Healthpeak Properties Inc (PEAK) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HCP, Inc. Fourth-Quarter and Year-End 2014 Financial Results Conference Call.

(Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, John, Senior Vice President.

Thank you, Jonathan.

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 2014.

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 in 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 fourth quarter conference call.

Joining me this morning are Paul Gallagher, Chief Investment Officer, Tim Schoen, Chief Financial Officer, and John Lu, Investor Relations. We are very proud of all we accomplished in 2014 and more importantly, how we have positioned the Company for growth in 2015.

I would like to start by summarizing the highlights of our accomplishments. We generated 3.3% same-store cash NOI growth, consistently above 3% for the sixth consecutive year. We completed approximately $1.9 billion of accretive acquisitions and developments at a blended 7.8% cash yield and have an active transaction pipeline in all segments of our portfolio.

We have added acquisition professionals at the P&L level to drive consistent investment activity and capture both mid-sized assets and portfolio transactions. We are well-positioned to bring our structuring expertise and reliable execution to large transactions and respond with the total strength of HCP. We have proven we can navigate a competitive domestic and international marketplace using transaction and capital structures to optimize investment returns.

We have completed triple net sale-leasebacks, RIDEA, joint ventures, developments, and debt transactions. We have maintained our investment discipline, even as competition has bid asset prices above replacement cost. Paul will cover our recent investments and portfolio performance in a moment. Including the add-on investment with HC-One we announced today, our UK investments now exceed $1 billion and our London office opened in January.

We just announced a 3.7% increase in our annualized dividend in January, representing our 30th consecutive year of dividend growth. We continue as the only REIT in the S&P 500 Dividend Aristocrats Index and we continue to excel as a global leader in sustainability. As we put all this together, we entered 2015 from a position of strength.

Let me turn the call over to Tim to cover our 2014 financial results and expectations for this year.

Thank you, Lauralee.

Let me start with our fourth quarter results. Our same property portfolio generated strong year-over-year cash NOI growth of 3.5%, driven by contractual rent increases, as well as higher occupancy in our life science portfolio. For the quarter, we reported NAREIT FFO of $0.70 per share, which reflected an $0.08 non-cash impairment announced in December that reduced the carrying value of our HCR OpCo equity investment to $39 million.

Excluding the impairment and $0.01 per share of acquisition and pursuit costs, we reported FFO as adjusted of $0.79 and FAD of $0.66. The results benefited from same property performance and accretive investments closed in 2014, representing strong per share growth rates of 3.9% and 8.2%, respectively, compared to the fourth quarter of 2013.

Turning to our full year 2014 results, cash same property performance increased to 3.3%, consistent with our forecast. Full-year 2014 NAREIT FFO was $3 per share, which included an $0.08 per share impairment in Q4, offset by a positive $0.08 per share gain recognized in Q3, resulting from the Brookdale Transaction. In addition, we incurred $0.04 per share of acquisition and pursuit costs for the year, which are now broken out from G&A and reported as a separate line item on our income statement to provide better transparency.

Excluding the impact of $0.04 per share for the year from impairments and transaction-related items, 2014 FFO as adjusted was $3.04 per share and FAD was $2.57 per share, above the midpoint of our last guidance for both metrics. On a year-over-year basis, the 1% per share growth rates for both metrics were moderated due to a number of favorable one-time items recognized in 2013, including gains from monetizing our UK Barchester debt investment, Brookdale stock, and Hyde Park senior housing development project.

Absent these 2013 favorable one-time items, on a recurring basis, FFO as adjusted per share increased 3% and FAD increased 5% in 2014. Our 2014 cash dividends of $2.18 per share resulted in an FFO as adjusted payout ratio of 72% and an FAD payout ratio of 85%, providing $160 million of retained free cash flow after maintenance CapEx to fund our 2014 investment activity.

Moving on to investment and financing transactions, during the fourth quarter, we invested $813 million led by a GBP395 million or $630 million loan facility secured by a care home portfolio operated by HC-One. At closing, GBP363 million were initially funded yielding 8.2%, of which the majority was match funded with a four-year GBP220 million term loan at 1.8% in January of 2015, with the remainder funded in pound sterling on our revolver. Also in January, we raised $600 million of 10-year senior unsecured notes at a 3.4% coupon.

Proceeds were used to pay down the entire US dollar portion outstanding under our revolver and prefund all of our 2015 debt maturities, which consist of $400 million of unsecured notes due in March and June at a blended rate of 6.5%, thereby realizing a favorable 300-basis point refinancing spread. Taking into account the $930 million of debt raised in January, we substantially increased our liquidity from $1.3 billion at year end to $2.2 billion currently.

Our long-term commitment to a strong balance sheet has remained consistent. We began 2014 with financial leverage of 39.2%, slightly below our long-term target of 40%. We opportunistically took advantage of this balance sheet capacity to finance 2014 acquisitions primarily with debt proceeds, which was motivated in part by currency hedging benefits.

As a result, financial leverage increased to 41.5% at year end 2014 and is forecasted to return to a 40% level by the end of this year, principally driven by organic cash flow reinvested in our portfolio. Fixed charge coverage was stable at 4.1 times in 2014, the secured debt ratio improved to 5% representing a 180-basis point reduction as a result of our strategy to finance mortgage maturities with unsecured notes at a lower cost.

Next, our full-year 2015 guidance and dividend: our guidance does not include the impact of any future acquisitions, dispositions, or early repayment of debt investments and reflects the following: 2015 NAREIT FFO is projected to range from $3.14 to $3.20 per share, which reflects $0.01 per share of acquisition and pursuit costs for transactions executed year-to-date. Excluding the deal costs, 2015 FFO as adjusted is projected to range from $3.15 to $3.21 per share, which at the midpoint is projected to increase 4.6% year-over-year.

2015 FAD is projected to range from $2.73 to $2.79 per share, which at the midpoint, represents a strong 7.4% growth rate compared to 2014. The earnings increase from 2014 is driven by, one, our cash same-store growth; two, a full year benefit from accretive acquisitions completed during the last 12 months; and three, refinancing benefit from 2015 debt maturities mentioned earlier, offset slightly by higher G&A as we expanded P&L business development teams, including our international platform, and the pre-funding of our 2015 debt maturities in January.

Cash same property performance is projected to increase between 2.75% and 3.75% this year with same-store capturing 90% of our overall operating portfolio. Paul will discuss the outlook by segments in a few minutes. Note that 2015 earnings projections are described in more detail on page 12 of today's earnings release on a per-share basis.

Let me quickly run through a few assumptions. G&A is forecasted to be $90 million, including stock-based compensation of $24 million. Amortization of below market lease intangibles and deferred revenue of $4 million, amortization of deferred financing costs of $20 million, straight line rents of $27 million, DFL accretion totaling $137 million, of which $72 million is reported in income from direct financing leases with the remaining $64 million reflected in income from joint ventures.

DFL and other depreciation of $27 million; lease restructure payments of $23 million related to the 2014 Brookdale Transaction; our 49% share of FFO contribution from the CCRC joint venture to range from $24 million to $26 million; and FAD contribution to range from $46 million to $50 million, inclusive of non-refundable entrance fees; Leasing costs and second-generation tenant and capital expenditures of $86 million.

In addition, total development, redevelopment, and first-generation capital investment of $315 million, including $80 million in 2015 for the Phase I life science development at The Cove in South San Francisco. Regarding our 2015 dividend, last month, we increased our quarterly dividend from $0.545 to $0.565, marking the 30th consecutive year of dividend increases and continuing HCP's representation as the only REIT in the S&P 500 Dividend Aristocrats Index.

The annualized dividend of $2.26 per share represents an increase of 3.7%, or $0.08 per share over 2014. After taking into account the increase in the dividend and based on the midpoint of our guidance, our projected 2015 FFO is adjusted and FAD payout ratios remain low, improving to 71% and 82%, respectively. As a result, we expect to retain $230 million in cash flow after dividends and recurring capital expenditures to continue growing our portfolio.

Let me end with a quick word on our expanded disclosure. As you may have noticed, this quarter, we made available on our website a downloadable list of property addresses for each of our 1,200 assets under management. Added disclosure in our supplemental, providing metrics by major markets for our 68-property RIDEA portfolio, and as I mentioned earlier, report acquisition and pursuit costs as a separate line item on the income statement for greater transparency.

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

Thank you, Tim.

Let me start with an overview of our investments. 2014 represented an outstanding year of growth for HCP and our partners, led by the creation of our $1.2 billion strategic joint venture with Brookdale, the restructure of our legacy Emeritus triple net senior housing portfolio, and our expansion into the international markets.

Together, we completed $1.9 billion worth of investments across four of our segments with a blended cash yield of 7.8%, resulting in a 12% expansion in our total assets under management. During the year, we acquired over 1 million square feet representing $260 million of medical office buildings.

Acquisitions for the quarter included a 327,000 square foot portfolio of three medical office buildings located in Louisville, Kentucky for $51 million at a 7.5% cash yield, which complements our 386,000 square feet of existing on MOBs on three hospital campuses in Louisville. Notably, since our last earnings call, we closed our GBP395 million debt investment in a care home portfolio operated by HC-One, with an 8.2% yield to maturity, bringing our total international investments to over $1 billion with a blended yield of 9%.

Our 2015 investment activity, including several new developments, is off to a strong start. As announced last week, we broke ground on the first phase of The Cove at Oyster Point, the premier life science development at the gateway to the South San Francisco market. The Cove will be a lead silver project and is planned to feature a 5.5-acre outdoor green space, a state-of-the-art amenity center, retail and hotel entitlements.

Upon full buildout, the project will comprise seven buildings totaling 884,000 square feet with a high 7% return on cost. The first phase encompasses two class-A buildings totaling 253,000 square feet at a total cost of $177 million and is expected to be completed by the third quarter 2016.

We also entered into a development agreement to construct a $37 million medical office building with a projected return on cost of 8.7%. The 165,000 square foot MOB will be on the campus of Memorial Hermann's Cypress, Texas hospital in suburban Houston and is 25% pre-leased. This is our third ground-up development MOB project in process and the second with Memorial Hermann.

Our MOB development pipeline now consists of $164 million of projects. We exercised our purchase option right to acquire a newly developed assisted living and memory care facility, currently 98.8% leased, in Houston, Texas for $36 million. The facility is one of seven in our $141 million participating development loan program with Formation Capital that provides with us the opportunity to convert our debt investments into real-estate ownership in an off-market transaction.

The acquisition is projected to close in the first quarter of 2015, at which time, we will realize a 19% unleverred IRR on our development loan. Including the reinvestment of our participation interest of $5 million, our investment provides a yield of 6.6%. Upon closing, the assets will be contributed to our RIDEA joint venture with Brookdale.

In addition, we entered into an 85/15 joint venture with Formation Capital to develop a 117-unit independent living facility, adjacent to our new development I just mentioned in Houston, Texas. The $29 million development has a 10.9% return on cost and will also be contributed to our RIDEA joint venture with Brookdale. This is the second joint venture with Formation Capital and brings our total senior housing development pipeline to $77 million.

In February, we further expanded our relationship with HC-One and facilitated their acquisition of Meridian Healthcare by adding a GBP108 million short-term bridge tranche to our existing GBP395 million debt investment. By the end of the first quarter 2015, we expect to convert GBP174 million of the debt investment into sale-leaseback on 36 care homes. All 36 sale-leaseback facilities will be long-term leased to HC-One at a 7.3% initial yield at a 2015 EBITDARM coverage of 1.65 times.

Now let me review the highlights of the portfolio's performance. Our life science segment reported an all-time high occupancy of 95.2%. The strong performance of our portfolio, coupled with strong demand from life science tenants and low inventory in South San Francisco market, were key factors in our decision to undertake the first ground-up multi-tenant life science development in South San Francisco in nearly a decade.

The senior housing portfolio performed well in the fourth quarter. As you are all aware, Brookdale reported lower than expected results in the fourth quarter and lower guidance for 2015, primarily due to a 40-basis point sequential occupancy decrease driven by legacy Emeritus assets. However, HCP's 68 RIDEA facilities operated by Brookdale experienced a sequential occupancy increase of 70 basis points, as a result of our efforts to identify and commence the capital investment plans for the legacy emeritus assets immediately upon closing the merger.

Our RIDEA portfolio reported an increase in occupancy from the prior quarter of 70 basis points to 86.7%, including a 50-basis point increase in the 48 assets transitioned from Emeritus. As Tim mentioned, we added a new page in the supplemental, page 22, which provides metrics by major market for all 68 properties in our RIDEA portfolios.

Looking at our senior housing triple net portfolio, cash flow coverage and Brookdale triple net portfolio remained unchanged from previous quarters at 1.12 times and 1.11 times, respectively. We do expect the coverage to soften slightly in the first half of 2015 and rebound in the latter half of the year, as Brookdale implements the integration of the former Emeritus assets and accelerate their CapEx spending to improve the underlying performance of this portfolio. As Tim mentioned, HCP's portfolio produced full-year same property growth of 3.3%, representing the sixth consecutive year that we've generated organic growth above 3% and demonstrating the consistency of our real estate portfolio anchored by triple net leases with contractual rent increases.

Looking to 2015, we have a positive outlook with same-store cash NOI expected to range from 2.75% to 3.75%. By segment, medical office is projected at 1.5% to 2.5% lower than the midpoint, due to two large tenant vacancies. Senior housing and post acute same-store growth, 3% to 4% each and hospital growth at 1.5% to 2.5%, all driven by contractual rent steps. Life science is projected to grow at 3.5% to 4.5%, driven by strong leasing activity.

In summary, we continued to achieve solid growth across our entire portfolio in 2014, driven by strong same-store growth from all five segments, accretive investments in four of our five segments, including significant growth in our international platform and advancements in our development pipeline.

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

Thank you, Paul.

Before I close out the call and open the lines for questions, I would like to discuss our largest operator and portfolio concentration, HCR Manor Care. Several of you have noted this morning an ongoing civil investigative demand involving HCR Manor Care mentioned in our 10-K today. This ongoing investigation began in 2013 and was previously disclosed in 2013 audited financial statements, which we provided as part of our 2013 10-K last year.

The investigation is ongoing and as such, has been consistently described in HCR Manor Care's audited financial statements the last two years. Our regulatory counsel has discussed the Department of Justice inquiry with HCR Manor Care's regulatory counsel and HCR believes that it is in material compliance with all applicable laws and regulations and that they are fully cooperating with the inquiry. Investigations such as described by HCR's financial statements are typical of the industry, as can be seen in similar filings of Kindred and Genesis Skilled.

Turning to HCR's operating performance, in December, following receipt of HCR's 2015 preliminary base financial forecast, along with their year-to-date operating performance, we impaired the carrying value of our equity investment in OpCo. HCR's preliminary base financial forecasts indicate that HCR will continue to meet its contractual obligations under the master lease with HCP.

Their fourth quarter results were consistent with expectations, if we exclude one-time costs related to taking back food service capabilities, which they had previously outsourced. Trailing 12-month normalized fixed charge coverage was 1.08 times and normalized lease coverage of 0.81 times at the facility level.

HCR ended the year with a $128 million cash balance after spending $95 million on capital expenditures in 2014. Their total year results for 2014, particularly the second half of the year, were impacted by the continued shift in Medicare to Medicare Advantage, which unfavorably impacts reimbursements for both length of stay and daily rate. Despite the changing reimbursement landscape, HCR did continue to increase its market share and admissions in 2014.

They also delivered a very impressive 9.6% year-over-year EBITDA growth in their hospice and home health business. HCR's strategy focuses on higher acuity, post acute services where they continue to demonstrate positive quality and patient outcomes. Their test results with United Health regarding clinical care are exceeding expectations. HCR is positioned to benefit its various proposals designed to deliver higher quality care at lower costs, such as bundle payments, size neutral or episodic payments are implemented.

We continue to have discussions with HCR on how we can support the success of their business, while also improving our lease coverage. As part of those discussions, we have jointly agreed to market for sale an identified pool of up to 50 non-strategic properties.

The proceeds at any sale are anticipated to be reinvested by HCP and in return, provide HCR rent relief which will improve both fixed charge coverage at the corporate level, as well as improvement in facility level coverage. Because of the required time to market a transaction and to transfer licenses at the property level, the impact of any sale will likely be seen in the latter part of this year or early 2016.

Switching gears, on May 11, we will be celebrating our 30th anniversary with an Investor Day held at the New York Stock Exchange in New York City. We hope you will join us where you can get to know our P&L leaders, Kendall Young, Senior Housing; Darren Kowalske, Hospitals/Post-Acute; Tom Klaritch, Medical Office; John Bergschneider, Life Science; and John Stasinos, International, as well as others on our Management team.

Let me close by again saying how proud I am of the results delivered by HCP professionals in 2014. We have only begun to show you the potential growth and performance we can deliver.

Operator, can you now open the lines for questions?

(Operator Instructions)

Our first question comes from the line of Joshua Raskin from Barclays.

Lauralee, I know you were just talking a little bit about Manor Care. I guess may question around the potential asset sales and what prompted that discussion and I guess when did these discussions start and what prompted that? Then related to it, have you already identified the potential assets that will be sold and any sort of magnitude or size would be helpful. I don't know if there's a targeted coverage ratio when you're all done. Then I think you said none of this was in guidance, but just want to make sure that was the case, too.

First of all, none of it is in guidance. If you will recall, we did sell one asset with them last year. We called it the Beckley asset and it did have benefit for both of us. We've had an ongoing dialogue of, are there more assets? As you know, any portfolio probably has 10% to 15% assets that don't exactly get the sweet spot and this would fit that profile.

So together, we've identified those assets, focusing on what are non-strategic. The portfolio is going to be listed with an agent. It's early at this point in time to tell you what the magnitude of that is. What I would say is you all know that this is a good market to go to in terms of selling assets, and that would be the goal.

Any sort of color around -- just sort of thinking about the reinvestment, in terms of the potential size of this, it sounds like you guys have come together and it sounds like this is different commentary than what you've said in the past. I understand you're constantly evaluating portfolios, but should we think about this as a material piece of your current relationship?

50 assets out of over 300 isn't going to be material, particularly since these are the non-strategic. But directly to your question, what we have agreed with HCR is that we will work this very similar to what we did with Beckley and that is, we would give them rent credit at 7.75% of any proceeds with the idea that both of us are highly motivated to get the highest level proceeds out of this transaction.

Okay. Just more broadly, on SNFs, does this, the sort of events that have transpired in the last year or so, and the write-down, does this change the way you think about your exposure to skilled nursing and maybe commentary on current rates? You said this is a good environment to sell into. So, should we think about HCP, broadly speaking, probably reducing exposure to SNFs? Is that fair to expect?

We continue to have other operators that we do business with so we're not at all negative on the space. It's been a space that's been challenged, no question, by changes in regulations, but that being said, it's a very important part of the healthcare landscape and it's a part that we plan to be a part of.

Okay, perfect. Thanks.

Our next question comes from the line of Vikram Malhotra of Morgan Stanley.

Lauralee, just following up on that, in your initial budgeting, when you've look at those 50 assets and the metrics associated with them, can you give us any kind of broad idea or color, help us think about what the coverage levels could look like when all that is completed?

It's premature. Again, we were just getting the package together to sell, and what we don't know is do we sell all of them, part of them, or whatever. It is going to be based on best proceeds and what makes sense for both of us. So it's just early in that process. Generally speaking, though, these are assets that were not contributing to the coverage of the portfolio, so there's benefits both in terms of proceeds and their impact on the overall coverage.

One thing that I would say, when we originally underwrote the sale-leaseback, we had identified what the sub-performing assets had been. We, on a regular basis, sit down with Manor Care and go through and review that. Sometimes it expands, sometimes it contracts. Given where we see pricing today, it makes sense, given the environment and the fact that a lot of the short-term noise with respect to reimbursement seems like it might be, at this point in time, that it was the right time to evaluate and pull the trigger and go to market and see what we could get for these assets.

Just on that, does the master lease need to have -- are any amendments required to kind of make those sales or is that all within the lease?

No, no, we have the ability to sell the assets.

To your point, like you said, based on the pricing you are seeing, can you kind of give us a sense of what you're seeing for kind of the quality of assets in the marketplace in terms of pricing?

I think we'll let market determine what the price is going to be.

Okay. One last clarification on the puts and takes related to the EBITDAR, the Manor Care EBITDAR, can you just remind us, I think the rate increase went in, in the new fiscal year. But just kind of looking at the decline in the EBITDAR, I'm just wondering, based on your discussions with Manor Care, was there a big impact from either expenses and can you maybe just give us some color on the shift that occurred this last quarter to Medicare Advantage?

In the fourth quarter, the principal impact was what I had mentioned and that was they took back in-house food service capabilities. So there was a modest charge to do things like build inventories and so forth. So not an ongoing impact, but it did impact the quarter.

OKay. Thanks.

Our next question comes from the line of Juan Sanabria from Bank of America.

Hi, good morning, guys. I was just hoping you could speak to cash flow generation and liquidity position of Manor Care and what'd you expect the company to reinvest? Do you expect them to be able to put in $90 million to $100 million in CapEx? If you could just remind us what's required by your lease.

Right. Well, they ended with $128 million of cash. They also have planned asset sales outside of the 50 modest that are cash proceeds to them. The requirement for CapEx on ours is just a little over $30 million. So again, as we get and look at their financial forecast, which they provided to us, they both cover our lease, as well as their obligations, so we're very comfortable.

I would expect them to be a little bit more cautious with their growth CapEx.

One thing to bear in mind, when this was originally formed into an OpCo/PropCo, Carlisle spent quite a bit of money at the facility level and for the first couple of years of our lease, we had what we deemed kind of to be above market CapEx spend in the portfolio. The lion's share of what they've been spending has been on new value creation and new opportunities. We have expected that the ongoing maintenance to come down to a more normalized run rate, which is the $300 million that Lauralee talked about. What's that level now?

It was just a touch over $70 million in 2014 for maintenance CapEx.

Okay. Thanks for that. Just switching gears to the senior housing portfolio, could you just comment if you're seeing any pressure on costs at all; particularly labor, given the strong employment numbers we've seen. As a side note to that, if you could just comment on your Houston exposure and what you're seeing on the ground there, with what's going on in oil as well as elevated supplies there locally?

Yes, I can talk a little bit about that. We haven't seen much in the way of the employment other than the issues with respect to integration in our Brookdale portfolio. That said, with respect to Houston, in our portfolio, between 2013 and 2014, we spent about $14 million in CapEx, which is a little over $8,000 per unit, so that they would remain competitive. We've seen year-over-year growth in net portfolio in Houston of 7.6% and over 320 basis points of occupancy and over 500 basis points in rate.

So we're seeing good results as a result of kind of being proactive on the front end in repositioning those particular assets. With respect to Houston and what we're seeing on development and what have you there, absorption still exceeds the inventory growth by 110 basis points; however, construction is high. We've had good success with the leasing of the property that we are buying and as a result of that, we've had numerous inbound inquiries about the independent side and since these will be complementing facilities, we think this is the right investment to be doing at this point in time in Houston.

Okay, great. Just one last question from me, if could you just comment on what drove the sequential decline in occupancies in SNF portfolio. Is that the continued shift to Medicare Advantage?

Yes.

Great. Thank you.

Our next question comes from the line of Michael Knott from Green Street Advisors.

Hey, everyone. Question for you on Manor Care coverage, I think on page 26, you guys showed a 1.08 normalized coverage for 2014 and as I recall, when you took the impairment charge, I think you gave a 1.07 number for 2015. So is that a fair assessment that you think that coverage is basically going to remain flat during the course of this year?

That's right. Based on their base financial forecast, that's right, Michael.

Then when you think about your -- the lion's share of your HCR investment is in the form of the real estate, that you have sliver in the operator, as you think about future outcomes with your real estate, how would you think about the opportunity or possibility of shifting some of that real estate pocket into the operator pocket?

Well, if you're talking about trading real estate or rent for ownership interest in the OpCo, there are certain limitations that we have as a REIT. But from our standpoint, we're going to do what's in the best interest of the HoldCo, which is both the property and the operations and we work closely with Manor Care to figure out what is the best way to maximize value of the entire structure.

Okay. Just with respect to that disclosure that was in the Manor Care part of your 10-K last year, what prompted to you put it in the actual HCP portion this year as opposed to last year or why not have done that last year?

We just wanted all the risk factors of HCR in one place, Michael. You'll notice that every year we go back and reorder risk factors by order of importance, so we start with tenant concentration and then we mention all the risks associated with HCR and then follow up with Brookdale. So it's really just an ordering of the risk factors. That's really what drove it. Then to put everything associated with HCR in one location for the reader.

Okay, so it's not a fair assessment to say that your view of the riskiness of that situation is higher than a year ago?

No, I think it just continues to progress.

Okay. Thanks. That's it for me.

Our next question comes from the line of Smedes Rose from Citi.

I did want to ask you, on The Cove development that you announced, you mentioned for another development you've preleased 25%. Have you begun to prelease on The Cove development as well?

No, and part of what's driving that is the market has really changed in South San Francisco from the standpoint of kind of lead time. We've actually seen decision making shorten quite a bit. We were up with several of our tenants this last week right after the announcement, all very excited about the opportunity, all in need of expansion space, but we thought that given what's going on with occupancy and vacancy in the marketplace, what we've seen with rental rates where we've seen rental rates increase as much as 65% in the marketplace in the last 18 months, it was the right time to come out of the ground for space.

Our portfolio there, we've got 900,000 square feet that we've developed adjacent to The Cove. It's basically full at this point in time. It's just a matter of time that we will have people occupying the space and the reception was quite strong.

So what kind of -- sorry.

Smedes, what we started on is the first phase. I know you're a New York guy, but if you take a 20-story building and you cut it in phases, we've just started the first phase, which is about 253,000 feet and that's adjacent to our Oyster Point project, which is 100% leased today. So that gives you a little bit more color.

I think the other thing that's a little unique about this, we've done quite a bit of development. I mentioned the 900,000 square feet. We did a little over 800,000 square feet with Genentech. This is going to be the first in South San Francisco that's going to be fully contained where you're going to have large green space, you're going to have amenity space, both food and activities and exercise.

You're going to have a full service boutique type hotel on site and this is something that's going to be very unique in the marketplace. We've got very good response back from the marketplace as a result of our announcement.

Okay. Thanks. In your opening remarks, you mentioned you had hired acquisition professionals that would look at a range of acquisition sizes, including smaller ones. Are you seeing more attractive opportunities on smaller assets or are larger portfolios harder to track down? Is there any kind of additional detail there?

I said mid-sized transactions and you can see it in our activities, our medical office that we invested in this quarter.

I think if you look across the spectrum, medical office and life science are going to be more of the one-off type buildings. Obviously, there are portfolios there, but a lot more one-off buildings whereas the skilled nursing and the senior housing are much more portfolio-based.

Great, thank you.

Our next question comes from the line of Daniel Bernstein from Stifel.

Good afternoon. Not to keep going on the HCP HCR leases, but is there a lease termination fee that you might be able to get on the sale of those assets that might contribute to your cash position?

No, we would just redeploy the proceeds, Dan. We'd get the proceeds from the sale and then go ahead and redeploy those. Think about what we did with the Kindred assets last year.

Okay. Is there any obligation in your leases to fund CapEx? I think you're funding some CapEx for Brookdale, but do you have any obligations or lines that they could draw upon to fund their CapEx if they wanted to?

No, we don't have any obligations under the leases to fund the CapEx, but we would look at that and we've talked about that in the past that we would look at providing them growth capital if it's an expansion of an existing facility or opportunity to increase their market penetration in certain markets.

We do that across the board in our portfolio.

Okay. When I'm looking at your projection for 1.07 fixed charge coverage, how should I think about that going through the quarters? Is that going to dip down closer to one and then pop back up the second half of the year or is it going to be relatively steady? How should I think about the pattern?

It's relatively steady, Dan, but it'll have some seasonality to it.

Just want to get off that real quick, the CCR JVs, you're developing some properties that will go in there. Are those actually CCRCs that you're developing to put in that joint venture or is it some other combination of assets?

We've got two scenarios. One is we're buying a loan that was -- or a property that was in our development loan program and that's going to go into our RIDEA joint venture with Brookdale. We're also doing a ground-up development joint venture with Formation and upon completion, that particular project is also going to go into our Brookdale RIDEA joint venture.

Those are 90/10.

The loan aspect is assisted living and memory care. The new development is going to be independent living.

Okay. So they're not really CCRCs, but you're still going to move them into that JV?

These are properties that are adjacent to each other. Based on the feedback that we got from the AL and Memory Care, it just made sense to go ahead and do the independent living component.

Can you talk just broadly about the opportunities there to develop more CCRCs and acquire more CCRCs? How should I be thinking about how fast you can grow that joint venture with Brookdale?

I would probably look at it more from an acquisition standpoint as opposed to a development play and it's really going to be a function of the opportunities that are out there. We've actually seen a couple of portfolios here in the last six months. We continue to mine. There's a lot of not for profits out there that could potentially use some liquidity, so we're actively pursuing those opportunities.

Okay. I've asked plenty of questions. I'll hop off. Thank you.

Our next question comes from the line of Nick Yulico from UBS.

Thanks. Going back to the talk of the possible asset sales at HCR Manor Care, when you were having those discussions with the majority owners of HCR Manor Care to explore a rent cut on the master lease as a way to sort of ease the financial burden of what looks like a pretty tough capital structure at Manor Care right now?

Well, just to reiterate, HCR's forecasts show they can and will pay our rent as well as meat the CapEx obligations of our lease, so let me start with that. We've also said very consistently, if their rent restructure is to be considered, it would need to be beneficial to our shareholders.

A good example is our transaction with Brookdale where we demonstrated that positive trades could be mutually made, but without similar type benefits with HCR, we're very happy to continue to collect the rent. I would say, though, that we're very favorably positive about the recent joint decision to market up to 50 non-strategic properties, because that's a very constructive way for them to address parts of their portfolio that are not necessarily additive to their strategy.

Okay. So it sounds like we could infer that rent cut is probably not on the table right now and so you're going down the asset sale approach first to see if that maybe helps things?

Yes.

Okay. Regarding the term loan that HCR Manor Care has, how close are they to breaching the covenants in that term loan? If they are breached in the next, whenever they might be breached, what does that mean for your rent payments?

Well, they are in compliance.

And they remain in compliance with their term loan, Nick, and they've got room to remain in compliance there. Any default on any debt over $25 million is a default under our lease.

Okay. Thanks. I think Ross had follow-up.

Hey, guys, I just wanted to follow up on the asset sale question. So 50 properties is about 19% of the 267 SNFs that you have with HCR. So I'm guessing this is not going to be the right math, but if you took 19% of your investment of $5.7 billion, you'd be looking at $1.1 billion of asset value. Is it fair to say that we should not be expecting anywhere near $1.1 billion of proceeds, given that these are the weaker assets in the portfolio?

I think that would be an accurate statement.

The second part of it, I guess, would be, in thinking about a cap rate, I know it doesn't serve you to discuss cap rates ahead of a sale, but just big picture here. While a rent cut isn't happening today, it would seem to me that these things are going to get sold at significantly higher cap rates on what the implied rent would have been versus where you're going to be able to redeploy those proceeds in today's lower cap rate environment. So in essence, shareholders will be suffering some dilution as a result of these asset sales. Can you talk maybe to that dynamic a little bit?

What we've talked about is 7.75% rent credit on proceeds. If you'll recall, you are right, it is a competitive marketplace, but we've been highly successful with the investments that we've had to be above that number or -- and believe we can be close to it. I think it's insignificant the impact.

We invested $1.9 billion in 2014 at 7.1%. So we'll take that reinvestment risk.

Just to make sure we all understand that, that rent credit, you're suggesting when we look at the master lease after these assets sales and we're thinking about what the remaining rent is on the, let's call it 217 assets, you're suggesting we just take that 7.75% rent credit -- I'm trying to think of how we back into it.

It's against the proceeds from a sale. It depends on what the asset sales for. That dollar number times 7.75%. It's independent of the rent of the assets.

Okay. Thank you.

Our next question comes from the line of Michael Carroll from RBC.

Thanks. Can you break out the CapEx spend by HCR Manor Care? What was maintenance and what was new CapEx or gross CapEx in 2014?

Yes. In terms of maintenance CapEx, it's been $40 million to $50 million range, Mike. There are some renovations. Lauralee mentioned the $70 million number, so call it $20 million to $30 million of renovations and improvements to facilities and then the rest with growth CapEx, call it $25 million to $35 million. I'm rounding, Mike, but it gets you directionally there.

You think going into 2015, they'll do the maintenance CapEx and be more thoughtful about the growth in the new CapEx?

Yes, that's right.

Okay. Can you also talk about what was the logic of agreeing to switch the UK debt investment into a lease? Are you planning on doing that on more of the HC-One portfolio over time?

I'll let Paul answer.

We had the ability to get in and see the performance of some of the underlying assets and worked with the operator to lock in kind of long-term escalating-type income as opposed to debt that, at some point in time, that is pre-payable. The assets are good, high-quality assets. We've got a great operator there and we look forward to the long-term relationship that we have with HC-One.

Mike, as we've mentioned, we have about a $1 billion portfolio of debt and we'd like to convert that into long-term ownership of real estate over time. I think Paul has pointed out a couple of things. One is the sale-leaseback opportunity with HC-One. The other one was the development loan that Paul had mentioned in his script. Both of those are good examples of using debt to create long-term ownership of real estate, and then having nice attractive growth in those assets over time, so converting that debt to an equity ownership in real estate.

Great. Thanks.

Our next question comes from the line of Rich Anderson from Mizzo Securities.

Good morning. When I wrote my note this morning, I searched the 2013 10-K and there's no doubt that the disclosure of the issue with HCR Manor Care was way more obscure than it is in the 2014 disclosure and your 2014 10-K. So if nothing has changed there in your mind and it's just kind of see how it goes, why did you escalate the disclosure? Further, why not just put it in your press release, particularly considering the sensitivity everyone has around this tenant, why not be a full open book and make sure everyone's aware of what's going on?

Oh, did you put out a note this morning, Rich?

To answer your question, we go through our risk factors every year, but we just wanted to put all of the risk factors associated with HCR in one place. They were throughout our 10-K document previously and as I said previously, when I answered the question, we ranked our risk factors. HCR is obviously our largest tenant concentration and we put all of the risk factors associated with HCR in one place. We did that, Rich, because obviously, the coverage ratio has become tighter in 2014.

The other thing I think is important is these investigations are very, very typical of the industry. You have similar filings with Kindred, you have similar filings with Genesis in skilled. HCR has a long history of hey quality care and a long history of compliance with regulations and so they believe they're in compliance and we support that decision.

So a coordinated effort by the Department of Justice, the Department of Health and Human Services, the Office of Inspector General, all these, this is par for the course for any --

For the industry.

It's not unique to HCR, Rich, and it's not new news. It's been out there since 2013.

We've all been talking about this HCR coverage. Why not open your book and say, by the way, we have this out there? I can't imagine everyone knew about this. So why not be an open book and say, this is out there. We just want to make sure everyone's aware as we're talking about rent coverage and what's going on, we also have this issue to make sure everyone's aware of and then it's out there and everyone has the full information. Just curious why not fully disclose the whole entire picture?

Well, first of all, I think we have fully disclosed it. Second of all, we've been answering questions about these investigative demands since 2013, so I don't know what else to tell you.

Okay. Thank you.

Our next question comes from the line of Derek Bower from Evercore ISI.

Could you talk about how you're thinking about the sources of capital for future investments, given your leverage targets are now above your 40% long-term target?

I'm sorry, can you repeat that?

Your current leverage is above your 40% long-term target. I was just curious to know how you're thinking about funding needs for future investment activity.

As I mentioned in my prepared remarks, we're a little bit above our target because we've utilized debt for the benefit of our currency hedging. But if you took our organic cash flow from this year, we expect to return to that 40% leverage ratio. You should continue to think that as we look at acquisitions that we would finance that on a 40 parts debt/60 parts equity basis, so no real change. It's just that we utilized the debt for hedging purposes because we had done more transactions in the UK late in 2014.

Okay. Got it, thanks. Lastly, do you have any updated thoughts on potentially diluting your Manor Care concentration through investing in other property segments? I know despite the competitiveness of the market, would you be more inclined to be purchasing larger more senior housing or MOB portfolios just so Manor Care is less of a headwind or less of a noise for your overall story?

I'll let our chief investment officer answer that, but I think generally we look at investing on an attractive risk-adjusted basis and that's the bedrock of our investment decisions.

Over time, with the investments that we've made, we've actually whittled down the exposure to below 30% at this point in time, so we continue to work on that.

Our next question comes from the line of Tayo Okusanya from Jefferies.

Yes, good afternoon. Most of my questions have been answered, but in regards to the line of questioning around the rent cuts, I understand what mind-set, but in April, when you get the additional 3.5% rent bumps, it seems like that's built into the 2015 guidance. I just wanted to confirm whether that was already a foregone conclusion that was going to happen or whether it could still be part of the negotiation process?

That's built into the forecast. It's built into Manor Care.

It's also built into the budgeted coverage of 107 times as well.

Okay, so it's also built into the budgeted coverage at 107, so that's helpful to know. Thank you.

That's right, Tayo.

Our next question comes from the line of Todd Stender from Wells Fargo.

Hi, just a couple questions remain. Just looking at life science leases assigned in the quarter, what kind of return profiles are you looking at? You're repositioning at least three assets, I see. You're putting money into the South San Francisco building. Can you just talk about what that return profile looks like with new additional cash being put in?

I'm sorry, I missed the first part of that question. Can you repeat that?

The development.

Sure, just the repositioned assets. I'm just looking at the three repositioned life science facilities that you've got: Sacramento, South San Francisco, and San Diego. What do those return profiles look like now that you're putting more money into the buildings?

On an incremental basis, Todd, those are up around the high teens, or in one case, almost 20% on additional invested capital. On an overall basis, they would be in the 7% to 7.5% range.

Okay, that's helpful. The seven-year lease on the biotech, the 30,000-square foot building, is that a vacant building right now?

Yes.

Thanks. Paul, I think when you were going over the medical office building forecast for 2015, it sounded like you're expecting a decline in medical office. Did I hear that right?

We have two tenants that we know are going to vacate and in the guidance, it shows them leaving the space. We're actively looking to backfill that and hopefully, we can get tenants in there sooner than expected.

Todd, the same story impact of that is we expect about 2% same-store growth in the MOB segment. Absent those couple of buildings that Paul just mentioned, we would be closer to the 2.75% to 3% growth rate range for MOBs.

On the radar screen, our guys do a pretty good job of being proactive on getting those spaces sold. Hopefully, we can get that space re-leased quicker.

That was my next question. Thanks, Tim.

Our next question comes from the line of Michael Mueller from JPMorgan.

Thanks. Hi. If you do sell the 50 properties, can you give us a sense as to how significant the fixed charge coverage benefit could be? Just a rough magnitude, are you thinking five, 10 basis points? Could it be more than that?

It's way too premature.

We'll let you know after we have some price discovery.

Okay, that was really it. Thanks.

Thanks, Mike.

Our final question comes from the line of Todd Lukasik from Morningstar.

Couple questions on sale-leaseback over in the UK, with the leasing market there, is it similar to expect the same type of rent escalators that you guys would normally see for a US investment of that type?

We usually use what's known as the RPI, which is the UK equivalent of CPI. Typically, we have floors and ceilings, very typical to what we have in the US.

Okay, great. I think you mentioned 1.65 time EBITDARM coverage to start out. Is that a level that you would expect to be maintained over time or is that either too high or too low at this point?

No, we would expect to the grow. That's the norm, over in the UK, is to quote an EBITDARM number. If you equate that to a more normal EBITDAR number, it's about a 1.35 time coverage and it's pretty much a market-type coverage in the UK.

Okay, great. Thanks. That's all I had.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Lauralee Martin, President and Chief Executive Officer.

Thank you very much. Again, thank you all for joining us and let me close by reminding you that May 11 is our Investor Day in New York. We hope to see many of you there. Thank you so much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.