Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 HCP Earnings Conference Call. My name is Zenita and I will be your coordinator today. [Operator Instructions] Now I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir.

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

Thanks, John. Happy Valentines Day, everyone, and welcome to HCP's 2011 Fourth Quarter Earnings Conference Call. Joining me this morning are Executive Vice President and Chief Investment Officer, Paul Gallagher; and Executive Vice President, Chief Financial Officer, Tim Schoen. Let us begin with a review of the fourth quarter results that we released this morning. And for that, I turn the call over to Tim.

Thank you, Jay. 2011 was another strong and productive year for HCP. One, we generated cash, same property growth of 4% over 2010; two, increased FFO as adjusted by 21% year-over-year to $2.69 per share and FAD by 13% to $2.14 per share, both of which are at or above the midpoint of our last guidance and represented all-time highs for HCP; three, closed on $7 billion of investments led by our $6.1 billion acquisition of HCR ManorCare's real estate assets for which we replaced all stock consideration due seller valued at $33.14 per share with cash; four, transitioned 37 senior housing communities to Brookdale, including 21 under our RIDEA structure; five, raised $3.7 billion in the capital markets and renewed our $1.5 billion revolver; six, improved our investment grade credit profile and received positive rating changes from all 3 rating agencies; seven, delivered 18.7% total shareholder return; and eight, continued to be a leader in sustainability as recognized by the U.S. Environmental Protection Agency and NAREIT. With that summary, there are several topics I will cover today: Our fourth quarter and full-year 2011 results; our investment and disposition transactions; our financing activities and balance sheet; our 2012 guidance; and finally, our dividend. Let me start with our fourth quarter and full-year 2011 results. For the fourth quarter, we generated year-over-year cash Same Property Performance of 2.2% which was negatively impacted by a working capital adjustment in the fourth quarter of 2010 related to the transition of 27 properties from Sunrise to Emeritus. Excluding this, cash Same Property Performance increased by 3.1%. Paul will review our performance by segment in a few minutes. We reported fourth quarter FFO of $0.37 per share which included the charge resulting from the settlement of all outstanding litigation with Ventas. Excluding this charge, FFO…

Thanks, Tim. Now let me review HCP's portfolio performance. Senior housing. Occupancy for the third quarter in our same property senior housing platform was 85.5%, a 30-basis point sequential increase over the prior quarter and a 70-basis point decrease over the prior year. Cash flow coverage for the portfolio remained steady at 1.19x. Current quarter year-over-year same property cash NOI growth for our senior housing platform was up 2.8%. This growth was driven by normal rent steps including higher rents for assets transitioned to new operators. Full-year 2011 senior housing Same Property Performance was 6.6%. For 2012, we expect senior housing Same Property Performance to range from 2.5% to 3.5% driven by contractual rent steps. The 21 RIDEA assets owned in a joint venture with Brookdale Senior Living, which closed September 2011, has been transitioned and integrated into the Brookdale platform. Quarterly same-store performance data will be available in the fourth quarter of 2012 on the first anniversary of our contribution of the assets to the venture. During the fourth quarter of 2011, HCP closed 2 senior housing development loans under a participating mortgage program we launched in the first quarter of 2011, bringing the total amount committed under the program to $101 million on 5 projects. HCP receives current income and participates in the projects' appreciation, which combined, is expected to achieve a low- to mid-teens unlevered IRR on these projects. Upon stabilization, HCP has the option to purchase each of the properties. All 5 projects will be managed by Brookdale. Post-acute/skilled nursing. Our post-acute/skilled nursing portfolio metrics this quarter reflect a full-year of RUGs-IV reimbursement rates for Medicare. For the trailing 12-month period ended September 30, 2011, HCR's fixed charge coverage ratio was 1.66x, a 6-basis point increase. For the fourth quarter of 2011, excluding nonrecurring expenses, HCR's…

Thanks, Paul. HCP moves into 2012 with tremendous momentum following an impressive 2011 result where we achieved total shareholder returns in excess of 18%. Once again, our real estate portfolio led the way, registering a 4% Same Property Performance increase with each of our 5 property sectors generating positive contributions. Our balance sheet is strong and we are recognized by each of the 3 rating agencies that rate our debt with positive rating actions in 2011. With HCP's credit metrics now tracking at single A rated levels, our cost of capital as is at an all-time low, and last month, we issued $400 million in 7-year unsecured debt at a coupon of 3.75%. Turning to our operating environment, recent improvement on the unemployment front, while remaining below historic recovery norms, is helping to change end-user behavior for our real estate. This is most evident in our Bay Area portfolio where the demand from technology and social media companies is driving impressive gains at our Mountain View and Redwood City campuses. In our senior housing sector, recent NIC data has steadily improved, allowing us to launch a senior housing development platform which is currently sized at over $100 million. In addition, our primary care hospital partner, HCA, and our primary post-acute care partner, HCR, continue to perform well. HCP's sector-leading sustainability initiatives, under the leadership of Executive Vice President, Tom Klaritch, continue to garner well-deserved recognition and lower the company's carbon footprint. In November, we received the innovator award at NAREIT's Annual Leader in the Light competition in Dallas. In addition, our North suburban medical office building campus in Denver, Colorado, won first place in the medical office building category in ENERGY STAR's national building competition. We received 20 additional ENERGY STAR labels during the quarter consisting of 14 Medical Office…

[Operator Instructions] And your first question will come from the line of Adam Feinstein with Barclays Capital.

Congrats on getting added to that prestigious S&P index and also on a great year. So maybe, Jay, just curious to get your thoughts in terms of deal activity. Just -- obviously, we hear about some of the public things that happen but just curious in terms of just things that maybe aren't necessarily in front of us. Has there been an increase in activity? I was thinking primarily in the post-acute care space just in terms of the informal conversations you guys may be having. And since you do have such a strong primary partner, as you mentioned, in terms of looking for opportunities, just curious in terms of whether there's things being shopped around and maybe we'll see an increase in the coming year.

Right. Let me take the big picture and then I'll end on the post-acute space, Adam. I would make a couple of comments. One, looking back at 2011, we closed a large volume but if you actually think about our incremental 2011 commitments, so commitments that we initiated in 2011, and think about those in the context of commitments in excess of $100 million, we actually only made one. And that was, of course, our commitment to effectively buy back $850 million of HCP stock at a price of $33.14 and then refinance that out at a higher price. So we've been very -- I think we've looked at everything, obviously, and we require, when we go forward with the transaction, we require that there's a positive spread to our weighted average cost of capital. And that incorporates reasonable underwriting assumptions, not seller-provided assumptions. So I think a lot of it -- we kind of think about the -- the Ted Williams quote that "You've got to wait for the right pitch". So that's a little bit of looking back at 2011. Moving to 2012, I would say that within our 5x5 business model, we have active discussions going on in each of our property sectors at the current time. So I think there's absolutely an increase in chatter and dialogue, and I think that's, without a doubt, the best leading indicator in terms of ultimate transaction volume. So that's how we kind of talk about the macro transaction environment. With respect, Adam, to the post-acute space, I would say that we obviously had a fourth quarter that was the first quarter of the RUGs-IV benefit going away. So for the most part, what we have seen with HCR and then more broadly within that space, we've seen people necessarily focused in the fourth quarter on the various cost-mitigation strategies that they have put in place. At this point, most of the heavy lifting is behind the sector and I think it's actually fair to say that as a result of that, kind of coming out of the year-end numbers, the accounting sign-offs and the reporting out of those numbers, there's been an uptick in dialogue in the space. Now let me also say, I've read a couple of sell-side pieces that have come out in the last week or so, talking about storm clouds parting in the skilled space and maybe things aren't as bad as they thought. I would just say that this is going to remain a challenging space with the political partisan reimbursement kind of backdrop. But we feel obviously, very, very good with the operating partner that is HCR and we work with them very, very closely. And so I'm optimistic that there will be some opportunities that present themselves that are good opportunities from the standpoint of HCR and from the standpoint of HCP.

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

We don't -- that's a disconnect from the way we think. We think about -- when we think about acquisitions, we think about risk-adjusted returns, and again, with reasonable underwriting assumptions, and they've got to create an attractive spread to our weighted average cost of capital. So all other things being equal, which of course they never are, if you're alluding to the fact that our cost of capital is now at an all-time low, were the opportunity sets that's out there to remain totally the same, then sure, that spread would've gapped out. But as you know, the financing markets and the acquisition environment are, to a certain extent, inversely correlated. In other words, the best time to make an acquisition is, in our experience, the time when the financing markets are most challenged. And you flip that around, when the financing markets are most frothy, oftentimes that's when it's tough with seller expectations to make the numbers. So again, that's how I'd answer that question. You should not -- we don't -- we're not going to change our investment discipline because our cost of capital has gone down. We certainly incorporate that lower cost of capital in each of the opportunities that come before Paul's investment committee, but that's how I'd answer that question.

Your next question will come from the line of Daniel Bernstein with Stifel Nicholas.

Actually, just -- the senior housing development is not a really large part of your business but it seems like you made a strategic decision to launch a senior housing development platform and I wanted to get your thoughts behind some of that and is HCP going to be a larger developer going forward than buyer? If I could get some of your thoughts on that.

Yes. Let me say -- let me take the macro piece and I can let Paul talk a little bit more about the specifics of the development program that we are now -- we've now rolled out and we're blowing and going on. From a senior housing standpoint, you've got some favorable tailwinds. Those obviously include the aging baby boomer and the lack of new supply. It's that point that our development platform is specifically targeted at. That said, it's kind of for a different reason than I just alluded to in terms of some of the perspective that's out there that the worst is behind the skilled operators. You got 2 major headwinds for the senior housing space that are going to be with that space for the foreseeable future. One of which is affordability in light of all that's going on with the seniors' net worth and their incremental family obligations. And the other is CapEx. So we think it's an interesting space. We've obviously done very, very well. If you take a look at our coverage ratios for our senior housing portfolio, they have, very impressively, I think, in light of the last 3 years operating environment, gone up each year. But we do see an attractive opportunity to get some outsized economic performance in terms of unlevered returns. And therefore, outsize the spread over our weighted average cost of capital with this development platform. So with that, let me have Paul maybe elaborate a little bit more on what we're doing there.

Yes, I think one of the pieces of your question, was it going to replace our acquisition? It's to supplement acquisitions of our senior housing projects. And just a little bit of color as far as kind of what it is that we're looking at, these deals range in size from 75 to 100 units, primarily assisted and Alzheimer's. We have one project that's a little bit larger that has a larger I/O component. Property locations in Germantown, Tennessee; Olney, Maryland; Horsham, Pennsylvania; Houston, Texas; Roseland, New Jersey. What we structured is we structured a loan for up to 85% of costs with the borrower putting in the first 15% in cash. Our loans per unit is less than $200,000, and the interest -- we receive interest payments, we participate in the value creation and we expect kind of low, mid-teens types of returns on these.

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

No, we're concentrating -- the 5 that we've got up and running, we're concentrating those with Brookdale. So again, I think that's another element of this when we take a look at where we want our partnerships. We want to concentrate, as we said before, with partners, whether that's in the acute care hospital space, the post-acute space, senior housing space -- with operators that have quality outcomes, have efficient operations and have critical mass.

And one other question I have is following up on the broad picture on the acquisition environment. When I look at the buyout of leases today Brookdale announced, that the senior housing guys clearly want to own their real estate so where are the opportunities -- we also know that you can grow without acquisitions but when you're looking at acquisitions, what spaces do you see acquisitions of scale available?

Oh, I mean, like I said in answer -- in response to Adam's question, we've got, right now, within the context of our 5x5 model, we've got opportunities of size. We're in dialogue with concerning opportunities of size in each of our 5 property sectors. Let me just say first of all, welcome in a primary coverage responsibility to the space. But for those of you who don't know, Jerry Doctrow has announced his retirement effective March 1, and I'd just like to pass on to Jerry, on behalf of HCP, we want to congratulate you and thank you for multiple decades of quality support of the health care real estate industry. And we wish, jerry, you all the best in your future endeavors.

Next question will come from the line of Paul Morgan with Morgan Stanley.

Just kind of 2 related questions. First, from the bigger picture, you gave 3% to 4%, I believe, kind of 2012 same-store NOI guidance for the portfolio. Admittedly, that's 60% of the portfolio right now. But kind of from a high level, is that what you think given your current portfolio mix, the company can generate on a same-store basis? Is that -- is there any reason to think that kind of over the cycle, that 3% to 4% or a different number, perhaps, would be achievable? And then kind of specifically on the life science portfolio at 4% to 5%, I just wanted to get a quick question about how much of that is driven by sort of what really aren't life science tenants but the Billington and Google deals and maybe if you have a number kind of absent those.

Yes, we don't have a number absent what's going on at Redwood City and Mountain View campus. It's all in the life science vertical. I mean perhaps, we should expand our model and add a fixed property type technology and social media so we'd have a 6x5 model instead of a 5x5 model and then perhaps we could get a social media valuation for HCP. But returning to reality, I would say the following: if you go back and look at our initial guidance for 2011 on this call a year ago, Paul, we went out at 2.25% to 3.25%. So we had a midpoint of 2.75%. We obviously ended up at 4%. If you take a look at the guidance for this year, we're at 3% to 4%. So we're up -- that's materially higher than the guidance of a year ago. You point out correctly that only 60% of the portfolio is included in the guidance that gets to 3% to 4%. So I think those are a couple of comments. Let me turn it over to Tim because I think he wants to maybe make a comment about that other 40% that's not in same property that'll eventually this year. We waved -- on the first anniversary of our acquisitions, that's when we place our properties in the Same Property Performance. We're pretty disciplined on that. We don't deviate from that pattern. So let me have Tim pick up on a couple of comments, related to both that dynamic and also the life science technology space.

Paul, to answer your question for what's not included in our same-store, you got the HCR ManorCare portfolio that is projected to grow at 3.5%. So that's within our range. And then the RIDEA assets which would be at the midpoint of that range or at the higher end of the range, and that would kind of get you the whole pie. With regards to our life science portfolio, the growth is really a combination of contractual rent steps and then the increased rents that we've seen down in our Mountain View and Redwood City area. So if you take those 2 combined, they're about equally weighted, that will get you to the 5%.

Next question will come from the line of Jeff Theiler with Green Street Advisors.

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

Well, I think Paul took you through the fourth quarter results which is the first quarter, Jeff, of the non RUGs-IV. I mean I would add to that. If you want some color commentary, I would say that HCR feels they've made the transition to a new cost structure well. In part, that involved cost reductions. But perhaps more importantly, the real focus was on maintaining and increasing the capability to care for complex patients. HCR has the largest share of that market and I suspect you will see them build share here in the next 12 to 24 months. So that -- the pieces that are in place there. I think, again, if you think back to the fact that HCR has been proven over many cycles to be the low-cost provider for a wide variety of post-acute care patients requiring short-term rehabilitation, that augers well for that platform, and by extension, our real estate portfolio and by extension, our investment and outcome.

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

Those 2 particular assets were turnaround assets that we've moved to a new operator several years ago. Gave them a way-out-of-the-money purchase option that they ultimately executed. The other asset was a $1.5 million asset that's part of the Horizon Bay transition that we decided to sell jointly.

Next question will come from the line of Ross Nussbaum with UBS.

Here with Derek Bower. Jay, I just want to focus in on the same-store NOI growth, specifically for the life science and the medical office. The guidance ranges you gave of, I guess, 4.5% to 5.5% for the life science is a pretty material pickup from the performance over the last year. Can you help me understand what's the primary driver behind that level of growth? Is it occupancy? Is it you got some new, higher lease spreads coming in? What's driving that?

The most important point is we've got some, finally got some top-notch leadership in our life science space but other than that, I'll turn it over to Tim.

Ross, is really 2 things that make up life science. As I just said, it's the contractual rent steps associated with those leases. That's about half of it and other half is the increased rents related to the southern part of the Peninsula and San Francisco really, our Mountain View campus with the leases we've executed with LinkedIn and Google.

And then on the MOB side, there's a little bit of a pickup there.

Yes. On the MOB side, it's mainly contractual rent steps and slightly higher occupancy.

Ross, at 30,000 feet from the life science standpoint, if you were to go back and take a look at our Same Property Performance guidance for the life science sector a year ago on this call, we projected mark-to-market declines. If my recollection is correct, somewhere in the 15% to 20% down. Where we ended up for the year was in fact up 30%. So that's another way of looking at the swing there, just during 2011, Ross.

Okay. While we're on that topic, can we talk a little bit about the Page 9 in the supplemental? You've got quite a few life science and MOB assets under redevelopment. Can you give us a sense of where you are in terms of leasing your occupancy on, let's call it, what, nearly $250 million worth of investments there?

Yes. Why don't we -- do you want to start, Tim, with the life science?

Yes, on the -- looking at page, the top of Page 9, Ross, the Mountain View asset is 100% pre-leased to LinkedIn. The Modular Labs asset is about 28%. The Soledad asset is 100%. The 1030 Mass. Ave. is 10%. The Durham research lab is 100%. The Knoxville asset is about 22%. And then the remaining MOB assets, there's about 4 there, those don't have any pre-leasing and then the Fresno that's on the bottom is 100% pre-leased. So a fair amount of pre-leasing on those assets.

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

Yes. There's -- we continue to talk to tenants there. We've actually had a pickup on occupancy on that campus. We had a medical device tenant move in to one of the 3 buildings here in the last couple of quarters and continue to talk to people about the 500/600 Saginaw building both on the medical device side and the life science side.

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

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

Incremental probably in the low teens.

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

Got you, thank you for the comment.

And just as a follow-up, Ross, the pre-leasing percentages on the pipeline as a whole is about 1/3.

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

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

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

Perhaps if you could give it for what the macro is or the entire health care real estate pipeline?

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

Jay, if I remember, I think you did when you gave raised equity. I think it was like 2 Januaries ago when you talked about the pipeline being bigger than to the time prior to CNL and this was prior to doing HCR ManorCare so that would have implied a pipeline greater than $6 billion at that point.

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

And then if you look across your 5 sectors you've spoken about, it sounds like there's quite a bit of potential deal activity across those 5 sectors. But if you look at the risk-adjusted or the potential risk-adjusted returns from each of those sectors, where are you sort of seeing the best opportunities at the moment?

We've actually -- again, you've got to put this in the context of our 5x5 model. So within a sector, we can play a sector multiple ways, but we've got interesting opportunities in each of our 5 property sectors as I mentioned in response to Adam's question.

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

I think that's a smart observation. I'll say that. I'll also say that we have absolutely 0 in the way of dispositions included in our 2012 guidance. But we're economic animals, so we'll see.

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

It depends what the valuation is on what you sell.

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

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

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

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

Look, I mean, I think I kind of feel the same way that I did back in October, November when I think I got about 10 questions a day as to what was going to happen with the super committee. So we're not in the business of handicapping what's going to come out of Washington given the partisan politics that are being played there. But I will say, again, as I made the comment a couple of minutes ago, when I read a lot of sell-side pieces in the last week or 2 that are unusually positive about maybe an easing government reimbursement environment or I think one was entitled Storm Clouds Parting. I would say that this is continue to be a challenging space, I'd say that. But I think you've got to look at not just the potential challenges but there's the potential for some opportunities to come out of that, particularly for HCR. And I think the one opportunity would be if CMS moves to a site-neutral reimbursement sort of protocol for patients that had a surgical procedure in an acute care hospital and make that discharge, whether it's to a rehabilitation property or an LTACH or a post-acute property. If they make that site-neutral in terms of the reimbursement, which is not the case today, that obviously, given HCR's low-cost model, that would actually be quite an interesting development. So again, we don't speculate as to what's going to happen. We're taking it all in and we will respond accordingly through our operating partners, which in this case, in the post-acute space, is HCR.

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

We have not asked them that specific question, no.

[indiscernible] -- capital markets.

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

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

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

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

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

Yes, I don't think we've been hesitant to use the structure. I think we've been unwilling to move forward unless we have an appropriate risk-adjusted return, which in our view, requires a premium to a triple net execution and not a discounted return to a triple net execution. That's our only hesitancy. Yes, we found, with all the transactions we looked at, we found one of those that cleared that hurdle internally and that was our RIDEA 1 and it's early days. You've only got 4 months of actual operating results in there so far and ourselves and Brookdale are working through that and we're pleased with the results so far. But it's early days. We're repositioning some of the assets, we're putting some CapEx in to change a little bit of the profiles for some of those assets. So we feel very good about that.

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

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

Okay. I'm sorry. I might have missed that detail. Now onto the life science portfolio, and specifically, what some might view as kind of blurring lines between the office business and the life science business. You've obviously made some good deals with LinkedIn and Google. But I'm just curious as to what's creating that. Is it a lack of opportunity or is it just the Google and LinkedIn, these leasing opportunities are coming in and they're just too good to pass up? I just -- if you could give tops-away view about the incorporation of more conventional office tenants into that portfolio.

Yes, let me -- I'll have the specifics answered by Tim or Paul but I take you back, Rich, to the call we made when we announced the Slough acquisition back in the middle of 2007. One of my first comments was that if you take a look at that Bay Area portfolio, it is book-ended by Stanford University and Palo Alto to the South of our real estate portfolio there, which obviously includes -- didn't include then, includes now, more of a technology-focused component of tenancy. And then to the North, our Genentech campus up in South San Francisco, then you've got a lot of real estates in between. So that's a good location. And so that hasn't changed at all. I think, if anything, we're seeing the benefit of that. But in terms of the specifics of the lease, and stuff like that, Tim, do you want take that?

Yes. Rich, it was just a -- we just evaluated the rent relative to the TI investment, and given where office rents have gone, they're a much higher return for us. Those buildings can support both life science or technology. So we just evaluate those -- that demand as it comes in and the superior financial outlook for us was to continue to expand LinkedIn and Google on those campuses. Now we do have a couple of remaining life science tenants on those campuses, so as I say, we'll continue to evaluate the rent relative to the incremental TI investment and choose the best financial outcome.

Can you say the presence of Google and LinkedIn creates a draw that you might see more conventional office users versus life science users?

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

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

What do you mean it's moved up?

Well, if you look back 18 months ago, pure office space in that particular market was maybe lower than where life science rents were.

Okay, understood. And then last for me, the FAD guidance implies, if I'm doing this right, about $245 million or $250 million of absolute dollars of either non-cash or CapEx. And I'm coming about $30 million or $40 million short of in terms of the number that you provided. I've straight-lined CapEx, DSO income related to the capital lease accounting and other issues and above and below market rents. But what's in that other FAD adjustment line that you typically provide in your disclosure?

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

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

It's actually $59 million.

I think Tim took you through the -- Tim took us through it in his high level remarks, Rich.

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

Next question will come from the line of Rob Mains with Morgan Keegan.

Just a couple of odds and ends here. Tim, the $4.7 million mark-to-market on marketable securities, could you explain what that was?

Yes, that was our ownership in Brookdale stock. The accounting regs there require you to take that quarter end price, which was $17.40, Rob, which is obviously, the stock is higher today but that's what that's all about.

Right, okay. Remind me then. It's a rule then that you book -- you take -- you mark losses but you don't mark gains, or am I wrong about that?

Until you actually realize the gain.

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

Yes, specialty hospitals, LTACHs, to be honest, acute-care hospitals. But kind of for a different reason. We're not concerned that acute-care hospitals are going to vanish in the next round of reimbursement changes but we do believe that space is very, very operational-intense and likely to become more operational-intense, whether it's their cost structures, with labor and union activity, and then the constant demand for more technology and then you've got the reimbursement environment, you've got the managed care providers who've become quite substantial in size. So in hind --again, I preface everything by, when people ask us about what sectors we're looking at, within the context of our 5x5 model, I think we're more likely to do something incremental on the hospital space if that was more of a debt sort of product as opposed to equity ownership. We love what we've got in acute-care hospitals but I don't think you should expect to see us add materially to that from the standpoint of an equity ownership. So that's how I'd kind of answer some of those thoughts, Rob.

Okay, great. And then that's actually a good lead into my next question which is given the increasing complexity the acute-care hospitals are facing and some of the ways that they're reacting to ACAs, ACOs and the like, I think this question comes up all the time. Starting to shake loose any of the medical office buildings that they own that arguably they shouldn't, are you seeing any activity towards that?

That's the great hope, right? That the tax-exempt markets continue to be challenged and the operating challenge is in that space, that's the great hope. I think you've got a barbell effect going on there, not dissimilar to some of the other sectors, which quite frankly, you could include healthcare REITs as well. The strong are getting stronger and the folks that aren't so strong are likely to go away. I thought I saw yesterday where HCA sold some new debt at a coupon that started with a 5. So they are certainly -- have very access to very, very attractive cost of capital. So I think to date, you've seen 1 or 2 instances of the health care system monetizing some of its MOBs with an eye towards reinvesting those proceeds in their physical plant. I would say for the most part, that's been more of a defensive move by those hospital systems as opposed to an offensive, kind of a strategic call to say hey, we're getting out of the bricks and mortar of MOBs. But we'll see what happens here over the next year or 2.

Okay. So clearly, it's not a trend?

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

Your next question will come from the line of Todd Stender with Wells Fargo Securities.

My question is related to life science, so probably directed to John. Just looking at the portfolio, how is that going to look 5 years from now? Is this in general a property type that's offers good visibility on space demand? And just geographically, are we going to start to see the portfolio move away from South San Francisco and Torrey Pines and then move towards markets like Utah?

Oh gosh, no. No, I think if you think about life science, you want to be in the 4, maybe 5 geographic markets that are the largest beneficiaries of the NIH grants from the government. So in ranked order those are #1, the Bay Area; #2, Boston, Cambridge; and probably #3, it might be tied for the Maryland, Baltimore corridor and San Diego; and then probably, 5 would be Seattle. So I think to the extent you see us do life science, it'll likely be in those markets. So that's how I'd answer the geographic part of your question, Todd. With respect to what this portfolio looks like, I would say in addition to -- this is the safe -- of our 5 property sectors, this is the property sector that has the preponderance of land for future development. So -- and we've got some of that in Northern California, in the Bay Area at the Cove, which is in South San Francisco and our Sierra Point parcel, which is in Brisbane, which is right between South San Francisco and downtown San Francisco. And then you got some down in the San Diego area, most notably in Carlsbad and Poway. So my guess is you'll see some activity on those parcels which could look like build-to-suit with pre-leasing commitments or could take other forms of monetization as well.

And just what are your tenants saying? Are the tenants in general willing to give out where they want to be 3 to 5 years from now? And does that -- how does that relate to what they were saying say, 3 to 4 years ago?

It really hasn't changed in the life science. I mean that ranking that I just gave you, 1 through 5, the Bay Area; Boston; Cambridge; Baltimore, Maryland; San Diego; Seattle, that would have been -- those would've been the same 5 markets 5 years ago. They might have been ranked a little differently. I think San Diego 5 years ago might have been second, and Boston, Cambridge third. But that really hasn't changed an awful lot. I don't know, Tim, if you want to add something.

Yes, Todd, I would guide you towards the investment that continues to happen in that space. There continues to be, over the last 3 years, a record amount of investment into the life science space in the $65 billion range, primarily partnering with larger pharma -- with some of our life science tenants. So the investment continues to be very robust in that sector.

Next question will come from the line of Tayo Okusanya with Jefferies & Company.

Jay, I realized that most of your leases are triple net, but just curious what you were hearing at his point about the potential for Prop 13 in California to kind of start to exclude commercial real estate just given you guys own so much commercial real estate in that state.

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

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

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

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

Can you say that again?

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

Well, you currently have the income associated with the loans as opposed to the drag from development.

Okay, and how long will the loans be outstanding?

It's a 5-year term.

Your next question will come from the line of Nicholas Yulico with Macquarie.

Just going back to the development loan business, did you say it was $100 million that's the commitment outstanding right now?

Is that the Nick Yulico?

That's me, live and direct.

The Nick Yulico, the author of the proprietary Macquarie's sniff test? That Nick Yulico?

That's right.

You want to take the development question?

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

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

I don't have the total numbers right now.

5 separate communities.

5 projects averaging in size between 75 and 100 units so it's probably close to 600 or 650 units.

Okay, and would these all fall into the Brookdale program max process?

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

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

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

Yes.

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

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

So presumably, this could be used -- this whole program could be used as a way to perhaps expand our idea platform with Brookdale in the future?

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

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

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

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