are very actively in the market for deals. You'll recall that in the second quarter, just across the broader marketplace, sales activity really took a pause due to the uncertainty that was generated by the Federal Reserve's comments. We have seen market activity come back; and as I talked about, we see that activity across the entire five-by-five. So, we will be active. I think to your point, it will be lumpy. I would also say, we put a lot into the Barchester transaction, and transactions are binary. The good thing is we got paid very well for that effort, and we think we're strongly positioned for more in the future.

Okay. So, don't read into anything around the timing or anything like that?

Correct.

Okay. And then, I know Jack had a follow-up as well.

Just another one on the deal environment, specifically thinking about the acute care space, are you seeing any more interest for new transactions there? And then, are there any characteristics for certain assets that you're seeing in the market -- either more urban versus rural, or larger facilities, things like that?

We saw some activity first half of this year, probably a little more than we've seen the past two or three years, but we continue to see opportunities across the board. We like the debt side on the acute care hospital side. But, we have not seen anything as robust as we did the first half of this year, from a volume standpoint.

Okay. Got you. Thanks, guys.

Rich Anderson, BMO Capital Markets.

Can you have a comment on the G&A, now, with the severance behind you? What do you think a run rate will be for G&A on a go-forward basis, bigger or smaller in future years?

Yes, a good run rate, Rich, it is in the $21 million, $22 million range a quarter.

That stays intact?

Yes.

Okay. Lauralee, you mentioned HCR ManorCare and in close dialogue with them. Regarding the four master leases, could that number change in the future? In other words, could you see a lower number of master leases -- some type of transaction between the two companies that lowers your exposure?

You mean as far as just less assets owned by HCP?

Yes.

We constantly are in dialogue with HCR as far as what's going on with their platform. We have not had those specific discussions, but to the extent, if there was addition by subtraction, we would be open to those sorts of discussions.

Okay. And, if I could have your, Lauralee, your comment on your view on RIDEA, and how as HCP has been a lesser player in that business, do you have any comment about whether or not you will do more or less?

Yes, the RIDEA philosophy has always been vetted with the Board, and both management and the Board have shared a very consistent view. We have nothing against RIDEA. We just think it needs to be priced appropriately. It works for some assets. It doesn't work for other assets. It works when you can see a way to enhance value. And, it's got to be priced appropriately. If the opportunities come forward that match our risk-reward philosophy, we'll be in them. And if they don't, we'll do triple-net leases.

Okay. Lastly for me, you mentioned relationships with a very high-quality resume that you bring to the table, but what about healthcare relationships? Do you have that in your coffer as well? Or, will you be relying on folks that work for you to maintain and enhance relationships?

I will definitely be relying on the people in HCP, but Jones Lang LaSalle had both a healthcare business and a life science business. We approached it, not as an owner; we were a service provider. But it meant that we were advisors into many of the clients that actually HCP has or would like to have. So, those relationships come in at levels of conversation that can make us potentially dialogue differently, but get to what HCP would like. And that is an opportunity to be part of the capital structures of the best providers.

Okay, very good. Thank you very much.

Jeff Theiler, Green Street Advisors.

Just one on the HCR ManorCare portfolio. Coverage has continued to drop again this quarter. I understand they're working to fix those coverages through new initiatives, but how long do you realistically expect those fixes to take? And, where would you expect the bottom of the coverages to hit for the HCA ManorCare portfolio?

Jeff, first off, I mentioned this is the first time in 24 months that HCR has benefited from a Medicare rate increase, that was not offset by sequestration or therapy-provider cuts. They also saw some solid growth in their home health and hospice with 3.5% year-over-year growth. Headwinds do continue with lower census, due to shorter lengths of stay and shift from Medicare to Medicare Advantage. But, they are gaining market share. Admissions are up 1% year to date. Free cash flow, year to date, $65 million after rent, interest, and maintenance. They continue to spend the $100 million run rate on CapEx, and that validates their confidence in the platform.

Yes, they've been kind of bumping along the bottom from the standpoint of coverage, but we feel that with the rate increase that's happening, coupled with new cost-savings initiatives that they're initiating in the fourth quarter, and the strategic partnerships that they have, we think they're going to gain some good traction here in 2014.

Okay. So, you think we're at the bottom now, essentially?

We've been bumping along for the past couple of quarters. We're finally getting some good news. We think with what they've done with their strategic partnerships, they've positioned themselves well for 2014. They're taking into account new cost-savings initiatives in the fourth quarter. We've got rate bumps, we think that's going to bode well for 2014.

Okay. Thank you. Just one more on the overall acquisition environment. As you look at the various real estate subsectors out there, which ones, right now, based on current market pricing, look like the most attractive risk-adjusted returns to you?

We're actually seeing some good activity in life science, MOBs, and senior housing, right now. Not as much on the hospital side. Probably more debt opportunities on the post-acute side.

Okay. Great. Thanks very much.

Juan Sanabria, Bank of America Merrill Lynch.

I was wondering if you could give some commentary on the bid/ask spread. The last time around when capital markets were a bit more volatile, you talked about increasing your cost of capital and there being a wide bid/ask spread. Has that come in at all, based on your assessment of your own capital costs?

I would make one comment, and then I'll let others go in there. I think one of the things that I see is that the strength of HCP is really understanding the underlying property dynamics, the capital needs of the operators, and then being able to use the right structure against those to compete very well in any type of cost of capital environment. So, it's really going at the needs of the operators and what those properties need to have happen that gives us our opportunities.

It's also understanding where your exposure is. Just because we have very, very favorable cost of capital, doesn't mean we need to pay more than what property is worth. That's going to have an impact on you when there's new construction in the marketplace and things of that nature. So, we're constantly assessing what the right risk-return is from the real-estate standpoint as well.

Okay. And, are you guys more or less likely to do a RIDEA transaction with the pick up in supply we've seen? Does that make you a bit more hesitant or not necessarily?

From our standpoint, in RIDEA, we think that simply changing from a lease structure to a RIDEA structure doesn't give you, quote, the upside that you would need for taking on the risk in a RIDEA. We like more the turnaround type scenario, change in operator, occupancy play, reposition play, and things of that nature. And, to the extent we see those, we would consider doing a RIDEA transaction.

That said, when we bought our BREA joint venture from Blackstone and Emeritus last year, they had a component of that portfolio that had a lot of those characteristics. But, we were able to effectively structure that deal in the triple-net lease, where we got the upside through rent steps in the first five years, and then a rent reset to market at the end of that five-year period. And, effectively, we were able to protect our downside with a corporate guarantee from Emeritus, while still getting the upside that we would have gotten through a RIDEA transaction.

Great. Just a last question, were you guys looking at the Holiday transaction that one of your peers transacted on?

I guess I would say we look at all significant deals, but our policy is not to comment on what happens in the market.

Okay. Great. Thank you.

Nick Yulico, UBS Capital Markets.

I was hoping we could turn back to the Emeritus deal you did do a year ago. Thinking about the pricing for that, it was a 6.1% initial yield. There wasn't a ton of coverage on day one because you had -- it was going to be some occupancy upside. Is that the type of deal that you would do, today, in this environment -- similar pricing, similar type of coverage? Or, have you rethought that deal as it's now a year later?

Well, I think we liked that risk-return profile on that particular transaction. We would definitely be interested in a similar type of transaction. By the way, that portfolio was actually performing better than our underwriting, so we think of that as a very good outcome.

And as Paul mentioned, the reason we liked that transaction, corporate guarantee, outsized rent steps, the ability to stabilize that portfolio over time, investment of the tenant in that portfolio. So, those are all aspects of a deal that we like that we would definitely do again, even in today's environment.

So, you said it's performed a little bit better -- I'm assuming the coverage has gone up, then, in the past year?

Yes, occupancy, margins, and coverage are all up -- rate, occupancy, and margins are all up.

Okay. Good. And then, on HCR ManorCare, I think there was this thinking that, at some point in time, there was going to be some possible potential upside, maybe getting to some additional real estate opportunities by having the relationship with ManorCare, if they were a consolidator or in another situation. How much of that is still a possibility today? And, does that only happen if HCR ManorCare, at the OpCo, ends up, let's say, merging with a hospital provider or assisted-living provider?

Yes, I think those opportunities do exist. They do have owned properties, outside of our Master Lease, that we've had discussions with them in the past. ManorCare has been spending the majority of their time dealing with the difficult environment in the post-acute sector for the past 24 months. We do have constant dialogue about opportunities that are in the marketplace, and we have had active discussions about specific transactions over the past 12 months.

Okay. And then, just lastly, if we go back to the call three weeks ago, there was talk that the reason for the CEO change had to do with leadership style. Jay submitted his letter last night saying the vision for the direction of the Company -- his vision has differed in the past, and it still differs today, from that of the remaining Board members. Can you talk a little bit about that?

And maybe, Lauralee, if you could talk about it -- whether there really is any sort of strategy change in place, today, that you're looking to implement. Because, it sounds like there could be a strategy shift, potentially, but you guys haven't really said that there has been. So, maybe if you could talk as much as you can on that. Thanks.

Sure. First of all, the reasons expressed by Jay in his resignation, we do not view -- the Board does not view as any different than what Mike McKee, our Chairman, made in his comments on the reason for leadership change. The Board and Jay had a very different vision of the tone and standards of leadership that belong and are required at an S&P 500 company at the stature of HCP. So, it's very consistent with what you've been told and it is there.

I think what you've heard is my comments on our strategy, what we're doing in that strategy, and as a Board member, I've been very comfortable with our business strategy. If we change our strategy, it will be because the operating environment tells us we should, for more opportunity, and the management team wants to do it together. But, right now, it's working very well.

Thanks.

Emmanuel Korchman, Citibank.

It's Michael Bilerman, here with Manny. Lauralee, I find it strange that you're saying that it's consistent, in terms of what Jay had written and what you guys discussed on the last call. Mike specifically said, it's not about a new direction. It's purely about leadership. And, Jay's letter, clearly, would indicate direction -- not about how he takes that direction, but specifically, about what direction the Company is going to. So, can you elaborate a little bit more, because you were a Board member, about what those differences were?

Again, the word that he used was vision. And, the ongoing discussions between the Board and Jay were our vision of what leadership should be and his vision of how we operate it. We discussed those very clearly in the transition change, and that was the reason for the change. I appreciate everybody wanting to pursue what has happened, but we, as a company, are completely looking forward on how we optimize our performance and deliver the most to shareholders at this point.

Right. Well, he didn't say his vision for the leadership of the Company; he said his vision for the direction that the Company is taking. So, that's different from a style of leadership that would indicate that potentially he wanted to do potentially more transactions, maybe it was outside the five-by-five, maybe he wanted to go further internationally, maybe it wasn't just UK, maybe it was Asia. That's the type of thing that we're trying to get an understanding about, about the direction he wanted to take the Company, versus where the Board was willing to allow it.

Again, I think you're trying to find words in a document of resignation that is reading way too much into it. And again, I realize everybody wants to delve into it, but the most important thing is we're telling you our strategy today. We're telling you where we're going, and we are completely looking forward to get it done.

Okay. Manny has some questions.

Paul, I think you had made a comment earlier that Barchester had allowed you to get additional UK knowledge. Just wondering -- obviously, you guys have made the debt investments that's allowed you to get on the ground. Those have been done over and over again, at this point. It sounds like you wanted to be more involved in Barchester than beyond the debt investment; that didn't happen. How might things play out forward, or maybe you can elaborate on why Barchester isn't part of HCP today?

Why it is or is not?

Is not.

Well, again, we were dealing with risk-adjusted returns with that particular transaction. There were certain aspects of the transaction, after we got in and did some due diligence at the asset level, that indicated that where we thought value was, was different than where they were. But, from the standpoint of understanding the market, we do our normal due diligence.

We went out and we looked at a lot of assets, understood the landscape, talked with a lot of people about reimbursement in the marketplace, understood their particular strategy. We have a good relationship with the folks at Four Seasons, understood their strategy and how they created value in the marketplace, and we've been able to formulate some very strong opinions about what are good opportunities over there, in the UK market. We think that there are still some attractive opportunities for us to pursue.

We underwrote Barchester as a debt investment. We like the returns associated with the debt investment, but like we've done in the past, we do like the optionality of that. At times, that's led to the ownership of real estate, in HCR ManorCare's case, and at times, it's resulted in repayments, like in the case of Genesis and Barchester. We like the optionality. We underwrite it as a debt investment. If it clears the bar, great. If it leads to ownership of real estate, all the better.

Could we expect an entry into a different international market to be done the same way -- take a foothold for debt investment, then, if possible, then go into an equity investment?

Yes, I think Lauralee commented on that, that that's the preferred action. If we find something that we feel, on a risk-adjusted basis, makes absolute sense, then we would pursue the equity transaction. But, primarily, we like to get in with best-in-class operators, and try and provide capital in the debt stack.

Thanks, guys.

Michael Carroll, RBC Capital Markets.

Could you guys describe your current investment pipeline? I know last quarter HCP took a step back on the investment market, but now, it sounds like that's no longer the case, and the Company is, once again, much more active in the market.

I wouldn't say that we characterize it as HCP took a step back. I think what we said was, as a result what happened with the Fed and what have you, that buyers had taken a step back to reassess where pricing would be. Right now, our portfolio remains strong and robust across the five-by-five, and we're actively in the marketplace.

Okay. What type of investments should we expect in the near term? Will you be continuing to make these similar type of Barchester loans? Or, should we expect more real-estate centric investments?

Wherever we can find the appropriate risk-adjusted return.

Okay. And then, can you give us some color on -- I think you mentioned you had a follow-on investment in the Barchester loan?

Yes, we had the opportunity to acquire a small piece a couple of weeks prior to the payoff. We were able to buy that -- invest into that tranche, and subsequently, were repaid.

Was that the same seller that you made the original purchase from?

No, it was a different institution.

Okay. Great. Thanks.

Tayo Oksunaya, Jefferies.

Actually, my question has been answered. Thank you very much.

Michael Mueller, JPMorgan.

Quick question for Tim. I was wondering if you can give a little more color on -- when you talked about 2013 guidance, you said a pool of Sunrise assets were being transitioned from DFL to cash and that was $0.01 hit. Just give us more detail on that if you could. And, should we think of it as $0.01 hit per quarter going forward?

Yes, Mike, on the on that particular pool, it was a pool of 14 assets that are operated by Sunrise that has a unique structure, where CapEx is taken out of the operating cash flow. We anticipate making an increased amount of capital investment in that portfolio to improve the occupancy and the operating performance over the next 12 to 18 months. And as a result, the operating cash flow, after CapEx, is projected to be under our accrual level. We have chose to be more conservative and switch to cash basis this quarter. I would think about this investment similar to what we did on our RIDEA portfolio, where we invested in the portfolio to improve the operating results. So, we're going to take, over the next 12 to 18 months, invest in that portfolio and prove the results associated with those 14 assets.

Okay. So, it seems like it's going to be recurring, it's not a one-time item, until it picks back up down the road.

Right. Yes.

Okay. Thanks.

Rob Mains, Stifel.

Balance sheet question -- your leverage levels have gotten to be fairly low. Is there anything that you're targeting, like with the ratings agencies or something, or this just a function of slow investment pace and you could lever up given the opportunity?

Yes. I think, Rob, we've been very consistent with our capital structure -- 40 parts debt, 60 parts equity. I wouldn't expect that to change. We are a little bit below that, given the Barchester debt payoff, so there's no target with the rating agencies. We continue to have the highest-rated balance sheet in the healthcare sector. You should expect to see us continue to underwrite 60 parts equity, 40 parts debt, so we're right in that zone.

Okay. Fair enough. And then, Paul, you had said that, when you talk about asset classes, currently you're liking life science, MOB, senior housing. Are you looking at any life science markets outside of the ones that you're already in?

No.

Okay. And then, another question for you. The last call, you gave us normalized HCR ManorCare guarantor level coverage to take out the prior-period reserve adjustments. Do you have that for the September quarter?

I'd have to look that up, Rob.

Okay, I'll call you offline on that. And then, one FAD question for you, Tim. Can you give us either -- a run rate, either quarterly or annually, we should be looking at for your CapEx? Because, I've found that to be kind of challenging to model.

Yes. CapEx, Rob, is a little lumpy. It's got some seasonality in it. From a run-rate standpoint, for the year, year in and year out, it's been right around the low $60 million range. That should be consistent. 35% to 40% of that gets spent in the fourth quarter. So, expect to see that -- this fourth quarter, you would expect to see it a little bit more lumpy, I think, in the $25 million range. But anyway, $60 million, in that [Zip Code], is a good annual run rate.

Great. Thanks a lot.

Todd Stender, Wells Fargo.

Tim, your debt maturities between now and, I think, February 1, are up around $800 million. If you add in the line balance you're up in excess of $1 billion. Just talking through some of your options, now, how you are thinking about where your leverage profile could go, I guess, over the next couple months?

Yes, obviously, we'll continue to look opportunistically at the markets to do longer-term debt. We do have some cash coming back to us with regards to some purchase options that have been exercised, so that addresses a large piece of the maturities next year. We actually have a lot of optionality, in terms of liquidity, over the next 3 to 4 months.

Is that regarding the Tenet Healthcare repurchases?

That and one other asset with Health South.

Okay. What is that number? What's the Tenet Healthcare number? How much is that expected to be?

We're going through the valuation process right now.

Okay. Thank you. And Paul, you indicated you're seeing opportunities in life science. Could we get your updated thoughts on life science -- if that's an area you would add to? I just ask because of some of Jay's comments from a few quarters ago just suggested that there were some macro factors that were contributing to HCP maybe taking a pause in adding to that exposure.

Yes, I think we still view the asset class as attractive. I think at that point in time, when those comments were made, leasing was slow. We've seen it pick up in all three of the markets that we're in. So, there are opportunities that do exist in a couple of these various different markets, and we're actively looking at those opportunities.

Okay. Thank you.

Karin Ford, KeyBanc Capital Markets.

Just wanted to hear your thoughts on where HCP's required return levels have changed to, if they have at all in the last few months? And/or where you think cap rates have moved across different asset classes recently?

Well, we really haven't seen too much of a move in cap rates. I would answer the question this way. It's not a question of what is our hurdle rate, but what's the right risk-adjusted return for the investment opportunity that presents itself? And, those that have less risk, there's going to be a lower hurdle; and those that have more risk, we're going to want to have a little higher return. We look at them on an individual basis, utilizing the five-by-five, and to the extent there are opportunities across the board, we'll go for them as they hit the right return numbers.

Have those thresholds changed across the risk spectrum with either the change in cost of capital and/or the change in leadership at HCP?

I don't think we're looking at those any differently. Cost of capital, based on stock price, and debt costs move on a daily basis, but how we price the risk, that hasn't changed.

Okay. Thank you.

I think as we're coming up on the hour, we have time for one more question, Operator.

John Roberts, Hilliard Lyons.

I hate to keep beating this, but if the reason for the change in management was Jay's management style, why did it take so long for the Board to decide that it didn't like his management style? And, how does your management style differ from Jay's?

I think, style, you never quite know when it sort of hits you that it's too much. I can say I was on the Board of HCP for 5 years, most of the Board much longer than I was; and in that time, we had four CFOs, three general counsels, two audit firms -- I could go on. You never know what is finally enough is enough. There was no triggering event, I think, is what everybody's looking for that was there.

My style difference -- I believe in teams. I believe that it takes a lot of expertise to do complicated business. And, that's why you need teams that each bring their specialty, their knowledge, their add to what gets done. The team at HCP is extraordinary, and already, it is a team. It feels like a team. I'm delighted with what we're getting done.

So, I think it's a large company, HCP is. It works in a space where we want to be a much larger company. And, that requires talent being utilized across the board. That would be probably the major difference that I would say I'm bringing.

Thank you.

Okay. With that, we thank you all for joining us today. We look forward to seeing you shortly at NAREIT. We hope many of you will be joining the bus tour of our Bay Area life science portfolio on Tuesday, November 12. Thanks.

Thank you. This does conclude today's presentation. You may now disconnect.