Healthpeak Properties, Inc. (DOC) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 HCP Earnings Conference Call. My name is Melinda, and I'll be your coordinator today. [Operator Instructions] I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir.

Thank you, Melinda. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations of our tenants. These statements are made as of today's date and reflect the company's good faith, beliefs and best judgment based on current information. These statements are subject to the risks, uncertainties and assumptions that are described in our press releases and SEC filings, including our annual report on Form 10-K for the year ended 2012. Forward-looking statements are not guarantees of future performance. Actual results and financial condition may differ materially from those indicated in these forward-looking statements. Future events could render the forward-looking statements untrue, and the company expressly disclaims any obligation to update earlier statements as a result of new information. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these measures to the comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC today and are available on our website at www.hcpi.com. Also during the call, we will discuss certain operating metrics, including occupancy, cash flow coverage and same-property performance. These metrics and other related terms are defined in our supplemental information package. I will now turn the call over to our CEO, Lauralee Martin.

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

Thank you, Lauralee. Let me start with our third quarter results. Our same-property portfolio generated a robust 3.7% cash NOI growth compared to the third quarter last year. Led by contractual rent increases and RIDEA senior housing performance, this represents the second consecutive quarter we achieved same-store growth at or above 3.5%, a trend we expect to continue in the fourth quarter. For the third quarter, we reported FFO of $0.73 per share, which was impacted by management transition-related costs of $26 million or $0.06 per share, including the acceleration of equity-based compensation and severance payments. Excluding these severance-related charges, we achieved strong results, generating FFO, as adjusted, of $0.79 per share and FAD of $0.67 per share, representing year-over-year growth rates of 14.5% and 21.8%, respectively. The results included a $0.05 per share gain and interest income from the par payoff of our 2 Barchester debt investments, which was $0.01 better than the prior forecast due to a follow-on investment completed in August. From a quarterly run rate standpoint and before taking into account the Barchester investment gain, FAD for the quarter would have been $0.62 per share, representing a 12.7% year-over-year growth. The double-digit per share growth is jointly driven by our 3.7% cash same-property performance and accretive acquisitions completed during the second half of 2012, including a $1.7 billion senior housing portfolio operated by Emeritus and a $200 million mezzanine debt facility with Tandem Health Care. Turning to investment transactions and balance sheet. During the quarter, we made investments totaling $78 million, that consisted of: one, $55 million in funding for development and other capital projects; two, a $15 million acquisition of an in-patient rehab facility as part of an asset swap transaction with Kindred Healthcare. In exchange, we sold a L pack at a matching price generating a gain of $8 million; and three, a GBP 5 million or $8 million follow-on Barchester debt investment purchased at a 40% discount to par. In September, we received proceeds from the par payoff of our 2 Barchester investments totaling GBP 129 million or $202 million, which was used to pay down our revolver. The Barchester payoff and related revolver paydown improved our financial leverage sequentially by 80 basis points to 39.1% at quarter end. Our adjusted fixed charge coverage reached a new high at 4x during the quarter. In addition, we repaid $240 million of mortgage debt at a blended interest rate of 6%, reducing our secured ratio, secured debt ratio, by 100 basis points from 8% to 7%. We ended the quarter with $1.3 billion of immediate liquidity from our revolver and cash balances. The improvement to all of our key credit metrics demonstrates our continued long-term commitment to a strong balance sheet. Debt maturities for the balance of 2013 totaled $414 million at a weighted average interest rate of 5.7%, including $400 million of senior unsecured notes due in December. Finally, updates to our 2013 guidance. We expect full year cash same-property performance to remain unchanged at a range between 2.5% and 3.5%. We are revising our 2013 NAREIT FFO guidance to a range of $2.91 and $2.97 per share due to the $0.06 per share severance-related charges in Q3 mentioned earlier, partially offset by a net positive benefit of $0.01 per share that I will discuss next. Excluding severance-related charges, we are raising our 2013 FFO as adjusted guidance by $0.01 per share to a range between $2.97 and $3.03 per share. The increase is driven by the following items not contemplated in our last guidance: an additional $0.01 per share benefit from our follow-on Barchester debt investment in Q3; and a $0.01 per share gain for monetizing our investment in the Hyde Park senior housing development project in Tampa, Florida in anticipation of a refinancing during the fourth quarter of 2013. These are offset in part by a $0.01 per share reduction due to lower noncash DFL income as we place the portfolio of 14 senior housing communities operated by Sunrise on a cash basis effective this quarter. We are raising our FAD guidance by $0.02 per share to a range between $2.48 and $2.54 per share, driven by a combined $0.02 per share benefit from our follow-on Barchester investment and Hyde Park refinancing I just mentioned. As many of you know, we place the most emphasis on FAD per share amongst our various reported earnings metrics. We believe FAD is an effective measure of cash flow and our capacity to sustain and grow our dividends. At the midpoint of our updated guidance, 2013 FAD per share is projected to increase by 13.1% compared to 2012, improving our FAD payout ratio from 90% in 2012 to 84% this year. While the current year FAD reflects the combined benefit of $0.09 per share from several favorable items, including gains from monetizing our Brookdale stock in Q1, Barchester debt in Q3 and refinancing our equity interest in Hyde Park in Q4. Excluding these favorable items, our year-over-year 2013 FAD per share growth remains strong at 9%, driven by the recurring benefit from cash same-store growth and accretive acquisitions. With that, I will now turn the call over to Paul. Paul?

Thank you, Tim. Now let me review the portfolio's third quarter performance. Senior housing. Occupancy for our senior housing platform was 85.5%, a 20 basis-point increase over the prior year and a 50 basis-point decline versus the prior quarter. The sequential decline is attributable to the lingering effects of a severe flu season. After reaching a low of 85.3% in April, occupancy has increased each month thereafter, reaching 86.3% for the month of August, a 100 basis point increase over the April lows. Cash flow coverage for the portfolio was 1.12x, unchanged from the prior quarter. Same-property performance increased 7.2%, driven by contractual rent steps, including higher rents for assets transitioned to new operators and strong performance in our RIDEA portfolio where year-over-year occupancy is up 230 basis points, rates are up 3.2% and margin is up 340 basis points. Post-acute/skilled nursing. HCR's normalized fixed charge coverage for the trailing 12 months ended September 30, 2013, was 1.19x, a decline of 5 basis points from the June 30, 2013, coverage of 1.24x, reflecting the continued challenging rate and census environment for HCR's post-acute facilities, with increased admissions offset by shorter average lengths of stay. Despite the shorter average lengths of stay, HCR's rehospitalization rate of 18% remains significantly lower than the industry average, demonstrating HCR's continued high quality of care. Although the outlook for reimbursement remains uncertain effective October 1, the skilled nursing industry was the beneficiary of the first Medicare rate increase of 1.3% in 24 months not offset by sequestration or other therapy provider cuts. Turning to our non-HCR post-acute/SNF portfolio. Cash flow coverage was 1.51x, an increase of 2 basis points over the prior quarter. Same-property performance for the non-HCR portfolio increased 4.6%, driven by rent steps and additional rent on capital improvements at our covenant care facilities. In August, HCP acquired an additional GBP 9 million participation in the Barchester mezzanine loan facility at 60% to par. In September, we received to the par payoff of our aggregate GBP 129 million participation and realized a gain of GBP 16 million or $24 million related to the purchase discount, achieving an IRR of 53%. The Barchester debt investment provided HCP with 3 potential options: one, a pathway to the real estate; two, an amendment or extension of our debt purchase; or three, a payoff at par. While we were not able to convert the debt investment into a long-term investment, we were well compensated and gained further U.K. market knowledge. Hospitals. Cash flow coverage was 5.87x, an increase of 13 basis points over the prior quarter, driven by strong performance at our HCA Hospital at Medical City Dallas. Same-property performance increased 4.2%, driven by increased cash rents on our recently repositioned Plano, Texas facility. During the quarter, we placed 3 of our hospitals in discontinued operations pending their acquisition by Tenet Healthcare under a fair market value purchase option effective February 19, 2014. The Tenet facilities generate annual rents of $23 million or 1% of HCP's annualized revenues. In September, we acquired a 60-bed inpatient rehab facility located in Houston, Texas in exchange for a 62-bed long-term acute care hospital located in Milwaukee, Wisconsin, both operated by Kindred. The swap resulted in improved cash flow coverage for our 12-property Kindred master lease without any impact on rents. All 3 of HCP's Kindred hospitals are now located in Kindred-designated key markets. Medical Office Buildings. Same-property performance was up 1.4%, driven by rent steps, partially offset by a decline in occupancy of 170 basis points from the prior year to 90% related to the relocation of 2 major tenants to their own buildings. Excluding these relocations, the same-property performance increased 3.5%. During the quarter, tenants representing 492,000 square feet took occupancy, bringing the year-to-date leasing total to 1.4 million square feet. The year-to-date retention rate is 70.2% and the average term for new and renewal leases is 52 months. We have 528,000 square feet of scheduled expirations for the balance of 2013, net of 251,000 square feet of month-to-month leases. We have executed 360,000 square feet of leases that have yet to commence and have an active leasing pipeline of 1.6 million square feet. Life Science. Same-property performance declined 1.4%, driven by mark-to-market rent reductions and vacancy associated with the downsizing and consolidation of Takeda's South San Francisco operations into one of our San Diego properties earlier this year. Excluding these items, same-property performance increased 2.9%. Occupancy for our Life Science portfolio increased 70 basis points from the prior quarter and 210 basis points from the prior year to 92.3%. For the quarter, we completed 108,000 square feet of leasing, bringing the year-to-date total to 369,000 square feet, with a retention rate of 60.1%. Subsequent to quarter end, we executed an 8-year 69,000 square foot lease with a genomic diagnostic tenant, CardioDx, at our Redwood City, California Life Science campus. The lease with CardioDx will anchor approximately 75% of the redevelopment HCP repositioned in 2011. The Life Science portfolio has 277,000 square feet of scheduled expirations for the balance of 2013, representing just 0.3% of HCP's annualized revenues. These expirations include 160,000 square feet in Redwood City that will be vacated by an office tenant and is currently being marketed for both office and lab uses. Additionally, 77,000 square feet expiring at our Durham, North Carolina redevelopment project has been 100% leased to Duke University for 15 years. The Life Science development pipeline consists of 3 redevelopment projects currently 75% pre-leased totaling 166,000 square feet and a development project that is 100% pre-leased totaling 115,000 square feet. Total remaining funding requirements for the development pipeline are $23 million. Turning towards 2014, the Life Science portfolio has 373,000 square feet of scheduled expirations, representing just 0.6% of HCP's annualized revenues. We are presently on track to address approximately 45% of those expirations by year end through early renewals and leasing. Overall, we are seeing an increased demand across entire portfolio, indicating our existing vacancies and landholdings are well positioned to capitalize on positive volumes and trends. Sustainability. We have incorporated sustainability reporting into Page 2 of our supplemental. Sustainability highlights for the quarter include being named the CDP's Global 500 and S&P 500 climate disclosure leadership indices by obtaining a score of 97 out of 100 and ranking in the top 10% of reporting companies. We were named Global and North American leader for health care sector by the Global Real Estate Sustainability Benchmark and were ranked #1 in the health care sector for the second consecutive year. And we were named to the Dow Jones Sustainability North American Index ranking in the top 20% of the 600 largest North American companies in the Dow Jones Global Stock Market Index. With that, I'd now like to turn it over to Lauralee.

Thanks, Paul. I've had the opportunity to speak with many of you, investors, analysts and bankers, and I would like to address what I've heard and provide my view on our conversations. First, accretive growth, when and how much, has been the priority question, and I can assure you it is a priority focus for us as well. Specifically, I've been asked how will we continue to source deals. HCP has grown over the last 10 years through several large transformative acquisitions, which today are the property categories of the 5x5 investment model. From our hospital origin, MedCap added medical office, CNL Retirement expanded our senior housing and medical office portfolios, SSF provided the premier life science platform, and HCR ManorCare for our post-acute. With these acquisitions also came tremendous talent, rich in relationships and expertise. This talent is ready and able to play a much greater role in acquisition without us missing a beat. HCP today is a capital leader in healthcare real estate and is regularly called on by operators, bankers, private equity firms and brokers as sellers look to monetize their properties and portfolios or existing owners seek efficient liquidity events. HCP differentiates itself from the competition with our ability to quickly respond to time-sensitive and complicated structures. Our deep bench of industry expertise means we understand the needs of our operators and tenants, making us a reliable capital source. And finally, my 35 years in real estate is blessed with long-term relationships, and quickly, these connections, both in the U.S. and abroad, are focusing on healthcare assets as a relationship priority. Second, there's a desire to better understand our view on international markets and the use of debt, particularly in the U.K. We have now made 2 debt investments into the U.K. We have one still outstanding, contributing nicely to FFO and FAD. And most recently, as Tim and Paul have covered in their comments, we realized an attractive return from our Barchester mezzanine debt investment. The European markets have lagged the U.S. in dealing with its troubled debt portfolios, largely due to capital and bank markets lacking liquidity. This, together with demographics that track the U.S. market for aging seniors, makes this a market worth seriously evaluating for investment potential. Because reimbursement policies are different from those in the U.S., our approach in this market has been consistent with the HCP risk-reward philosophy. We are using debt, which is part of our 5x5 strategy, as it gives us a chance to take a safe look, with equity having the first loss in the capital stack while we get smart on these new markets. As we underwrite and then asset-manage our debt positions, we are able to gain a deeper understanding of the market, its operators and property performance dynamics. As you are aware, property acquisition pursuits are binary, win, lose, with both opportunity and pursuit cost. Although we did not convert Barchester to property ownership with this mezzanine debt investment, we received a significant investment return while we learned a great deal about the market and its key players. Additionally, we have established solid relationships for future deal sourcing. With these investment returns, as well as the knowledge we gained, we still have potential property optionality in the future. Debt is part of the HCP 5x5 investment strategy. As we evaluate each of the 5x5 property categories, we also look at where they are in the risk-reward cycle to determine the best approach for investment. For example, 30 months ago, we identified superior returns in senior housing development over those of acquisition. The Hyde Park monetization anticipated this quarter validates this approach as we achieve both an investment gain while we still have an ownership position in the property for continuing FFO. So in response to the question, will the disciplines of HCP's investment strategy change? Let me confirm that the 5x5 strategy is both proven and flexible to provide us growth and performance in all types of markets. Finally, many of you have asked for my perspective on our important HCR ManorCare investment. Although this investment was underwritten in anticipation that coverage would decline with the RUGs-IV cuts, the coverage has been further impacted by additional reimbursement reductions, lower hospital volumes, which have impacted the entire skilled nursing industry and declines in average lengths of stay. However, we remain confident that our investment will continue to perform. Let me reinforce why we are so confident: First, our relationship with HCR management is solid, characterized by open communication and alignment for our mutual business success. I've had the opportunity to meet with management and discuss first-hand the actions they are taking to address their business challenges. These include their focus on managing cost that include aggressive actions to take out permanent costs in response to a softer rate in census environment. HCR is also focused on enhancing revenues, such as initiating pilot programs with managed-care companies and creating partnerships with hospital systems. Second, as a leader in post-acute, offering the lower-cost alternative to other post-acute settings, the HCR management team continues to strengthen their market leadership by investing in the business, and in particular, our real estate. These investments represent expansions that exceed what is required by our lease. These investments have resulted in an increase in admissions over the prior year and census higher than the broader market, demonstrating they are gaining market share. The investments are a demonstration of the confidence that HCR has in their own business, a confidence we share. Third, for asset management purposes, the structure of 4 separate renewal pools in the master lease, each diversified by geography, quality mix and property-level performance, strongly incents HCR to address individual property performance that may be a drag on overall lease coverage. We continue our close dialogue with them as we mutually work to optimize how to enhance overall lease coverage. So in summary, after 3 weeks on the job, I'm even more excited and confident about the opportunity and the potential of HCP. And finally, yesterday, we received Jay's resignation from the board of HCP. We thank Jay for his many contributions to the company and wish him the very best in his future endeavors. This is the conclusion of our formal comments. Let me now ask Melinda to open the call for questions.

[Operator Instructions] Your first question comes from Josh Raskin with Barclays.

It's Josh here. I'm with Jack as well. I guess we have 2 quick questions for you. One, maybe, Lauralee, could you talk a little bit about the timing of investments that you're making, sort of a lower number in the quarter than we've seen in historical times? I'm just curious if the management change had anything to do with that or if it's just -- typically it's lumpy and it comes in a different time and there's nothing to read into it.

Well, we are very actively in the market for deals. You'll recall that in the second quarter just across the broader marketplace, sales activity really took a pause due to the uncertainty that was generated by the Federal Reserve's comments. We have seen market activity come back. And as I talked about, we see that activity across the entire 5x5. So we will be active. I think to your point, it will be lumpy. I would also say we put a lot into the Barchester transaction and transactions are binary. The good thing is we got paid very well for that effort, and we think we're strongly positioned for more in the future.

Okay. So not going to read into anything around the timing or anything like that.

Correct.

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

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

We saw some activity first half of this year, probably a little more than we've seen in the past 2 or 3 years. But we continue to see opportunities kind of across-the-board. We like the debt side on the acute care hospital side, but we have not seen anything as robust as we did in the first half of this year from a volume standpoint.

Your next question comes from Rick Anderson from BMO Capital Markets.

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

Yes, a good run rate, Rich. It's in the $21 million to $22 million range a quarter.

That stays intact?

Yes.

Okay. Lauralee, you mentioned HCR ManorCare and in close dialogue with them. Regarding the 4 master leases, is that -- could that number change in the future? In other words, could you see a lower number of master leases, some type of transaction between the 2 companies that lowers your exposure?

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

Yes.

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

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

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

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

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

And your next question comes from Jeff Theiler with Green Street Advisors.

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

Jeff. I think first off, I mentioned this is the first time in 24 months that HCR has benefited from a Medicare rate increase that was not offset by sequestration or therapy provider cuts. They also saw some solid growth in their home health and hospice with 3.5% year-over-year growth. Headwinds do continue with lower census due to shorter lengths of stay and shift from Medicare to Medicare Advantage. But they are gaining market share. Admissions are up 1% year-to-date. Free cash flow year-to-date $65 million after rent, interest and maintenance. They continue to spend $100 million run rate on CapEx, and that validates their confidence in the platform. Yes, they've been kind of bumping along the bottom from the standpoint of coverage, but we feel that with the rate increase that's happening, coupled with new cost savings initiatives that they're initiating in the fourth quarter and the strategic partnerships that they have, we think they're going to gain some good traction here in 2014.

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

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

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

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

And your next question comes from Juan Sanabria with Bank of America Merrill Lynch.

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

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

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

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

From our standpoint in RIDEA, we think that simply changing from a lease structure to a RIDEA structure doesn't give you "the upside" that you would need for taking on the risk in a RIDEA. We like more the turnaround-type scenario, change in operator, occupancy play, reposition play and things of that nature. And to the extent we see those, we would consider doing a RIDEA transaction. That said, when we bought our Bray joint venture from Blackstone and Emeritus last year, they had a component of that portfolio that had a lot of those characteristics. But we were able to effectively structure that deal in the triple-net lease where we got the upside through rent steps in the first 5 years and then a rent reset to market at the end of that 5-year period. And effectively, we were able to protect our downside with corporate guarantee from Emeritus while still getting the upside that we wouldn't have gotten through a RIDEA transaction.

Great. And just a last question. Were you guys looking at the holiday transaction that one of your peers had transacted on?

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

And your next question comes from Nick Yulico with UBS Capital Market.

I was hoping we could turn back to the Emeritus that you did do a year ago. Thinking about the pricing for that, it was a 6-1 initial yield. It was in a ton of coverage on day 1 because you had -- there was going to be some occupancy upside. Is that the type of deal that you would do today, I mean in this environment? Similar pricing, similar type of coverage or have you sort of rethought that deal as it is now a year later?

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

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

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

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

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

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

Okay. And then just lastly, I mean, if we go back to the call 3 weeks ago, there was talk that the reason for the CEO change had to do with leadership style. Jay submitted a letter last night saying the vision for the redirection of the company -- his vision has differed in the past and still differs today from that of the remaining board members. Can you just talk a little bit about that? And maybe, Lauralee, if you could just talk about it? I mean, Lauralee whether there really is any sort of strategy change in place today that you're looking to implement? Because it sounds like there could be a strategy shift potentially, but you guys haven't really said that there has been. So as much as you can on that.

Sure. Well, first of all, the reasons expressed by Jay and his resignation, we do not view -- board does not view as any different than what Mike McKee, our Chairman, made in his comments on the recent per leadership change. The board and Jay had a very different vision of the tone and standards of leadership that belong and are required at an S&P 500 company at the stature of HCP. So it's very consistent with what you've been told and it is there. I think what you've heard is my comments on our strategy, what we're doing in that strategy. And as a board member, I've been very comfortable with our business strategy. If we change our strategy, it will be because the operating environment tells us we should for more opportunity and the management team wants to do it together. But right now, it's working very well.

And your next question comes from Emmanuel Korchman with Citibank.

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

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

Right. Well, he didn't say his vision for the leadership of the company. He said his vision for the direction that the company is taking. So that's different from a style of leadership that would indicate that potentially, he wanted to do potentially more transactions maybe with outside the 5x5. Maybe wanted to go further internationally, maybe it wasn't just U.K. Maybe it was Asia. That's the type of thing that we're trying to get an understanding about the direction he wanted to sort of take the company versus where the board was willing to allow it.

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

Okay, Manny has some questions.

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

Why it is or it's not?

It is not.

Well, again, we were dealing with risk-adjusted returns with that particular transaction. There were certain aspects of the transaction after we got in and did some due diligence at the asset level that indicated that where we thought value was, was different than where they were. But from a standpoint of understanding the market, we do our normal due diligence. We went out and we looked at a lot of assets, understood the landscape, talked with a lot of people about reimbursement in the marketplace, understood their particular strategy. We have a good relationship with the folks at Four Seasons, understood their strategy and how they created value in the marketplace. And we've been able to formulate some very strong opinions about what are good opportunities over there in the U.K. market. And we think there are still some attractive opportunities for us to pursue.

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

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

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

And your next question comes from Michael Carroll with RBC Capital Markets.

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

I wouldn't say that we characterize it as HCP took a step back. What -- I think what we said was, as a result of what happened with the Fed and what have you, that buyers have taken a step back to reassess where pricing would be. Right now, our portfolio remains strong and robust across the 5x5 and we're actively in the marketplace.

Okay. And what types of investment should we expect in the near term? I mean, will you continue to make these similar type of Barchester loans or should we expect more real estate-centric investments?

Wherever we can find the appropriate risk-adjusted return.

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

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

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

No, it was a different institution.

Your next question comes from Tayo Okusanya with Jefferies.

Actually, my question has been answered.

Your next question comes from Michael Mueller with JPMorgan.

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

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

Okay. So it seems like it's going to be recurring. It's not a onetime item until it picks back up down the road?

Right, yes.

And your next question comes from Rob Mains with Stifel.

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

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

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

No.

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

I have to look that up, Rob.

Okay, I'll call you off-line on that. And then 1 FAD question for you, Tim. Can you give us either a run rate, either quarterly or annually that we should be looking at for your CapEx? Because I found that to be kind of challenging to model.

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

And your next question comes from Todd Stender with Wells Fargo.

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

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

Is that regarding the Tenet Healthcare repurchases?

That and one other asset with call sell [ph].

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

We're going through the valuation process right now.

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

Yes, I think we still view the asset class as attractive. I think at that point in time when those comments were made, leasing was slow. We've seen it pick up in all 3 of the markets that we're in. So there are opportunities that do exist in a couple of these various different markets and we're actively looking at those opportunities.

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

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

Well, we really haven't seen too much of a move in cap rates. I would answer that question this way. It's not a question of what is our hurdle rate but what's the rate risk-adjusted return for the investment opportunity that presents itself. And those that have less risk, there's going to be a lower hurdle, and those that have more risk, we're going to want to have a little higher return. So we look at them on an individual basis, utilizing the 5x5. And to the extent there are opportunities across the board, we'll go for them as they hit the right return numbers.

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

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

And your last question comes from John Roberts with Hilliard Lyons.

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

I think style, you never quite know when it sort of hits you that it's too much. I think I can say I was on the board of HCP for 5 years, most of the board much longer than I am -- was. And in that time, we had 4 CFOs, 3 general councils, 2 audit firms, I could go on. I mean, you never know what is finally, enough is enough. So there was no triggering event, I think, is what everybody's looking for that was there. My style difference? I believe in teams. I believe that it takes a lot of expertise to do complicated business, and that's why you need teams that each bring their specialty, their knowledge, their add to what gets done. The team at HCP is extraordinary. And already, it is a team, it feels like a team. I'm delighted with what we're getting done. So I think it's a large company, HCP is. It works in a space where we want to be a much larger company, and that requires talent being utilized across the board. And that would be probably the major difference that I would say I'm bringing. Okay. Well with that, we thank you all for joining us today. We look forward to seeing you shortly at NAREIT, and we hope many of you will be joining the bus tour of our Bay Area Life Science portfolio on Tuesday, November 12. Thanks.

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