Healthpeak Properties, Inc. (DOC) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 HCP Earnings Conference Call. My name is Darla, and I will be your coordinator today. [Operator Instructions] I would now 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, Darla. 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.

Thank you, John. Welcome to HCP's First Quarter 2013 Earnings Conference Call. Joining me today are Executive Vice President, Chief Investment Officer, Paul Gallagher; and Executive Vice President, Chief Financial Officer, Tim Schoen. We will start off with a review of the results we released earlier this morning. And for that, I turn the call over to Tim.

Thank you, Jay. Let me start with our first quarter results. For the quarter, we reported FFO of $0.74 per share and FAD of $0.62 per share, representing year-over-year increases of 10% and 15%, respectively, driven by accretive acquisitions completed in the second half of last year. Results this quarter also included a onetime gain of $0.02 per share from the sale of marketable securities. Our same property performance generated 1.1% cash NOI growth compared to the first quarter last year. The growth was negatively impacted by a few onetime items that included: cash income of $5 million recognized in the first quarter of 2012, consisting of a $4 million rent payment from Google and a $1 million working capital recovery from transition properties in the senior housing segment; in addition, a $1 million negative impact incurred in the current quarter that resulted from a revenue adjustment in the MOB segment and business interruptions due to Superstorm Sandy at a senior housing community. Combined, these nonrecurring items reduced our first quarter same-store growth from 2.9% to 1.1%. Paul will discuss our results by segment in a few minutes. During the quarter, we made investments of $96 million, consisting of $38 million for the 4 remaining senior housing properties that completed our acquisition of the Blackstone JV portfolio and $58 million for development in other capital projects. Turning now to our balance sheet. The significant positive momentum in our credit profile, which led to 2 upgrades by the rating agencies in the fourth quarter of 2012, continues into 2013. Our balance sheet improved during the first quarter as measured by the following credit metrics: financial leverage of 39.6%; fixed charge coverage at 3.9x; net debt-to-EBITDA at 4.8x; and secured debt ratio remains low at 8.3% and will improve to 6.9% based on our current plan to refinance $280 million of mortgage debt maturing later this year. During the quarter, we repaid $150 million of 5 5/8% senior unsecured notes with existing cash, which included a portion of the proceeds from our 2 5/8% unsecured notes issued in November last year. Our remaining 2013 debt maturities, all in the second half of the year, totaled $685 million with a weighted average interest rate of 5.9%. And we have $1.5 billion of immediate liquidity from our revolver. Updates to our 2013 guidance. Our existing portfolio continues to perform in line with our business plan with projected full year cash same property performance growth between 2.5% and 3.5%, and we continue to expect growth to accelerate as we move through the year. We are raising our 2013 FFO guidance by $0.02 per share to range between $2.94 and $3 per share. This increase is driven by achieving $0.01 higher gains than our previous forecast from the sale of marketable securities and an additional $0.01 from several other items. We are raising our 2013 FAD guidance by $0.02 per share to a range of $2.41 and $2.47 per share. Lastly, a few words on our triple-net leased portfolio. As you know, we have often emphasized the combination of safety and growth in the recurring cash flows generated from our properties. Today, $17.4 billion or 85% of our owned portfolio across 5 property types are anchored by long-term triple-net leases, providing contractual escalating rents. An important safety aspect of triple-net leases comes from HCP's practice of grouping properties into large master lease pools. To provide additional transparency regarding our individual master leases, we have expanded our supplemental package on Page 8 to profile several key credit attributes in a heat map format that shows for each lease the contribution to HCP's annualized revenues, EBITDAR coverage and remaining term. I'd like to point out that $13.2 billion of real estate operated by our senior housing, post-acute and hospital tenants is triple-net leased with a 12-year average remaining term. Of this amount, $12.4 billion is pooled in master leases and $10.4 billion is further supported by corporate guarantees. This heat map conveys the long-term contractual nature of our cash flows with creditworthy counterparties on the majority of our portfolio. In addition, these master leases produce attractive risk-adjusted predictable growth year after year via annual rent increases averaging in the 3% to 3.5% range. Combined, this translates into a core portfolio with low volatility that is expected to produce annual FAD growth per share of 5% to 6% organically. Adding accretive acquisitions will further elevate this trajectory, as is the case this year with our projected year-over-year FAD per share growth to be 10% at the midpoint of our guidance. With that, I will now turn the call over to Paul. Paul?

Thank you, Tim. Before I review HCP's first quarter portfolio performance, I want to reiterate how our triple-net occupancy, triple-net cash flow coverage and overall portfolio same property performance metrics are calculated. Occupancy represents the average occupancy for the quarter. Cash flow coverage is based on EBITDAR after allowing for management fees for the trailing 12 months. Both metrics are for our same property portfolio and our one quarter in arrears. Same property performance represents cash NOI for the quarter compared to the same quarter prior year for properties that were stabilized and remained in operation for the duration of the year-over-year comparison periods. Now to the portfolio performance. Senior housing. Occupancy for our senior housing platform was 86.6%, a 20 basis point sequential increase over the prior quarter and a 120 basis point increase over the prior year. Cash flow coverage for the portfolio was 1.11x, unchanged from the prior quarter. Same property performance increased 1.9%, driven by contractual rent steps, including higher rents for assets transitioned to new operators, partially offset by a decline in working capital recoveries from transitioned assets. Net of the effect of working capital, same property cash NOI increased 2.8%. Post-acute/skilled nursing. HCR's normalized fixed charge coverage was 1.29x for the 12 months ending December 31, 2012. For the trailing 12 months ending March 31, 2013, normalized fixed charge coverage was 1.28x. Normalized coverages exclude the impact of $95 million in reserves accrued in 2012 for prior period liability claims. Including these reserves, the first quarter trailing 12-month coverage would be 1.09x. HCR's year-to-date 2013 revenues have been driven by higher reimbursement rates, improved patient mix and growth in census. HCR has now had 2 consecutive quarters where quarterly census was higher across all lines of business than the same period in the prior year. Revenue growth was offset by an increase in operating expenses for the quarter, primarily driven by increased staffing levels early in the year due to a higher acuity patient mix. Operating expenses -- operating expense levels came back down to normal in March. Overall, first quarter EBITDAR was stable with a trailing 12-month fixed charge coverage ratio decreasing 1 basis point from the prior quarter due to an additional quarter incorporating HCP's April 2012 rent bump. Turning to our non-HCR portfolio. Cash flow coverage was 1.48x, a 3 basis point increase over the prior quarter, and same property performance increased 3.4% driven by normal rent steps. Hospitals. Cash flow coverage increased 24 basis points to 5.26x, driven by strong fourth quarter performance at our HCA hospital at Medical City Dallas and our tenant hospitals. Same property performance increased 6.7%, driven by increased cash rents on our recently repositioned Plano facility. During the quarter, Tenet Healthcare exercised its option to acquire 3 of our hospitals. The purchase price will be at fair market value and will be effective February 2014. The Tenet facilities generate annual rents of approximately $23 million or 1% of HCP's annualized revenues with an EBITDAR cash flow coverage of 4.7x. Medical Office Buildings. Same property performance was up 0.4%, driven by rent steps partially offset by the relocation of a major tenant in Las Vegas to their own building and a onetime revenue adjustment. Excluding this adjustment, the same property performance increased 2.1%. MOB occupancy as of March 31, 2013, decreased 100 basis points from the prior quarter to 91% due to the delay in commencement of 3 large leases totaling 47,000 square feet in Nashville, Dallas and Denver and the relocation of a Las Vegas tenant. Our retention for the quarter was 67.6%. During the quarter, tenants representing 340,000 square feet took occupancy, of which 291,000 square feet related to previously occupied space. Renewals for the quarter occurred at 3.3% higher mark-to-market rents. We have 1.9 million square feet of scheduled expirations for the balance of 2013, including 478,000 square feet of month-to-month leases. We have executed 257,000 square feet of leases that have yet to commence and have an active leasing pipeline of 1.1 million square feet. Life science. Occupancy for our life science portfolio as of March 31, 2013, increased 20 basis points from the prior quarter to 91.5%. Same property performance was down 5.6%, driven by the $4 million nonrecurring rent payment received in the first quarter of 2012 associated with Google's lease amendment and the mark-to-market rent reductions, offset by contractual rent increases and occupancy gains. Absent the onetime Google rent payment, same property performance for the quarter was up 1.2%. We added 70,000 square feet to the portfolio following the completion of a build-to-suit on our Mountain View campus, 100% leased to LinkedIn. Including the 70,000-square-foot LinkedIn lease, tenants representing 183,000 square feet took occupancy during the quarter. Renewals for the quarter occurred at 1.4% higher mark-to-market rents, and the average lease term for new and renewal leases was 6 years. The life science portfolio has 332,000 square feet of scheduled expirations for the balance of 2013, representing just 0.4% of HCP's annualized revenues. The expirations include 77,000 square feet in Durham that will be redeveloped under a previously executed lease agreement with Duke University. The life science development pipeline consists of 3 redevelopment projects currently 69% pre-leased, totaling 166,000 square feet and a development project that is 100% pre-leased totaling 115,000 square feet. Total remaining funding requirements for the development pipeline are $41 million. Sustainability. During the quarter, we received 9 ENERGY STAR labels, bringing the total to 102 across the MOB, life science and senior housing sectors. Our Oyster Point campus in South San Francisco was awarded BEST SITE designation by Best Workplaces for Commuters for offering outstanding commuter benefits. With that, I'd like to turn it over to Jay.

Thanks, Paul. HCP is off to a nice start in 2013. We achieved double-digit year-over-year percentage increases in both FFO per share and FAD per share. Our portfolio performed in line with expectations and will ramp sequentially in 2013 as we move beyond the anniversary of several positive 2012 onetime events. Our balance sheet continues to register A metrics with quarter-end leverage of 39.6%, fixed charge coverage ratio at 3.9x and net debt-to-EBITDA of 4.8x. Momentum from HCP's ongoing commitment to sustainability, the feature of our new annual report, continues to build. We have made progress on monetizing the small nonstabilized portion of our real estate portfolio. For our Four Seasons mezzanine debt position, trading levels have rallied 250 basis points from that investment's entry point of 9 months ago. And the level of dialogue surrounding potential acquisitions continues to be substantial. Turning to our sectors. HCP's hospital coverage ratios improved to 5.26x, although each of the publicly traded hospital operators reported weak admission trends in their first quarter results. Last week's CMS-proposed reimbursement rates are positive relative to expectations for the hospital sector. HCR's post-acute admissions were up in the quarter and results improved over the course of the quarter, resulting in quarter-end cash building to $158 million. This is noteworthy given the lower acute care hospital admission trends in the first quarter, coupled with the understanding that 90% of HCR's admissions come from hospital discharges. In our office sector, mark-to-market occupancy trends for our life science and MOB portfolios remain solid, and we expect to approach new high-water occupancy levels of 92.5% by year end for each segment. In senior housing, our triple-net coverage ratios remain stable despite outsized rent escalators. Our RIDEA joint venture with Brookdale has improved significantly with quarter-end spot occupancy at 88%, up 310 basis points from its low point a year ago. And for our Blackstone JV acquisition, we closed on 4 remaining communities and one fee interest in the quarter. Granger Cobb and his Emeritus team have that portfolio's performance ahead of our underwriting with the stabilized component at 91.5% occupancy and the lease-up portfolio increasing 250 basis points in occupancy since closing the transaction in the fourth quarter of 2012. Finally, when you have a few minutes, please take a look at the new triple-net master lease disclosure on Page 8 of our supplemental package. I want to thank our accounting and asset management professionals who worked so well on this initiative. With that, we are delighted to take your questions. Darla?

[Operator Instructions] Your first question comes from the line of Nic Yulico with Macquarie.

Jay, I wanted to ask you about HCR ManorCare. I sense here that the investment community is very focused on the coverage metrics and the risk that the EBITDAR of their company cannot keep up with the rest -- escalators and there's, I think, also a thesis that Medicare dollars are going down to post-acute operators over time. But clearly, when you look at it, there's this other alternative world developing where CMS starts to reward or penalize post-acute operators based on quality of care whether it's via bundled payments or something else. HCR likely benefits in this environment given its very high-quality patient outcome. So my question is how are you and HCR ManorCare thinking on this issue? And is this the year where HCR begins taking some market share from other operators and thus coverage metrics improve based on that?

I think the answer is yes. In fact, you already saw that in the first quarter when you've got a business platform that has 90% of its admissions coming from discharges from acute care hospitals and discharges from acute care hospitals were reported to be uniformly down and weak across the sector yet you've got admissions and census and revenues up year-over-year, that's exactly what's starting to happen. So what you've got here is a business model that starts with a significant competitive advantage, that being that it's the low-cost setting in the post-acute space. Through an awful lot of hard work post the RUGs-IV modification back at the end of 2011, HCR has rightsized their cost structure. So now what we've got here -- and the challenge here is going to be revenues. And looking beyond just quarter-to-quarter, you're seeing some significant opportunities develop. We've obviously got those that'll come out of the Affordable Care Act. You've got the bundling, you mentioned the test pilot that HCR was the exclusive partner selected by UnitedHealth on the post-acute bundling project. You've got the potential -- there's been some discussion in Congress about moving to site neutral. So you've got a lot of things that are starting to be talked about and will, in fact, result in lower cost to the payer. And that's where you're going to see HCR disproportionately benefit given their business model.

So on that note, you think it's fair to say that there's been a little bit of a benefit so far like you mentioned, but really we haven't really seen obviously the payment model fully change yet, so that a lot of this benefit could still be on the come here?

Well, I think you've seen just smatterings. Remember, the project -- the CMS-mandated project with UnitedHealth, I mean that in and of itself is being tested just in the 3 large markets that UnitedHealth and HCR overlap. So what's happening right now is you've got the beginning, as I've said on the prior call, the true elements of health care reform starting to be put in place in the marketplace. And you're going to see alliances, you're going to see risk-based sharing, you'll see these bundled payment programs, you'll see -- eventually you'll see site-neutral opportunities. And that's going to be the real -- the real play here for HCR is a revenue play over the next couple of years as these other programs -- as these new programs get put in place. But in the meantime, HCR, given their visibility in the space and given the test pilots that they're working with with their partners, they've already positioned their business model for that opportunity. So you'll see continued -- you'll see this revenue growth disproportionately drop into earnings over the next couple of years given the cost structure that's been put in place.

Okay. And then just one last question from me separately on the gain on marketable securities. Did that relate to a sale of your investment in Brookdale Senior Living stock? And if so... [Technical Difficulty]

Nic, I think we lost you there for a second.

Just on the gain on marketable securities, did that relate to a sale of your investment in Brookdale? If so, could you talk a little about your thought process on that? I know it was never a large position for you guys.

Yes. Early in the quarter, we sold our position in Brookdale, and that's what gave rise to the gain that Tim communicated.

I mean, anything you can just -- I mean, I know it was never a large position; it was essentially Brookdale. You took the proceeds they put into the RIDEA transaction and reinvested that in Brookdale. You saw clearly an opportunity at the time to align with the operator. I mean, is there anything that you kind of learned through this whole process that was kind of interesting, or is it just that the stock ran up in the first quarter and you saw an opportunity to get out at a profit?

We think making money for our shareholders is among the most interesting things we do. So if you look at the types of investments that will fall into this bucket, nontraditional triple-net real estate sort of acquisitions, you've seen us in the Genesis debt, the HCA debt, you've seen us initially at our senior housing joint venture where we subsequently took out the institutional partner. And here again, when we go into these sorts of -- this basket of opportunities, we're looking for "heads we win, tails we win" sort of outcomes. So here, we were able to realize an attractive return for our shareholders. We're also able to make some additional progress on the monetization of the nonstabilized portion which is quite small, less than 5%, but every dollar counts. The nonstabilized portion of our investment portfolio that we are moving into stabilization, you'll see -- on that point, you'll see us -- I suspect you'll see us make further progress during the course of the year. In particular, I think it's likely that we'll be out of the entire legacy Delphis loan position by the end of the year. So we're -- again, we're making good progress on all these fronts. So that's what I would say about the exit on that sale, Nic.

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

Looking at your new triple-net master lease profile chart, it looks like about 5.4% of annualized revenues are below onetime EBITDAR coverage. I was just wondering if you expect those to improve through the life of the lease or what your thinking is on those?

Well, again, we use this as a -- it's a very helpful asset management tool. We certainly look at the opportunities that are below 1.0 just like we look at opportunities that are above 3.0 or 4.0, for example. I know a lot of you will probably be pleased to hear that our hospital coverages are at 5.26x. At the other side of that argument is that the difference between 1.0 and 5.26x is a substantial amount of cash flow that's accruing to the benefit of the operating tenants. But in the situations that are below 1.0, I think what we've attempted to do there is show you that the remaining term is not insignificant. You've got corporate guarantees. But as a matter of doing our routine asset management discharge of our fiduciary responsibilities, we look and we talk with the operators that are involved there and we're constantly looking to see if we can improve the position of HCP shareholders. Don't you want to add something, Tim?

Yes. In all those pools that are below 1, they are -- have a corporate guarantee. They have a long term associated with them. And the underlying properties in those pools are with occupancies in the 75% to 85% range, so there's upside in terms of occupancy in those pools over the longer run.

And I guess on the reverse of that, for those that are below -- above 3x, is there opportunity for kind of rent roll-ups and renewals there?

Yes, again, we're somewhat -- I think there's a lot on that page and obviously the opportunity to do that would be as you approach the lease renewal date, so -- but again, it's what we've tried to communicate here is that, a, that the triple-net portfolio as a percent of our total investment portfolio is massive as a percentage basis. I think Tim quoted that it's 85%. Number two, as you can see depicted here, now you're not seeing the triple-net portfolio here for either the life science or the Medical Office Building sectors. This is just the senior housing, post-acute and hospitals. And as you can see here, the coverages are good. The corporate guarantees are good. These are creditworthy tenants that are behind these corporate guarantees. And by and large, the remaining lease term is significant. So it's a nice package that really speaks to the safety side of the safety and growth business model that HCP enjoys.

Your next question comes from the line of Jeff Theiler with Green Street Advisors.

A quick question about the, I guess, you call it a hot zone you have depicted there in red. Is this implicitly saying, for example, that if you've got a lease covering at 0.75x, you don't really talk about it with the operators until 2 years out, or how should I be thinking about what that red area represents?

We talk about all of our leases with all of our operators constantly. I think you should take the hot zone, lower left portion of that graph, to be an indicator of maybe a watch list sort of a moniker, if you will, where you've got -- if you've got a portfolio, fortunately we don't have any in or relatively speaking near that hot zone, if you've got a portfolio where you've got below 1.0 coverage with, say, a less than creditworthy counterparty and you're inside, say, 18, 24 months of lease term, you're going to have -- you're going to be having a different asset management protocol than you'd be having for a lot of the others on that page.

All right, okay. Just switching gears to HCR ManorCare quickly. So it seems like the coverage, excluding those reserves, is pretty stable from the year ending December 31 to the year ending March 31. We've got the sequestered cuts kicking in here. Where do you see that coverage trending for the rest of this year, I guess, before we get into the fiscal year '14 Medicare rates? I mean, with this 2% cut, where do you see that coverage trending?

If HCR makes their calendar 2013 budget, you'll see that coverage in the low 1.3s.

Low 1.3? And so what kind of Medicare rate increases, if any, do you feel like you need to really feel comfortable with that lease on a longer-term basis?

We feel very comfortable about this lease on a long-term basis right now.

So even at 0% Medicare rate increase, you see no risk over the next several years?

The play here, Jeff, will be HCR gaining share and bringing in incremental revenues because of what gets changed with CMS and quite frankly what gets changed in the marketplace with the large managed care payers and things like that. That'll drive the upside from this point. That'll drive the increased valuation in our OpCo investment.

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

Jay, can you kind of tell us what you're seeing in the investment markets? What kind of deals you're pursuing? Is it size? Is it a lot of large portfolio deals out there? And if there's any particular property type that you find more attractive?

Well, Michael, as you know, we don't really comment on prospective events. But I will say that we obviously have a business model that's arrayed across 5 property sectors: hospitals, post-acute, senior housing, medical office and life science and up and down prospective counterparties, capital structures with the fee simple ownership in real estate development, mezz debt, the opportunity to do joint ventures and RIDEA. And I'd tell you that as I'd mentioned on the last quarter, I think the thing that's different right now and that's continued as we've moved into the, I guess, we're 1/3 of the way through 2013, I think the thing that's different is the breadth of the opportunities. I mean, you can light up -- I'd say you could probably light up, if there's 25 boxes in that 5x5 business model, I think you'd probably light up about 80%, 80-plus percent of them in terms of where there's opportunities that are in discussion. And that is different than in years past where it might have been more limited to, say, 1/3 of the business model. So that's the thing that's different and obviously quite interesting.

And the reason why the activity was light this quarter is because the deals were, I guess, pooled into 2012 for tax reasons?

No, I don't think so. I think it's just the opposite. I think they were pushed into -- I think -- my guess is you'll see a pretty active 2013 from this point on, by the way, from our standpoint, both on the acquisition side but also on capital market side. I think what happened was with all the election in November and then you had -- immediately after you got the election behind us, which was a somewhat more contentious election than normal elections, then you ran into the whole fiscal cliff stuff. And I just think you had kind of gridlock there for quite a while. And now people are starting to come out of it. It's not like it's off to the races time. But I think you're getting to the point where through price discovery and access to the capital markets, I think there's -- there's some -- you're starting to see some meaningful interaction between prospective counterparties as it relates to incremental transactions.

Okay. And then my last question is were you able to extend one of your 2014 senior housing expirations?

Were we able to extend? Not that I'm aware of. Is there something you want to ask...

No, I was just comparing the lease expiration schedule and it looks like that 2014 there's a lease that moved out and I just wanted to see if you can give the details around that if that was the case, but maybe I'll follow up after the call.

Yes, why don't you -- -we'll do that side bar, that'll be fine.

Your next question comes from the line of Ross Nussbaum with UBS.

Jay, you characterized your acquisition, I guess, pursuit as having a substantial dialogue. And I'm curious just given the volumes that you reported in Q1, and your, I'll call it, the track record over the last couple of years on consummating some very large deals, would you characterize the dialogue as being more focused on those, what I'll call, big elephants versus sort of smaller one-off transactions?

No, I'd characterize it as being different from a standpoint that we've got multiple opportunities in both those buckets, if you will. That's the thing that's different. It's very comprehensive in terms of the property type, the product type, the size, the prospective sellers. It's much more varied and deep as opposed to a couple one-off situations. So that's really the thing that's different now than in years past.

Okay. And the second part of the question is clearly you're dealing with an equity currency that you've really never had before in terms of its cost. How do you avoid -- or maybe this is the question, how do you think about that cost of equity with respect to how you pursue acquisitions? Is it just about the accretion that you can generate to the earnings, or do you really look to the real estate value at the end of the day? How do you balance where your cost of equity is against using that cost of equity?

We always -- our business model is such that we always triangulate in on 3 or 4 key metrics. It starts with where you are on a price-per-pound basis versus replacement costs, Ross. So that's an important element. Accretion, and again we always talk about accretion to FAD because FAD is what gives source to an ever-rising dividend stream, which keeps us positioned as the only REIT in the world on the Dividend Aristocrat list. We're going to look at unlevered returns. And then we're going to look at spreads to our weighted average cost of capital. And importantly there, by the way, Ross, we look at, and this is something that we've kind of got written in stone or blood with the rating agencies, we look at all of our prospective investments on the basis of our targeted long-term capital structure, 40 parts debt, 60 parts equity. Now that 40 parts debt, we don't put any floating rate debt in there at all. That 40% debt is all 10-year unsecured debt. And then for the 60 parts that are equity, not only do we put the yield in there, but we put the growth rate that we have in our business model for the next 3 years. So for something to -- for an opportunity to clear the bar, it's got to clear that fully loaded weighted average cost of capital calculation. It's got to be additive not to earnings this year but additive to the growth rate in earnings that we've already got locked in. And so that's [indiscernible] how we look at making our investment decisions.

Okay, last question. Irrespective of price, if you could put a dollar to work in any property type in your portfolio today, where does that dollar go?

Irrespective of price?

So basically, where do you see the best cash flow growth over, let's call it, a reasonable time frame as we sit here today?

Well, I think if you can opportunistically buy some senior housing assets in here, I think that's interesting. I think you're seeing that play out on our RIDEA joint venture portfolio right now where we're seeing outsized growth in terms of the occupancy in that portfolio since the period of time we bought out the 75% institutional partner. I think you're seeing outsized growth on the lease-up component of our Blackstone JV, which you will recall was about 1/3 of what we bought. So those 2 specific portfolios, which I called out in my script, I mean, you're seeing much more than a kind of a normal sort of course improvement in occupancy and cash flows. So to the extent we could source some more of those, that would be very interesting. To the extent there were some opportunities to kind of have another, what I'd call, "heads we win, tails we win" sort of situation where maybe because of some disruption in our company's capital structure where there's a debt maturity but there's some underlying real estate value, I think those are very interesting opportunities right now, Ross.

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

First question, Paul. I think you mentioned this in your prepared remarks, but can you just go over again what you thought the impact was to HCR ManorCare's coverage of the rent bump in April?

Yes, it's 1 basis point from the prior quarter.

Okay. So almost nothing?

Right.

Okay, perfect. And then on the MOB leasing, I guess there were some lease-specific issues in the first quarter. But are you guys seeing or hearing anything out of your tenants that is -- are their views evolving on the types of leases, the length of leases, anything with consolidation of physician practices in hospitals, anything like that that's kind of evolving this quarter versus last quarter or 2 quarters ago that you've seen?

No, in fact our mark-to-markets there are trending a little bit higher. I do, and this isn't anything that's reflected in our financials, but we increasingly hear about and are seeing a greater involvement from the hospital itself whether they're buying out the physician practices or what. So that's a trend that seems to be continuing.

Okay, great. And then last one on the balance sheet with the debt maturities. Do you guys expect with the refinancing activity the majority of that to come from the unsecured debt market versus equity, I suppose?

Absolutely. Absent any incremental acquisitions, yes.

Perfect. And then, finally, is there an update on, I believe the second tranche of the Tandem mezz loan that goes out in the third quarter? Is that still the plan or is anything different there?

That is still the plan. There's a possibility that, that might get accelerated a little bit but that is still the base plan. We have not changed the guidance from our base plan.

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

Looking at the RIDEA portfolio, you continue to show good occupancy and momentum through the quarter. Is the 88% in April tracking better than your previous forecast? And how is flu relative to expectation?

Well, I think you weren't with us at that time we did that so let me just give you a little background. This was a portfolio that historically Horizon Bay had managed for us and we had the opportunity to do 2 things. We had the opportunity to move that portfolio from Horizon Bay and then we had the opportunity to buy out our institutional partner because at that time we only owned, I think, 25% of the actual real estate. So when we looked at these opportunities that presented themselves about 2 years ago, we thought there was upside in the portfolio, which historically had been largely an independent living portfolio, Jack. We thought there was some upside in the portfolio on a number of fronts, most notably if we were to introduce a quality senior housing operator that had kind of an ancillary revenue business model and increase the cash flow of the properties that way. Now in order to do that, we also recognized we had to put some CapEx into it. So it was kind of a multi-dimension thought process of buy out the venture partner, invest some CapEx in the portfolio and then migrate that to an operator that had the ancillary revenue capability in their business platform. So we effected all that back in the fall of 2011. At the time we did that, we said we thought this was going to be 18 to 24 months before Brookdale was -- had their arms around the portfolio. I mean, they had geographic overlaps, which was one of the critical reasons why we decided to go with Brookdale, but we thought it'd be 18 months to get them to totally check out the communities, assess what the opportunities were for the residents that were there, build in the ancillary revenue platform and have the CapEx additions take place. Well, in fact, I would suggest to you, given the progress that we reported this morning, we're at the short end on the 18- to 24-month time frame. So we're feeling pretty good about that and we suspect that these outsized trends will continue. Relative to your comment on flu, there's really no material impact on this particular portfolio, given the most recently completed flu season.

Okay, got you. And then maybe what are your expectations for the remainder of the year then when it comes to occupancy? And then do you have any update on the unstabilized portion of the Emeritus portfolio?

Well, let me take the last one first. In my formal remarks, I commented on the unstabilized portion of the Emeritus portfolio. I mentioned that -- remember, of the total acquisition that we closed on in October, 1/3 of the portfolio was unstabilized or what -- the term we use was a lease-up, Jack. And in my prepared remarks this morning, I mentioned that, that 1/3 of the portfolio had, had occupancy gains of 250 basis points in the 4 months or so that have transpired since we closed that. Now, to go back to your first question, I think you were asking about -- I don't think we've communicated to the public a year-end occupancy metric for the RIDEA JV portfolio so I'll have to remain quiet on that.

Your next question comes from the line of Michael Bilerman with Citi.

Just looking at your comments regarding the Four Seasons debt, which has come in nicely from a pricing perspective and recognizing that you're perfectly hedged on the foreign exchange and you're generating a substantial amount of free cash flow just given the spread of how you financed it, should we take your comments as perhaps willing to sell down some of that position and harvest more gains for your shareholders?

Unlikely. I think harvesting the gains is not the unlikely part. I think the way we may affect -- Pete and his team over there are really good and we are certainly desirous of using our capital to increase the size of his operating platform. And so I think working with Pete and his team in the private equity firm there, I think the opportunity to first create and then subsequently harvest additional gains for HCP we see as quite attractive and quite likely, but it won't be because we're liquidating the existing position. It's likely that we'll add accretively to the position in the form of being a capital partner to that partner.

Sort of like HCR ManorCare buying into the debt and then going into assets and effectively round tripping a pretty attractive yield?

Yes, but also perhaps helping Four Seasons to facilitate some bolt-on acquisitions or expansion of their business platform.

If we switched to HCR ManorCare for a second, when you talked about 1.3 coverage by the end of the year, you're referring to the guarantor fixed charge coverage, the 1.10, I guess, as of March 31?

Yes, I'm talking about the 1 -- low 1.3 is I think is what I said. That would be normalized for reducing the noncash GL/PL charge that they took in the fourth quarter. So it would be -- if apples to apples to apples, it would be equivalent to what I think Paul quoted as being 1.28 today.

1.28.

1.28 today. And that's the guarantor coverage?

Yes, sir.

And then that comes in from a lease payment, so the bump is 3.5%. How do those bumps work during the year? You talked about April lease payment that had gone up. I just wasn't sure how that increase should we think about over the course of the year?

Tim?

Yes, Michael, those come in annually in April.

All right. So it's basically fully loaded at that point. And at this point, you get the increase in their cash flows to offset some of that?

You got it.

Is anything -- just lastly, just on the investment landscape where you talked about this being varied and deep versus some larger just one-off transactions, I guess what are the critical points of transactions at this point to get them to the finish line? It appears it's not like deals are going away from you, right? It's just there's a lack of deals overall in the marketplace. So I'm just curious as you sort of see these deals evolve, what are the key hurdles that the sellers or conversely the buyers need to get over to make a deal occur?

Well, Elmer Fudd, everything has got its own little story, some of it is private equity kind of decision-making processes, some of it is more of a public company governance process, some of it might be a particular debt maturity that's got a maturity date. I mean, the trigger points are different in each situation, so I don't think you can really -- you can't say that they're all -- I mean, to be trite, I'd say, well, we haven't been able to come to an agreement on price, but I think there's other things that act -- that go into that and they're each quite unique, situation to situation.

Right. I should know if there was something that was causing some of them to go longer than others or not occur for others, but that's helpful color.

There are, but I guess my point is there are, but it's not one single thing. They're all unique to that particular deal dynamic.

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

Just kind of going back to Ross' question about the acquisition outlook. You seem to hint that you had a little bit more interest in doing something in the RIDEA space. Just kind of curious how your thoughts are evolving on that?

I don't recall hinting to Ross that we had more interest in the RIDEA space. Were you reacting on a specific comment I made?

Yes, I think you mentioned to Ross that when he asked where you'd put an additional dollar, one of the things you mentioned was the Brookdale transaction had gone -- has been going very well and you'd be interested in doing something more like that.

Oh, right. I think what I also said, though, was I also referenced the lease-up component of the Blackstone acquisition we did in the fourth quarter, which, as you know, was a triple-net lease structure. Now that comment related more towards the ability to create an entry point in a senior housing opportunity properly structured, properly valued, properly CapEx. That was really what that one -- that was not a comment relative to triple-net versus RIDEA. We looked at that -- that's part of our normal arsenal. So we look at that execution real time in senior housing. And there, as you know, the determinant is we look at the risk-adjusted returns for the triple-net lease execution versus the RIDEA. And assuming we have a premium to compensate us for the cash flow uncertainty and the CapEx lability, we're delighted to proceed with the RIDEA structure.

Got it, okay. That's helpful. And then any baked [ph] at this point in regards to what SNF reimbursement could look like for fiscal year '14?

I don't -- you'd probably know more about than I would, Tayo.

Your next question comes from the line of Rich Anderson with BMO Capital Markets.

So first of all, if I could just mention or ask on HCR ManorCare if you were to look at a cash flow coverage, I know it's not relevant to you but it might become relevant when those leases expire. Cash flow after CapEx, too, you're probably sub 1. Wondering if my math is right, number one. Number two, what happens when 10, 12 years from now, those leases expire, what is your negotiation -- negotiating position in that type of scenario?

Well, for starters, as you know, in the lease, HCR is required to invest a minimum amount of CapEx in the portfolio. Our real estate, plus or minus, that's about $50 million a year, Rich. Last year, they invested $100 million, so 2x that. I think you'll see something similar in terms of a proportion in 2013 to what you saw in 2012. So again, it really kind of goes to the bigger issue of what the opportunity is that I was discussing with Nic. I mean, you've got a company now who's got its business model structured from a cost standpoint for what will be a very substantial market share gain that occurs in the next couple of years, which takes advantage of the fact that it's the lowest cost setting in that post-acute space and that post-acute space is going to have some very substantial changes in reimbursement protocols, risk sharing with acute care hospital operators, risk sharing with managed care companies, things of that state. So this is a revenue play here in the next couple of years, not so much of a cost. They've got the cost situation sorted out. Now, that said, today, we're at the fixed charge coverage ratio of 1.3x. We're -- after CapEx, we're at 1.15x. So that's certainly not below 1. But I think you'll see lift here -- you'll see directional lift in '13 but I think you'll see the major significant improvement start to occur in '14 and '15 as these other elements of marketplace-driven health care reform start to happen.

But if you were to look at the property level, would that be materially different than the fixed charge algebra?

Are you asking us if we'd go away from...

No, I'm just wondering how different is it when you say fixed charge coverage versus cash flow coverage?

Well, I mean, it'll be lower. But again, we've got -- remember that you're looking just at the property. These properties were used for much more than the revenues. You've got a whole host of other revenue streams here, hospice and home health and a number of other, that these properties that we own are facilitating, which is one of the reasons why we passionately believe the right metric to look at is the overall corporate...

I'm not disagreeing. I'm just wondering what happens say you get the properties back 12 years from now, what then, that kind of thing. That's all. So then turning to...

If we go to the heat map on Page 8 of the supplemental...

I wish I can print it out in black and white, but anyway...

This isn't going to be a good conversation if you print it in black and white. You've got to get the green and the red, but...

I can guess where the green is.

Yes, you'll see this portfolio position kind of looks like somewhere between the 12- and 13-year mark on the x-axis and definitely in the green on the y-axis.

Okay. Can you comment on the 2/3 of the Emeritus portfolio acquired through the Blackstone joint venture acquisition, how that -- those assets are doing, the stabilized assets?

Yes. Their occupancy is at 91.5%, I think I quoted that in my...

And what about coverage because it's omitted from the coverage statistics in your supplemental, right?

Well, it's not admitted, it's not in the same-store calculation. I think Paul took you through our philosophy on that at the beginning of his remarks. So we won't have that in there. You've seen -- overall, you've seen modest lift on our coverage. But again, we've got through -- you probably got 4.5 months worth of actual data. So we're ahead of our underwriting, that's what I said in my formal comments. That's absolutely the case, and we've had a nice improvement on the lease-up portion, which is about 1/3 of the portfolio.

Just quickly back to HCR ManorCare, does your target of 1 -- over 1.3 coverage assume any market share gain, or is that just real organic stuff?

That is -- it's not my target. That's their target. That's their budget.

Okay, their budget.

That doesn't -- that has very modest revenue assumptions for calendar 2013.

Okay, last one for me. Is it a reasonable scenario where you shift the Brookdale RIDEA assets back to triple-net once you've kind of gotten to a point where you feel like you've stabilized it and all that sort of stuff?

We look at that. I mean, we look at that and then we look at the ones that are at the 1.4, 1.5 and shift those over to RIDEA, right? I mean, we're looking to drive increases in cash flow so we've got to -- and again, this isn't a conversation that's unique to Brookdale by any means. I think people sometimes get a little overly fixated with coverage ratios, particularly as they escalate higher and higher and higher. Those are -- that gap between a 1.0 and a higher coverage is cash flow that's not going to the landlords. It's cash flow that's going to the operator.

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

One question on the 5x5 and I'm not asking you to tip on your hand on what you might do. But institutional joint ventures haven't done any for a while. Is there anything that's percolating there at all at this point?

Well, there's always stuff percolating. But you'll recall -- but let's take a giant step back and let's look at that question, which is a very interesting question over a span of, say, 6 or 7 years. So 6 or 7 years ago, ourselves and our peers, we competed with a lot of private equity firms for opportunities. Today, you don't really see us -- and this isn't today, it's the last couple of years. You really haven't seen us competing with private equity firms for deals because our cost of capital has improved significantly relative to their cost of capital. So in other words, the LP investors that are committing to those private equity funds, they're still looking for whatever they're looking for. It's probably 20% kind of plus whereas we've been able to benefit with the improving balance sheets in the sector, which has given rise to improved higher credit ratings and with the present 0 interest policy on the part of the federal government, you could add material increases in your cost of capital. So the -- what a prospective joint venture party today brings, say, to HCP versus, say, 7 years ago when the fellow across the table from me, Tim Schoen, was running that platform and we had $2.5 billion of assets under management for which we owned approximately 20% in institutional pension funds who were pension funds of AA and AAA-rated companies had a lower cost of capital, that paradigm has gone upside down. So we now have the lower cost of capital. So for us to do a joint venture at this point, it would be not having anything to do with really the decisions that we were -- the inputs to the decisions we were making 7 years ago, which was cost of capital. Today, it would be -- maybe there's something in that portfolio that they'd like to, I don't know, monetize some of it but not all of it or there'd have to be a different strategic element at this point in order for us to move forward on a joint venture. I think that's a long answer, but I think that would be my reaction to your question.

That's an interesting answer. And then I may have missed in Paul's commentary this. On the senior housing portfolio, rental and related revenues were down sequentially from the fourth quarter to the first quarter. Is there a reason for that because that same number of same-store properties?

Yes, Rob, it's Tim Schoen. There's some seasonality between the fourth quarter and the first quarter as it relates to add rent so that's the reason you see that dynamic.

A little lumpiness from quarter-to-quarter.

Even though it's triple-net through seasonality?

You do have some seasonality with the add rent component. There's a matter of...

Okay, right, right, right. There's the seasonality, got it. Seasonality in the industry. Right. And then a couple of other questions for you, Tim. First of all, CapEx was pretty light in the first quarter. It was last year, too. Can we kind of surmise that, that's normal seasonality at this point?

Yes, yes. Same word, seasonality, but yes. It's light in the first quarter, but we still expect to be in that $63 million range for the year.

Okay. And then straight line rent came up a lot but your guidance kind of seems to suggest it's going to come down sequentially. Was there -- in subsequent quarters. Was something going on in the first quarter with straight line?

Yes, well, there's 2 questions there. Yes, straight line's up from $9 million to $18 million because of the Blackstone JV acquisition and it will go down on a run rate basis over the year as we have contractual rent steps throughout the year.

Okay. It seems that the quarter-to-quarter decline looks like a little steeper than in the past, but that's probably because you're starting in a higher base?

Yes, it's still in that $61 million range that I provided guidance with on February.

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

I wanted to make sure I heard that right, sounded like Tenet was exercising purchase options to buy 3 hospitals. Is that correct?

Yes, we announced -- on the last call in February, Todd, we'd mentioned that they had purchase options that were in the zone where they had to notify us as to whether they were going to renew or purchase. They did that shortly after our February call. And as Paul mentioned, those purchase options are subject to a fair market value valuation and that they would close -- they would be effective February 2014.

What is the total sale price? Have you guys arrived at that valuation?

No, we just got their intention for them to exercise the purchase option. So these are 3 hospitals that collectively have an EBITDAR cash flow coverage of 4.7x and generate annual rents to HCP of about $23 million or 1% of HCP's revenue. You can see, at that sort of coverage ratio, that would imply low market rents.

Is this a surprise to you guys? It seems like it would go against maybe what we would think of as hospitals should only be focusing on their operations and not on their real estate?

Well, I think the surprise is that we're the only, I guess, us and Universal Health REIT, are the only 2 health care REITs that have -- actually, MTW does as well, acute care. Acute care hospitals, not LTACHs, not rehabs and things like that. We've got these 3 hospitals of Tenet that cash flow quite well. We've got our magnificent Medical City Dallas campus that I think you've been to and then we've got Hoag Hospital down in Irvine. So it's actually the opposite. It's the surprise that they're not on the balance sheet to the hospital. Historically, hospitals have wanted to own their, what they call, the strategic assets, which is their hospitals. And depending on lots of considerations, the nature of the counterparty, what their balance sheets look like, they will look to monetize the nonstrategic portions of their campuses, which typically tend to be medical office buildings or clinics and things like that. So it's really -- if anything, I would say that Tenet's decision to reacquire these 3 hospitals would be more consistent with the traditional view of real estate from a standpoint of acute care hospital operators.

Okay, that's helpful, Jay. Any other purchase options on hospitals for the remainder of the year?

The only other one is, again, what we talked about on the last call, HealthSouth has exercised a purchase option on a rehab hospital down in San Antonio and Paul described that on our previous call. So that's it for purchase options for 2013.

And did the agreements call for any requirement of HCP to provide seller financing on either of the deals?

Absolutely not.

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

A couple of questions going back to the HCR ManorCare coverages. The $95 million in reserves that you added back to get to the normalized coverage, is that impacting the facility level coverages as well, the 0.83 and the 1.18?

Yes, that would be it.

Okay. So it's all 3, it's fixed charge and the facility levels, okay.

Yes.

And then secondly, if we look at the Q mix, it looks like it's been stable from Q4 to Q1, but down a couple of hundred basis points year-over-year. Wondering what was driving that and where you see it going?

There's been a little bit of a mix shift, but other than that, I don't think there's anything beyond that. I wouldn't expect that quality of mix to move much from this metric right now.

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

My question is specifically on acquisition. So I was on wondering if the cap rate compression that we've seen in the senior housing space, particularly for Class A product, if it has caused a shift on your acquisition focus in terms of asset classes at least in the near term?

No. The answer to that question is no. We look at, as I said on a -- in response to an earlier call, we look at everything on kind of 4 critical metrics valuation relative to replacement cost, FAD accretion, unlevered returns and spread over weighted average cost of capital.

Okay. And then given this cap rate compression as well, could you see HCP accelerating any contemplated asset monetizations given where pricing is?

Well, we certainly -- we evaluate that. As you recall, I was up with Paul last month up in the Bay area where we've got some extremely low cap rate valuation assets. But again, we would look at that relative to what we've got in those particular situations. Those are long-dated leases with very, very, very substantial creditworthy counterparties behind them, in this case Google and LinkedIn, with very attractive escalators. So to the extent that, that just becomes a math exercise, at a valuation that, that makes sense. But absent that valuation, we're better off using that to further buttress an attractive increasing dividend stream with a fair amount of stability and safety built into it.

And your final question comes from the line of Karin Ford with KeyBanc.

It's Jordan Sadler. I guess this is -- relates back to the last question, but a prior question as well. But if you were to monetize or reduce exposure to one area in the portfolio among the 5 classes of assets, what would that be and why?

Well, I think we're doing that. We have -- we referred to it as our nonstabilized portion of our portfolio, Jordan. So we are definitely looking to reduce that -- that component of our investment portfolio. It's less than 5% and I think the next candidate you could see in that bucket will be the legacy Delphis loan that we inherited when we bought CNL. We're making very good -- the team's making very good progress on that going away.

But among the core properties or property types, is there anything there? I mean, of those 5, would there be one that you'd look to reduce exposure to?

Well, we look at all of them all the time and the reality is given the discussion we just had on the purchase options in the acute care hospital space, absent some incremental activity, you'll see the hospital component of our overall portfolio decline. So you'll see the nonstabilized portion of our investment portfolio decline. But it's all kind of within that 5x5 model. Wherever we think we can extract value for our shareholders, that's what we'll do.

I would now like to turn the call back over to Jay Flaherty, Chairman and CEO, for any closing remarks.

Thank you, everyone. We have a good start to spring for those of you who haven't seen it yet, and we'll see you at NAREIT. Take care, and thank you for your interest in HCP.

Thank you. This concludes today's First Quarter 2013 HCP Earnings Conference Call. You may now disconnect.