Healthpeak Properties, Inc.
Q4 2012 Earnings Call Transcript

Published: 12 Feb 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to the Fourth Quarter and Year-End 2012 HCP Earnings Conference Call. My name is Lashonda, and I will be your coordinator today. [Operator Instructions] Now I would like to turn today's presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir.

[John Lu:]

Thank you, Lashonda. Good afternoon, and good morning. Today's conference call will contain 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 upon currently available information. The statements are subject to the risks, uncertainties and assumptions that are described from time to time in the company's press releases and SEC filings, 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. Further, some of these statements may include projections of financial measures that may not be updated until the next earnings announcement or at all. Events prior to the company's next earnings announcement could render the forward-looking statements untrue, and the company expressly disclaims any obligation to update earlier statements as a result of new information. Additionally, certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures, as well as certain related disclosures in our supplemental information package and earnings release, each of which has been furnished to the SEC today and is available on our website at www.hcpi.com. I will now turn the call over to our Chairman and CEO, Jay Flaherty.

[James F. Flaherty:]

Thanks, John. Welcome to HCP's 2012 Fourth Quarter Earnings Conference Call. Joining me in Long Beach this morning are HCP's Executive Vice President, Chief Investment Officer, Paul Gallagher; and HCP's Executive Vice President, Chief Financial Officer, Tim Schoen. We will begin with a review of the results announced earlier today. And for that, I turn the call over to Tim.

[Timothy M. Schoen:]

Thank you, Jay. 2012 was another excellent year for HCP. One, we generated cash same property growth of 4.2% over 2011; two, we closed on $2.6 billion of accretive investments led by our $1.7 billion senior housing portfolio acquisition of The Blackstone JV; three, we raised $3.5 billion of debt and equity capital and significantly improved the pricing on our $1.5 billion revolver; four, we received credit rating upgrades from Moody's and S&P; five, we achieved substantial success in sustainability. With this summary, there are several topics I will cover

[Paul F. Gallagher:]

Thank you, Tim. Now let me review the fourth quarter results and provide 2013 Same Property Performance guidance by segment. Senior housing. As of September 30, 2012, our same property senior housing occupancy was 86.2%, a 90 basis point sequential increase over the prior quarter and an 80 basis point increase versus the prior year. Included in this, occupancy for our RIDEA JV was 86%. For the fourth quarter, our RIDEA JV's occupancy increased 120 basis points to 87.2%. Same-store cash flow coverage for the portfolio declined [ph] 1 basis point from the prior quarter to 1.11x, driven by outsized fixed rent bumps on our transitioned assets. Current quarter year-over-year same property cash NOI was up 6%. Growth was driven by rent steps, including higher rents for assets transitioned to new operators and additional rents earned in our Sunrise portfolio. Full year 2012 senior housing Same Property Performance was up 3.5%. For 2013, we expect senior housing Same Property Performance to increase by 3.75% to 4.75%. There are no lease expirations in our senior housing portfolio for 2013. Post-acute/skilled nursing. Coverage metrics in our post-acute skilled nursing portfolio now reflect 4 quarters of lower reimbursement rates under RUGs-IV. For the period ending September 30, 2012, HCR's normalized fixed charge coverage was 1.29x. Rolling forward 3 months to December 31, 2012, normalized fixed charge coverage remains unchanged at 1.29x. This normalized fixed charge coverage excludes $95 million in reserves accrued for prior period liability claims, of which $69 million was accrued in the fourth quarter. Including these reserves, the trailing 12 month fourth quarter coverage is 1.10x. CMS' 2011 cuts for skilled nursing facilities had the impact of reducing HCR's reimbursement and increasing therapy costs by $225 million. However, HCR was successful in mitigating over $100 million of that impact through

[James F. Flaherty:]

Thank you, Paul. For those of you affected by Storm Nemo, we hope things get back to normal soon. On our Q3 call last November, Hurricane Sandy's impact was in the process of being sorted out. Today, I'm pleased to report that all of HCP's properties are functioning fine and HCP's economic exposure, net of insurance recoveries, is de minimis. 2012 was a very good year for HCP. Unquestionably, the most complete year in company history. I'll elaborate on this in a few minutes. But first, I want to emphasize the following

[Operator:]

[Operator Instructions] Your first question comes from the line of Jeff Theiler with Green Street Advisors.

[Jeff Theiler:]

Just a couple of quick ones. Do you have any update on the Sunwest portfolio in terms of how their lease-up's progressing, how much of their CapEx program they've gone through since you last gave us an update, I guess, back in October?

[James F. Flaherty:]

Well, when we last gave the update, we hadn't closed the transaction yet, Jeff. We've now closed on 129 of the 133. We still have 4 properties that were waiting to come in once we clear some consents. So it's early days yet. But based on 2 months of actual data, EBITDAR is up relative to both where it was at the time of closing but more importantly up relative to our underwriting, which obviously is accretive to the coverage ratio.

[Jeff Theiler:]

Okay. And any update on the lease-up in particular? Are they getting those properties leased-up at the rate that you expected?

[Paul F. Gallagher:]

They are up just a little bit over where we had underwritten. So they're performing ahead of schedule.

[Jeff Theiler:]

Okay. And then just moving on to HCR ManorCare, continued drop in coverage as we expected as the cuts work through the system. Just wondering what your thoughts were on the facility-level coverage as we look out a year. I mean, HCR ManorCare spent a tremendous amount of capital on these facilities. The coverage has been overwhelmed by the Medicare impact. But as you look out over the next year, how do you see those rebounding?

[James F. Flaherty:]

Well, let me say -- let me make a couple of comments here. First of all, looking backwards, HCR has come through a very challenging 18 months. They've had the triple whammy, if you will, of the RUGs-IV cuts, changes to therapy reimbursement, which made it difficult for HCR to affect some of the cost reductions that they otherwise would have hoped to achieve. And then you've got the GL/PL litigation environment, which resulted in the reassessment by third-party actuaries of the company's potential liabilities for services provided in the prior 6 years. So that's kind of the context of the environment that they've been operating in. We now go -- we always like to look forward and, Jeff, you recall that about 18 months ago on our November '11 call when we were reporting the June 30, '11 coverage results, I had indicated that notwithstanding the fact that you would see the next couple of quarters reported by HCP of HCR coverage continue to go up. In fact, that was going to be a delayed reaction to the August 2011 CMS cuts, where that, in fact, has occurred. And now we're at the next inflection point, which is, you're now going to see these coverages rebound. So I take you to the fourth quarter results, which were quite strong for HCR. Admissions, 90% of which come from hospital discharges, and that's very significant for another reason, which we'll discuss in a minute, were up 3.2% in Q4 2012 versus Q4 2011. In 2012, HCR had its best year ever for patient quality and outcomes. And the Q4 census for each of HCR's 3 lines of business

[Jeff Theiler:]

Right. Just any sense of the magnitude of how much it would be in excess of that? Just trying to gauge whether we're looking at 0.1 turns or 0.2 turns there, just in that.

[James F. Flaherty:]

I think we've got perfect information for the first quarter of fiscal 2013, which is the fourth quarter of calendar 2012. I think we're going to want to see another quarter or 2 before we get definitive on that. But not surprisingly, the trend, directionally, are going the way we anticipated them. Perhaps much more importantly, because we've also got our OpCo investment that we watch, and I want to bring you back to the comment about 90% of the admissions for HCR come out of hospitals. With what's going on in health care reform, at least as it relates to health care reform being -- taking place in the marketplace, you got some very, very positive developments here. You've got increasing acceptance on the part of both the hospitals and the payers towards risk sharing reimbursement. And when you've got a company like HCR that's got a fully built-out model with market concentrations, you take those cluster markets and they are the beneficiary right now of several CMS-sponsored pilot concepts, which are teaming and partnering HCR with large, managed care companies to create new reimbursement paradigms that are risk sharing in nature. And you'll start to hear more later this year, but perhaps probably more importantly 2014, you'll start to hear concepts like site neutral reimbursement and bundling. And all of these become wind at the back of the HCR platform that generates best outcomes for the lowest cost.

[Operator:]

Your next question comes from the line of Rob Mains with Stifel, Nicolaus.

[Robert M. Mains:]

Looking at discussion of HCR ManorCare, one question, and it's just a number -- I didn't -- I want to make sure I got it right. The total accrual for the prior period reserve adjustments?

[Paul F. Gallagher:]

For the prior 12 months?

[Robert M. Mains:]

Yes.

[Paul F. Gallagher:]

$95 million.

[James F. Flaherty:]

That's for the entire 12 months ending...

[Paul F. Gallagher:]

That's for the prior 12 months ending December 31.

[James F. Flaherty:]

That would be in Paul's remarks, consistent with Paul's remarks.

[Robert M. Mains:]

Right. Okay. And then the [indiscernible] the $59 million was in the fourth quarter. Do you have the '12...

[Paul F. Gallagher:]

$69 million, Rob.

[Robert M. Mains:]

$69 million, okay. And then do you have the '12 for the period ending 9/30?

[Paul F. Gallagher:]

Yes, it was in the 30 -- $38 million.

[Robert M. Mains:]

Okay. Jay, you spoke about feeling positive about the pipeline. When you look out at what's available, have we kind of seen -- continue to see cap rate compression or are the assets you've been looking at sort of in the range of -- well, I'll stop the question there.

[James F. Flaherty:]

So what's the question?

[Robert M. Mains:]

The question's, what do you see, when you look at your pipeline, are valuations stabilizing, continuing to go up, what -- how would you kind of characterize things overall?

[James F. Flaherty:]

Again, I stand by my comments. The deal pipeline is quite robust. Good news for HCP. It cuts from left to right through our 5x5 model and from up to down through our 5x5 model. So we've got a number of opportunities that we're currently either diligence-ing or in dialogue on. I would say the following

[Robert M. Mains:]

Okay. And then just focusing in a little bit on life science. You seem to -- you're doing some new construction. Are you seeing kind of a pickup in demand there?

[James F. Flaherty:]

I would say we're seeing -- we're having very good leasing results. Witness our all-time high occupancy at 12/31, which obviously is expected to, rolling forward 12 months, be at an even higher occupancy by the end of '13. I would say the demand is not the intensity or fever pitch demand that we saw kind of back in '06 and '07. I think a lot of these corporations are being a little more measured in terms of, A, how much space they want and B, where they want that space. So I would say it's -- I would say it's muted. It's positive, but it's muted, would be the way I'd describe it.

[Robert M. Mains:]

Okay. And your development in Cambridge, would you kind of view that as planting a flag on the East Coast from which you can expand or is it kind of more opportunistic?

[James F. Flaherty:]

Well, it's clearly opportunistic. I guess you could say it's planting a flag, but I'd hasten to make the point that it's quite a small flag. The total building is how many square feet?

[Paul F. Gallagher:]

It's 70,000 square feet.

[James F. Flaherty:]

Yes. So we'll see. We're very pleased with that opportunity. It was very opportunistic, but in the context of a platform or a flag or a stake in the ground, I think people ought to understand the overall size of it.

[Paul F. Gallagher:]

Yes, it's more on the latter, it's more an opportunistic opportunity.

[Operator:]

Your next question comes from the line of Paul Morgan with Morgan Stanley.

[Paul Morgan:]

Just kind of sticking with the life science question there, maybe you could just -- in the context of your much bigger project in Oyster Point, I know you're kind of working through entitlements and everything now, but can you maybe talk a little bit about that? I mean, you are having discussions with anchors, is there any possibility given -- maybe it's not quite as active as you'd like that it would not go life sciences given the strength of the market for traditional office out here?

[James F. Flaherty:]

Yes, Tim, why don't you maybe talk about where we are with the zoning on the -- this is The Cove property, Paul, you're referring to? And then maybe talk a little bit about the demand.

[Timothy M. Schoen:]

Yes, Paul, obviously, the property you mentioned is adjacent to our existing Oyster Point project. It can go either office. Currently, first of all, it's in the entitlement process. We anticipate completing that midyear. And we can do either office or lab in those buildings, as you know the makeup of that building -- the makeup of that type of the building is generally suburban office. It can go either way. So we continue to look at opportunities, both on the office and the life science side, and we'll be entitled for both in about -- in size-wise about 850,000 to 900,000 feet.

[Paul Morgan:]

Great. On the same-store performance, maybe just give me a little bit of color, so the adjusted NOI growth sequentially was 6.6%? You added, it looks like the Brookdale assets to the same-store pool. Give me a sense of some of the composition of that sequential growth, whether it is very strong growth from the newly added assets or step bumps from the existing assets that were already in the pool?

[Paul F. Gallagher:]

You going sequential quarter-over-quarter, Paul?

[Paul Morgan:]

Well, you've got 6.6% [indiscernible].

[Paul F. Gallagher:]

Right. Right. It was primarily driven by our -- in senior housing by our transitioned assets that we transitioned away from Sunrise as well as performance in our Sunrise portfolio.

[Paul Morgan:]

Okay. I mean, given that, it seems like I mean, you do have pretty strong growth in the -- in your same-store guidance for senior housing for 2013. But maybe that was a pretty big step on a sequential basis or I mean, could we even see -- what would it take to even see above the high end of that?

[Paul F. Gallagher:]

Well, there's rent bumps in that fourth quarter, Paul. So you have a tendency to see more of our senior housing portfolio steps in the fourth quarter. So you have a tendency to see a higher sequential growth rate. So again, quarters are lumpy, but that's why the fourth quarter is a little larger than what you would see for the year.

[James F. Flaherty:]

But Paul, Paul Gallagher, mentioned the spot occupancy increases on our RIDEA JV, which is up 120 basis points, and our Sunrise mansions continue to perform quite well. So -- and then you saw the -- I think some of the summary of the Brookdale results, which came out last night. So again, in terms of positive trends, I don't recall a year feeling this good across the board as this one. You've got nice momentum in senior housing, particularly the metrics that got stronger during 2012 as the year went on. I've already alluded to some of the lift we're seeing at HCR in their fourth quarter results. The HCA results speak for themselves. And then -- so -- and you've got MOB and life science at all-time high occupancies, which are projected to go up from there, so. And again, this is against the backdrop of the 2012 Same Property Performance of 4.2%. In 2011, we were up 4%. And in 2010, we were up 4.8%. So we feel very, very good about not only where we've come from, but where we're going here the next 12, 18, 24 months.

[Paul F. Gallagher:]

But to give you a little bit more color, Paul, on the senior housing 2013 growth rate, it's contractual rent steps and continued outsized rent steps on our transitioned assets from Sunrise, to give you an idea going forward.

[Paul Morgan:]

Okay. Great. And just a quick last question on the acquisition/asset sales. I know that acquisitions aren't in guidance, but what are you thinking about it in terms of maybe asset sales over the course of the year?

[James F. Flaherty:]

Nothing aside from the one particular asset in our hospital space that Paul alluded to that's subject to a purchase option that's been exercised.

[Operator:]

Your next question comes from the line of Quentin Velleley with Citi.

[Quentin Velleley:]

Just in -- just sticking with asset sales, how many assets sort of have these tenant purchase options in them similar to the Alabama assets?

[Paul F. Gallagher:]

Right now, we have one portfolio that's subject to a purchase option at the end of 2013. But our guidance takes into account either that's going to get negotiated for an extension or sale proceeds will be redeployed. And if -- no other real material purchase options in the near term.

[Quentin Velleley:]

Okay. And then just going back to life science, it sounds like you've got one major roll down, which will impact same-store results this year. I know you sort of spoke about this muted demand in the life science space. Are there other future roll downs we should be thinking about across some of -- I guess the secondary lifestyle asset -- sorry, life science assets?

[James F. Flaherty:]

No. No, in fact, I mean, if there would be, they'd be in our guidance. So there aren't any, so there aren't any in our guidance. But the January roll down, that was the space we've talked to you previously about, where Takeda came out of one of our South San Francisco properties and we moved them down into San Diego, albeit at a lower, at a rent roll down. So we moved some of that vacancy internally within our portfolio from North to South to accommodate a strategic move on the part of Takeda.

[Paul F. Gallagher:]

Yes, just to put an order of magnitude on it, they were kind of at an all-time high rental rate in their space in South San Francisco at $5.50 a square foot, and we moved them down into San Diego, into pure office space where they're paying substantially less than that.

[Michael Bilerman:]

Jay, it's Michael Bilerman. Just wanted to come back to your comments sort of on the balance sheet and the credit ratings and certainly congratulations on being able to get the balance sheet and get the agencies to where they are. And I'm just curious as you talked about how your ratios are actually better than, I guess a Simon, EQR or Avalon -- I can't remember which one.

[James F. Flaherty:]

Federal Realty.

[Michael Bilerman:]

Do you have any -- I guess of trying to be opportunistic and wanting to be opportunistic. Do you want your rating to move up and hamper you any way or do you actually prefer to sort of stay where you are and that way if you do, do some transactions you can sort of let leverage creep for a bit before you term it out and not have the hangover potentially of an A- rating?

[James F. Flaherty:]

Well, I think -- I think a couple of things. One, we want our actual metrics to be reflected appropriately with the ratings. So if you take a look right now at things like fixed charge coverage ratio, particularly if you look at the fourth quarter that Tim cuffed at 3.8x and you take a look at fourth quarter debt to EBITDA, which actually was slightly under 5.0, and you take a look at our secured debt ratio at 12/31, which is 8.6%, those are significantly better than the 2 weak single A-rated credit. And if you go back to my last 3 or 4 calls, I've consistently talked about our credit metrics in the context of them being weak single A credit metrics. So that's a fact. Now if the other side of the argument would be yes, but if you take a look at things like tenant concentration, HCP has a tenant concentration that's much more concentrated than the 2 single A-rated REITs that are above us, which I think is a legitimate point. So I think the way we look at it is, we've got tremendous momentum right now with our balance sheet. I think -- I believe that balance sheets are things to take advantage of and create shareholder value from and not things to put on a mantle and admire. And I think the fact that we've got the active deal environment that we're in right now with -- not just a balance sheet, a significant balance sheet capacity, Michael, but if you think about things like capacity to do incremental RIDEA transactions, we've got great, great swath of runway there. If you take a look at things like secured debt, because a lot of times when you make acquisitions, they come with secured debt on them. We're way down on our secured debt metric, and we don't have competing operating platforms in some of these sectors. So we're in a very interesting position on a number of fronts. You mentioned the balance sheet, but there's a number of other more subtle fronts that we're equally well-positioned in.

[Michael Bilerman:]

And then just thinking about sort of raising capital, you did sell some assets this quarter and you talked about LinkedIn and Google. Do you have a desire potentially to sort of monetize what I'd say is non health care-related leases or buildings to harvest and capitalize on that demand for those geographies and that credit?

[James F. Flaherty:]

If the economics were -- made sense for HCP's shareholders, absolutely. But given the absolute dollar amount of rents we've got coming to us from LinkedIn and Google, the escalators in those leases and then the underlying credit, those are very attractive to the extent that we love our assets, but we're not in love with our assets. So economically, it would have to make sense, Michael.

[Michael Bilerman:]

I'm just trying to think about it from raising equity in terms of, as you enlarge the equity base, perhaps there is this continuation of rotating -- just like you sold assets this quarter, pursuing more of that balanced strategy of tapping equity from your assets relative to diluting the entire organization, even if they are accretive transactions, you're obviously enlarging the equity base.

[James F. Flaherty:]

That would certainly be an arrow in our quiver as we look at the strategic universe of opportunities we have in front of us.

[Operator:]

Your next question comes from the line of Jack Meehan with Barclays.

[Jack Meehan:]

Jay, you spoke about 90% of admissions for HCR are coming through hospitals. So with the HCR assets, 90% of admissions coming through hospitals. With your senior housing portfolio, have you looked into any opportunities to help structure ACO relationships across the continuum of care? And then what potential investments could that lead to?

[James F. Flaherty:]

This strategically becomes quite fascinating and while you may be new to our calls, I would just emphasize that our whole strategic direction in terms of the counterparties we want to be interacting with, they absolutely have to have the following 3 criteria

[Jack Meehan:]

Yes. That's really interesting. I guess with health care just around -- with health care reform just around the corner in 2014, especially on the acute hospital side, we're in the camp at least that reform is going to be a major positive next year. Has your thought process changed around adding greater exposure there? Are you seeing any new opportunities in the market? And do think that helps you as you're going around, these changes we're seeing in the market?

[James F. Flaherty:]

Why, I think what helps us is making risk-adjusted accretive transactions. So again, we're -- we don't pretend to be operators. We are delighted to be riding in the passenger seat of a car that's driven by HCA or HCR or Brookdale or Emeritus, Genentech, Amgen. So where we can be helpful, I think, is being a good capital partner for their real estate needs. That's why if you take a look at our 2012 acquisition volume, that's why I made the point of emphasis that 87% of our 2012 acquisition volume was all repeat business with existing customers. So being responsive to the folks that are in our portfolio today and helping them with their real estate needs is absolutely our top priority. There is, quite frankly, a possibility, I think, in a couple of sectors, in acute care hospitals, Jack, is one of them, that you may see more opportunities for real estate exposure to come into the health care REIT domain, and obviously, we'll -- if and when those occur, we would certainly look at those and evaluate those.

[Operator:]

You have a follow-up question from the line of Rob Mains with Stifel, Nicolaus.

[Robert M. Mains:]

Yes, just a simple one. The 2 facilities sold for $111 million, I surmise from that dollar amount they are fairly large?

[Paul F. Gallagher:]

Yes, they were. They were 2 very large senior housing IL and AL facilities.

[Robert M. Mains:]

Roughly, how many units were those?

[Paul F. Gallagher:]

I want to say about 250 units apiece. They're a fairly good size.

[Robert M. Mains:]

Okay. But they were rental model, they weren't entry fee.

[Paul F. Gallagher:]

No, it wasn't a CCRC, just large IL, AL.

[Operator:]

Your next question comes from the line of Jana Galan, Bank of America Merrill Lynch.

[Jana Galan:]

I wanted to ask, now that you've had your RIDEA investment for over a year, can you comment on if performance -- how your performance was versus your initial underwriting, and if the current dynamics within senior housing have you looking to kind of decrease the premium you require for RIDEA versus triple-net?

[James F. Flaherty:]

I think -- at the time we made our -- at the time we bought the joint venture partner out at the 7% cap rate and had moved that over to Brookdale, we indicated it would be -- based on our discussion with Brookdale, an 18-month plus or minus timeframe to transition the properties to Brookdale from Horizon Bay and put the necessary CapEx in that Brookdale felt was appropriate to capitalize on the opportunity. We are now -- I think, we announced that deal, Jana, in September of '11. So we're still a couple of months shy of that 18-month window which we had indicated to The Street would be all about transitioning and getting the portfolio up to speed. We're quite pleased with where we are today. I think Paul cuffed the fourth quarter increase in occupancy for that portfolio, which was 120 basis points. So we would expect in 2013 that, that will have a nice result for our shareholders. But we did experience drag from that portfolio in 2012, which was expected at the time we announced the transaction. So that's the answer to the first part of your question. With respect to the second part of your question, no, I don't think there's anything that we've seen that would cause us to change our underwriting discipline. I think the headline here is that if we can achieve RIDEA-like NOI growth without the RIDEA operating risk, that's first prize. And obviously, we are able to achieve that in a very, very significant measure with our October 31, 2012, closing on the Blackstone JV with Emeritus. We may do some more of that, we may do some more RIDEA, but it will all be in the context of looking at risk-adjusted returns.

[Jana Galan:]

And then maybe just on the life science, I was curious in conversations with your tenants and prospective tenants, are they concerned about cuts to NIH funding and is that part of the muted demand outlook?

[James F. Flaherty:]

Let me have our prior head of our life science platform take that question. Tim?

[Timothy M. Schoen:]

Yes. We have very little exposure to tenants with NIH funding.

[Operator:]

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

[Karin A. Ford:]

The $0.02 better accretion that you're getting in the Emeritus portfolio, is that solely due to NOI being better than you expected or did better-than-expected financing help that as well?

[James F. Flaherty:]

The latter.

[Karin A. Ford:]

The latter, okay, so...

[James F. Flaherty:]

Karin, -- it's really -- we've only had, I guess what, 60 days of actual results. So even if -- it would be difficult for anything to change just in 60 days, but the financing terms, particularly the debt that we had used to indicate the accretion upon announcement on that transaction, we greatly exceeded to the benefit of HCP shareholders.

[Karin A. Ford:]

Makes sense. Next question is on the MOB portfolio, with occupancy at a 6-year high, is it possible that you might see market rent growth start to accelerate there, given Obamacare and some positive demand dynamics in that business?

[James F. Flaherty:]

Well, I think -- the best -- our best and most current view on that, Karin, would be to have Paul -- what did you have for Same Property Performance guidance for '13 in MOBs? It is up to your point, Karin. Let me hear...

[Paul F. Gallagher:]

3.25% to 4.25%.

[James F. Flaherty:]

So we're expecting at the midpoint, Same Property Performance MOBs to be 3.75% and that would compare to -- what for all of 2012?

[Paul F. Gallagher:]

2.7%.

[James F. Flaherty:]

So it's up over 100 basis points right there, Karin. So I think directionally, you're onto something there. And we'll watch that as the year unfolds.

[Karin A. Ford:]

Okay. And then last question, could you just handicap what you think the outcome is likely to be with the 3 Tenet hospitals, whether you think they'll purchase, renew or move on?

[James F. Flaherty:]

We generally don't like to talk about transactions that haven't been announced yet. But that portfolio is an interesting portfolio. Those 3 hospitals were part of the original -- I'm going to date some of you on this call here, get ready. When American Medical International created a REIT in the early 1990s, called American Health Properties, they seeded that REIT with some of their acute care hospital portfolio. In 1999, HCP acquired that REIT, and that is how these 3 hospitals came on to the balance sheet of HCP. These 3 hospitals are subject to leases that were struck back in the early '90s, and at this point, all 3 of these hospitals are generating below market rent. If we really wanted to take a razor-sharp pencil to our non-stabilized pool, you could intellectually make the argument that these 3 hospitals ought to be included in that non-stabilized portfolio. So we view this as a win-win for HCP, either one or more of the hospital rents will be moved to market, which will be accretive to our shareholders, or these 3 hospitals will be acquired by Tenet, and it's at a fair market value purchase option and we'll have the opportunity to reinvest those proceeds in -- and get something that's more equivalent to tuck [ph] -- some market returns. So we're kind of indifferent with respect to the outcome. Tenet has done a nice job of -- on a number of internal and strategic moves, and their cost of capital, like many of our counterparties, has improved. And they did a debt transaction actually just last week. So we're really outcome-indifferent there, but we do think, either way, it's going to be a win-win for HCP shareholders.

[Operator:]

Your next question comes from the line of Josh Patinkin with BMO Capital Markets.

[Joshua Patinkin:]

Josh Patinkin. Most of my questions have been answered, but I do want to ask you a question, Jay, about just big picture $31 billion enterprise value you mentioned. Is it a fair way of thinking about these -- the largeness of you and some of the others in your sector that you're transitioning from kind of an earnings growth vehicle to a credit enhancement vehicle? And I know it's not all of that, it's somewhere in between. But is that how the sector might transition over the next 5 years as you get bigger and bigger?

[James F. Flaherty:]

I'm not sure. Explain a little bit more what you mean by transitioning. I get -- I understand what earnings growth is. What do you mean by credit enhancing vehicle? I'm not sure I understand it.

[Joshua Patinkin:]

You just got upgraded by S&P. I think that's who it was, jotting down my notes here. And so your cost of capital is getting cheaper, and so that thereby you get growth from a cheaper cost of capital as opposed to just pure NOI cap rate type growth.

[James F. Flaherty:]

Well, I think it's probably a bit of both. I think -- where were we? I guess we were down in NAREIT in San Diego in November and I was on a panel with George and Debbie, I'd made the point that I felt that all the health care REITs, not just HCP, but all the health care REITs, were underrated relative to their credit metrics. There's, obviously, been some positive news since I made those comments in November. My guess is there'll be some more positive news in the space. But I don't think -- I don't see that, Rich (sic) [Josh], as an end of itself. I think of that as a means and because now, for every dollar of incremental acquisition, if we have a lower cost of capital, they'll be more accretive to our shareholders. Much like -- I go back to my comments on our operating efficiency and our G&A. We now have a platform that's very well built out. So the incremental dollar of the acquisition volume, we don't need to add a new management team or new sector management or what have you. We've got a lot of critical mass. So if anything, I actually think -- the more I think about your question, Rich (sic) [Josh], I think it actually accelerates the first part, which is the earnings growth as opposed to I think the credit enhancement, more efficient operations, squeezing more juice out of the portfolio, as I mentioned in my prepared remarks, commitment to sustainability. I think all of those things are going to come together to make certainly HCP, as I can't speak for my peers, but certainly HCP's earnings potential that much more attractive.

[Joshua Patinkin:]

Okay. And then is there a way, or would you be interested in, if there was a way, to increase your stake in OpCo, HCR ManorCare OpCo? And -- or get more into the operating and management side of the business with the blurring of the lines in real estate that we're seeing today?

[James F. Flaherty:]

Yes. I don't think you want to confuse us with operators. So blurred lines into operations is not kind of our -- I don't think that's where we create value. Timing-wise, it would be -- as I've just taken you through the metrics, I mean, you're at an inflection point, in my view, in the HCR business model, and the 1 or 2 models away from them that share similar sorts of dynamics, which are commitment to clinical, high-quality, clinical outcomes, a large percent -- a disproportionately large percent of your admissions coming from acute care hospitals, things like that. So I think from a timing standpoint, much like I predicted 1.5 years ago, that you're going to see coverages come down. I think now you're on the backside of that cycle. So from a timing standpoint, a think it would be good. I think we are sensitive to REIT rules and things of that nature, which should pretty much keep us at the under the 9.9% number. And I'd also add that, recall that our true economic basis in that investment is effectively 0 because recall that at the time of closing on the HCR transaction, we exercised the call option on the share block that had gone to the private equity firm that we acquired that from. And there was a big pop between the price of the shares at the time we announced the deal versus the time we closed. And we, obviously, exercised that option and the value that we've created there for shareholders for HCP, we effectively reinvested in OpCo. So the true economic basis in that OpCo investment as opposed to the accounting basis is next to nothing.

[Joshua Patinkin:]

Last question is you how do you feel about HCN having ownership stake in the management company that runs your Sunrise portfolio?

[James F. Flaherty:]

I'm very relaxed about that. I mean, I think good people do good things. I think our Sunrise Mansions -- I don't know if we have highlighted or called the performance of our mansions out. If it's not, we can think about that maybe in the supplemental. But they're performing quite well. They're north of 91% occupied. And we couldn't be more pleased with the momentum we have in that mansion product. Recall some of our earlier discussions about moving the BGs, the Brighton Gardens and those things to some of our other partners. And George Chapman runs a very good shop, so we're -- and KKR. They're looking to maximize value for the investments. So we're quite relaxed on all those fronts.

[Operator:]

Your next question comes from the line of Nic Yulico with Macquarie.

[Nicholas Yulico:]

Just had a question on senior housing. I'm wondering how you're thinking about -- particularly related to the Emeritus-type investment you made last year. If generally, senior housing operators seem to be putting up same-store NOI growth that's well in excess of 4%. What is the real capacity out there for you to continue doing more of these triple-net type investments, where you're perhaps putting up 4% plus type escalators?

[James F. Flaherty:]

Well, when you say capacity, from HCP's standpoint, the capacity to do that is just short of unlimited, right? Given the balance sheet, horsepower we've got right now, and given the fact that we've got a de minimis amount of exposure to RIDEA and given the fact that we've got industry-leading, low secured debt exposure. So from our standpoint, the capacity is in the multiples of billions of dollars. It takes 2 to tango, so you'd have to have a counterparty or counterparties, plural, that were prepared to move forward on a similar transaction. And that really remains to be seen. So I think that would be a way to answer that question, Nic.

[Nicholas Yulico:]

Yes, I guess I was just wondering as far as -- in relation to operators, whether this is a type -- because we're in still, I think, early stages of senior housing recovery, whether operators these days might be able to -- be willing to absorb higher type of escalation in rents in kind of the next couple of years than we've be traditionally seen?

[James F. Flaherty:]

I think it depends a little bit on the nature of the owner. I think in the transactions that we've reviewed in the last couple of years, I would tell you, I think, the private equity capital is probably a little less willing to accept some of those fixed escalators, where the -- versus the operators, particularly the operators that have well built out platforms and are in some of these markets and maybe are a little closer to what's going on from an operating performance standpoint. I think they're a little more willing to do that. That would be the way I'd kind of -- I kind of bifurcate the pool of prospective sellers into those 2 buckets, Nic.

[Operator:]

Your next question comes from the line of Tayo Okusanya with Jefferies.

[Omotayo T. Okusanya:]

Jay, I wanted to go back to Medicare for just a brief second.

[James F. Flaherty:]

Do you mean HCR?

[Omotayo T. Okusanya:]

I'm sorry, HCR for a brief second. You talked about the recovery [ph] ratios kind of stabilizing from this point on. But I guess what I'm struggling with is, when I look forward and we just kind of went through these therapy cuts from the Tax Relief Act, we possibly have sequestration coming up, 2% cut, possibly there won't be a market basket update this year given the need to balance the budget. I mean, what's the offsetting factor that HCR is going to be doing to kind of offset all these things and still have steady or improving coverage?

[James F. Flaherty:]

Well, let's take them one at a time. Unlike a number of its peers, HCR has very, very little outpatient therapy, Tayo, to start with. So to the extent there's much there, any additional cuts there will be more than offset by continued growth in the other HCR business lines as well as the delay in sequestration. But I think people ask us about the property level coverage versus the entity level coverage. The reason why we are so focused on entity level coverage is there's a lot more here than just the skilled nursing post-acute. You've got 2 other lines of business, one being assisted living, with the Arden Court product, which is positioned to almost exclusively in the dementia memory care. And I think you've got better than most a good idea as to what the demand drivers and performance drivers are in dementia memory care right now. And then you've got home, health and hospice, which had a very, very good year. So you got a lot coming together. Those are very, very helpful, particularly right now. The real driver is going to be when in '14 and in '15, when HCR unveils some of the fully built out tactics and strategies in their cluster markets that they're in the process of doing pilot concepts on right now with United Healths of the world and people like that.

[Operator:]

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

[Michael Carroll:]

[indiscernible] RIDEA investments interest you more? Or are you seeing better opportunities in? The ones that are similar to the HCR deal or like the senior housing structure?

[James F. Flaherty:]

Mike, the first part of your question got cut off. Could you take it from the top, and then we can answer.

[Michael Carroll:]

Yes, sure. What type of RIDEA investments interest you more, or you seeing better opportunities in the ones that are similar to the HCR deal or the senior housing investments?

[James F. Flaherty:]

Okay. Well, HCR is most definitely not a RIDEA transaction, that's a triple net lease with fixed escalators with corporate entity guarantees and things like that. Separate and apart from that, as I just mentioned, we do have a small minority interest in the OpCo. But as I mentioned to you, that came to us effectively in a trade for some economics, so that our economic basis in that investment is next to 0. That is not a RIDEA exposure, that's a triple net exposure. The only true RIDEA exposure we have would be our joint venture with Brookdale. And that concerns 21 properties. And I think Paul talked to you in his formal remarks with some of the momentum we have right there, right now in terms of senior housing gains. So you bring all that back, first prize for us is we get upsized economics with downsized risk, we've been able to do that on some very large transactions in the last couple of years. But we're obviously aware of the market and what's going on there. So we look at everything the same way. We look at everything on a risk-adjusted basis and when the returns are there and they're accretive to FAD so that we can continue to grow the dividend and move into the 29th year next year of dividend increases, we'll pull the trigger.

[Michael Carroll:]

Okay. And then in your earlier comments, you said transaction activity remains strong. Do you still expect that 2013 activity will exceed the 2012 activity?

[James F. Flaherty:]

Yes, I said transaction -- I don't think I used the transaction, I think I used the words deal environment and I specifically talked about the dialogue. The dialogue, again, which generally tends to be a pretty good leading indicator, I don't think there's any question that the dialogue right now -- the dollar values involved with the acquisition dialogue that's out there are significantly in excess of where they were a year ago. Now what if any of that translates from deal discussion to actual deals remains to be seen. But I was very specific about how I described the current environment.

[Operator:]

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

[James Milam:]

My first question actually, just 2 quick ones on HCR ManorCare. What is the corporate debt structure at ManorCare? I guess how much debt outstanding do they have under the Fixed-or-Floating Rate, do you know?

[James F. Flaherty:]

You've got 2 debt facilities there. You've got a term loan and then you've got a $175 million line of credit. The $175 million line of credit has reserved against it, $75 million of letters of credit. So there's availability there that is meant to support, if needed, $75 million of lines of credit. So $75 million of -- sorry, letters of credit. So you've got an availability of $100 million at 12/31. At 12/31, the company was sitting on $120 million of cash. Away from that, the term loan -- Tim, do you have some details on the term loan?

[Timothy M. Schoen:]

Yes, they have a $395 million term loan, and that's at 5%.

[James Milam:]

It's fixed at 5%?

[Timothy M. Schoen:]

It’s actually LIBOR plus 3.50 but it has a floor. So it's effectively 5%, James.

[James Milam:]

Got it. Okay. And what's the maturity on that?

[Timothy M. Schoen:]

I'm going to say, it's up 4, 5 years -- I think 4 or 5 years from today.

[James Milam:]

Okay. Great. And then, we look at EBITDARM and then also EBITDAR coverage ratios. I guess I'm assuming -- or I'll ask, what do you guys assume for a management fee to get to EBITDAR from EBITDARM and how does that compare to the way you think about HCR ManorCare's corporate overhead? And the real question there is the profitability when we get concerned about the EBITDAR coverage ratio, but what's really the profitability behind that?

[Timothy M. Schoen:]

We assume a 5% management fee when calculating that EBITDAR number. But they run about 100 basis points lower than that.

[James F. Flaherty:]

They're not running at 32 basis points of G&A but they're pretty lean, mean fighting machine.

[Operator:]

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

[Todd Stender:]

Guys, you mentioned HCR ManorCare funded $100 million of maintenance CapEx in 2012. Is there a contractual obligation that they'll have to spend this year and are you able to quantify anything like that?

[James F. Flaherty:]

Well, absolutely. It's in -- the lease requires them to fund how much in terms of maintenance?

[Timothy M. Schoen:]

About $50 million a year, and they've doubled that.

[James F. Flaherty:]

Yes, so the takeaway there, Todd, was that in 2012, they actually funded, double the amount, the required amount that was in our lease and that required amount, that doesn't go away, that's in our lease every year.

[Timothy M. Schoen:]

And about 1/3 of that capital, Todd, was to expand the existing portfolio and expand their operations.

[Todd Stender:]

Okay. So anything above $50 million is discretionary on their part?

[Timothy M. Schoen:]

That's right.

[James F. Flaherty:]

With an eye towards building out their portfolio in anticipation of some of these strategic opportunities that they expect will present themselves with some of the themes I've already talked on this call.

[Todd Stender:]

Okay, I think that's a good point. They have obviously, have good visibility on where their business is going.

[James F. Flaherty:]

They've been doing it for 3 decades. They know what they're doing.

[Todd Stender:]

Just lastly, any update on the potential timing of when you'll make the Tandem Health Care loan, I think, it's $105 million, that could be as early as next month.

[James F. Flaherty:]

No, I think -- that's all contractual. I think it's August, right?

[Timothy M. Schoen:]

Right. That's right.

[James F. Flaherty:]

Is it August, or is it [indiscernible].

[Todd Stender:]

Is it not as early as March?

[Paul F. Gallagher:]

They can take it down early, but they have until August of this year.

[James F. Flaherty:]

If they elect to take it down.

[Todd Stender:]

At all. Okay. And does the interest rate change on that throughout this year or was that rate locked when you made the commitment?

[James F. Flaherty:]

Yes, the rate was locked when we made the commitment. The second tranche was funded 14%.

[Operator:]

Your next question comes from the line of Michael Mueller with JPMorgan.

[Michael W. Mueller:]

Just a couple of quick ones here. On -- if we're looking at the medical office portfolio and life sciences, what's embedded in your outlook for occupancy change and lease spreads?

[James F. Flaherty:]

I don't think we disclosed our projected occupancies, Michael. We do -- just for Michael's benefit, the same product performance for medical office, we've cuffed this year at a range between 3.25% and 4.25%, so you got a midpoint there, Michael, of up 3.75% for medical office and for life science, if you assume, you've got to counteract a lot of the onetime positive developments that happened in '12. If you want to take this out, you're looking at up 1% to up 2%, same product performance in life science. I would tell you that we anticipate both those portfolios having higher occupancy at 12/31/2013 than they certainly had at 12/31/2012.

[Operator:]

Your next question comes from the line of Tom Trizulio [ph] with Bank of America.

[Unknown Analyst:]

I appreciate the comments and response to Michael Bilerman's question on leverage. You mentioned that you have some excess RIDEA capacity, some excess secured debt capacity. That kind of leads me to think of Brookdale, and listening to their call today, much of that call was spent on a potential real estate transaction. Given your current relationship with them, do you think that puts you at any type of significant advantage versus other potential buyers if the transaction were to move forward?

[James F. Flaherty:]

Tom, I appreciate the question, I appreciate why you're asking the question, but we have kind of a long-standing policy. We just don't comment on -- we're delighted to kind of take you through chapter and verse on any deals that we've announced, but we just do not comment at all on prospective transaction activity.

[Unknown Analyst:]

Okay. And you talked about the work you've done to the balance sheet, which has been pretty dramatic and obviously, has resulted in much tighter spreads on your debt as well. But in addition to the metrics you mentioned, I think that lack of RIDEA, or the excess RIDEA capacity as you put it, is one of the big credit benefits that fixed-income investors see in your credit. Can you talk about kind of weighing that versus a potential -- potentially expanding that and taking advantage of some of the market movements you talked about earlier?

[James F. Flaherty:]

Yes. I mean, we would definitely. These credit rating upgrades are -- they don't roll-off the table easily. So I think we're very sensitive about the progress we've made there, and kind of detailed. And you probably got a better sense than almost anybody in this call, Tom, as to how much better those credit metrics are than a composite of BBB+ rated grade [ph] credits, which is why I've been talking about weak single A metrics. But certainly, we would take all that into consideration, and again, we like RIDEA-type returns without the RIDEA-type risks. So as jumping off point, that's step one, to the extent we go down the RIDEA route, it would have to compensate us for all the risks, which include, but don't stop at operating risk but also to the extent anything would change in our capital structure. But I think it's very unlikely you're going to see us do anything dramatic to our balance sheet. We are -- everything we underwrite is at a 40 parts debt, 60 parts equity capital structure. So we're not big fans of secured debt. Sometimes you got to bring it on as part of a transaction. But you saw what we did with the Blackstone JV where all that secured debt went away at closing. So we're pretty sensitive about our credit metrics.

[Unknown Analyst:]

Great. And then one quick follow-on, I think the increased prevalence of these RIDEA deals getting done says something about your peers', your competitors', whatever you want to call them, outlook on senior housing and willing to take on more risk. Do you think the inverse can be said about the operators, in that maybe doing RIDEA deals as opposed to fixed rate increase, triple net lease deals says something about their outlook on their business?

[James F. Flaherty:]

Well, again, I don't think you can generalize. I think every deal dynamic has its own unique set of statistics. I have described in the past the Nirvana scenario for a private equity investor that had an existing investment in a senior housing portfolio. And Nirvana was -- able -- the ability to bifurcate the existing C corp investment into PropCo, OpCo, monetize to PropCo at an attractive valuation, but monetize it at an attractive valuation without the existence of a triple net lease, which requires, Tom, not only the fixed escalators that you've talked about, but also requires them to shoulder the liability for the CapEx. Whereas in a RIDEA, I think people oftentimes focus on just the escalators. But that CapEx liability journals over to the balance sheet from the operator to the landlord in a RIDEA structure. So that's why we look at all those with all those factors involved. But again, I think it's -- I wouldn't start generalizing. I think every deal has got its own sort of pace and unique set of characteristics. I think you got to look at them on a one-off basis.

[Operator:]

I will now like to turn today's call back over to Jay Flaherty, Chairman and CEO, for closing remarks.

[James F. Flaherty:]

Okay. Thanks, everybody for your time. I know today was a busy earnings day, so happy Valentine's Day, and we'll be seeing a number of you shortly on the conference circuit. Take care. Thank you.