Download - HCP (HCP) Earnings Report: Q4 2014 Conference Call Transcripts.t.st/media/xtranscript/2015/Q1/13042842.pdf · consecutive year of dividend growth. We continue as the only REIT in

CompanyName:HCPIncCompanyTicker:HCPSector:Financial

Industry:RealEstateEventDescription:Q4 2014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 22

HCP(HCP)EarningsReport:Q42014ConferenceCallTranscriptThefollowingHCPconferencecalltookplaceonFebruary10,2015,12:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JohnLu;HCP,Inc.;SVPLauraleeMartin;HCP,Inc.;President,CEOTimSchoen;HCP,Inc.;CFOPaulGallagher;HCP,Inc.;CIO

OtherPart icipants

JoshuaRaskin;BarclaysCapital;AnalystVikramMalhotra;MorganStanley;AnalystJuanSanabria;BofAMerrillLynch;AnalystMichaelKnott;GreenStreetAdvisors;AnalystSmedesRose;Citigroup;AnalystDanielBernstein;StifelNicolaus;AnalystNickYulico;UBS;AnalystRossNussbaum;UBS;AnalystMichaelCarroll;RBCCapitalMarkets;AnalystRichAnderson;MizzoSecurities;AnalystDerekBower;EvercoreISI;AnalystTayoOkusanya;JefferiesandCompany;AnalystToddStender;WellsFargoSecurities;AnalystMichaelMueller;JPMorgan;AnalystToddLukasik;Morningstar;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,ladiesandgentlemen,andwelcometotheHCP,Inc.Fourth-QuarterandYear-End2014FinancialResultsConferenceCall.

(OperatorInstructions)

Asareminder,today'sprogramisbeingrecorded.Iwouldnowliketointroduceyourhostfortoday'sprogram,John,SeniorVicePresident.

JohnLu(SVP):

Thankyou,Jonathan.

Today'sconferencecallwillcontaincertainforward-lookingstatements,includingthoseaboutourguidanceandthefinancialpositionandoperationsofourtenants.Thesestatementsaremadeasoftoday'sdateandreflecttheCompany'sgoodfaithbeliefsandbestjudgmentbasedoncurrentinformation.Thesestatements




aresubjecttotherisks,uncertainties,andassumptionsthataredescribedinourpressreleasesandSECfilings,includingourannualreportonForm10-Kfortheyearended2014.

Forward-lookingstatementsarenotguaranteesoffutureperformance.Actualresultsandfinancialconditionmaydiffermateriallyfromthoseindicatedintheseforward-lookingstatements.Futureeventscouldrendertheforward-lookingstatementsuntrueandtheCompanyexpresslydisclaimsanyobligationtoupdateearlierstatementsasaresultofnewinformation.

Additionally,certainnon-GAAPfinancialmeasureswillbediscussedonthiscall.WehaveprovidedreconciliationsofthesemeasurestothecomparableGAAPmeasuresinoursupplementalinformationpackageinearningsrelease,bothofwhichhavebeenfurnishedtotheSECtodayandareavailableonourWebsiteatwww.hcpi.com.

Also,duringthecall,wewilldiscusscertainoperatingmetricsincludingoccupancy,cashflowcoverage,andsamepropertyperformance.Thesemetricsandotherrelatedtermsaredefinedinoursupplementalinformationpackage.

IwillnowturnthecallovertoourCEO,LauraleeMartin.

LauraleeMart in(President,CEO):

Thankyou,John.WelcometoHCP'sfourthquarterconferencecall.

JoiningmethismorningarePaulGallagher,ChiefInvestmentOfficer,TimSchoen,ChiefFinancialOfficer,andJohnLu,InvestorRelations.Weareveryproudofallweaccomplishedin2014andmoreimportantly,howwehavepositionedtheCompanyforgrowthin2015.

Iwouldliketostartbysummarizingthehighlightsofouraccomplishments.Wegenerated3.3%same-storecashNOIgrowth,consistentlyabove3%forthesixthconsecutiveyear.Wecompletedapproximately$1.9billionofaccretiveacquisitionsanddevelopmentsatablended7.8%cashyieldandhaveanactivetransactionpipelineinallsegmentsofourportfolio.

WehaveaddedacquisitionprofessionalsattheP&Lleveltodriveconsistentinvestmentactivityandcapturebothmid-sizedassetsandportfoliotransactions.Wearewell-positionedtobringourstructuringexpertiseandreliableexecutiontolargetransactionsandrespondwiththetotalstrengthofHCP.Wehaveprovenwecannavigateacompetitivedomesticandinternationalmarketplaceusingtransactionandcapitalstructurestooptimizeinvestmentreturns.

Wehavecompletedtriplenetsale-leasebacks,RIDEA,jointventures,developments,anddebttransactions.Wehavemaintainedourinvestmentdiscipline,evenascompetitionhasbidassetpricesabovereplacementcost.Paulwillcoverourrecentinvestmentsandportfolioperformanceinamoment.Includingtheadd-oninvestmentwithHC-Oneweannouncedtoday,ourU.K.investmentsnowexceed$1billionandourLondonofficeopenedinJanuary.

Wejustannounceda3.7%increaseinourannualizeddividendinJanuary,representingour30thconsecutiveyearofdividendgrowth.WecontinueastheonlyREITintheS&P500DividendAristocratsIndexandwecontinuetoexcelasagloballeaderinsustainability.Asweputallthistogether,weentered2015fromapositionofstrength.

LetmeturnthecallovertoTimtocoverour2014financialresultsandexpectationsforthisyear.

TimSchoen(CFO):

Thankyou,Lauralee.




Letmestartwithourfourthquarterresults.Oursamepropertyportfoliogeneratedstrongyear-over-yearcashNOIgrowthof3.5%,drivenbycontractualrentincreases,aswellashigheroccupancyinourlifescienceportfolio.Forthequarter,wereportedNAREITFFOof$0.70pershare,whichreflectedan$0.08non-cashimpairmentannouncedinDecemberthatreducedthecarryingvalueofourHCROpCoequityinvestmentto$39million.

Excludingtheimpairmentand$0.01pershareofacquisitionandpursuitcosts,wereportedFFOasadjustedof$0.79andFADof$0.66.Theresultsbenefitedfromsamepropertyperformanceandaccretiveinvestmentsclosedin2014,representingstrongpersharegrowthratesof3.9%and8.2%,respectively,comparedtothefourthquarterof2013.

Turningtoourfullyear2014results,cashsamepropertyperformanceincreasedto3.3%,consistentwithourforecast.Full-year2014NAREITFFOwas$3pershare,whichincludedan$0.08pershareimpairmentinQ4,offsetbyapositive$0.08persharegainrecognizedinQ3,resultingfromtheBrookdaleTransaction.

Inaddition,weincurred$0.04pershareofacquisitionandpursuitcostsfortheyear,whicharenowbrokenoutfromG&Aandreportedasaseparatelineitemonourincomestatementtoprovidebettertransparency.

Excludingtheimpactof$0.04persharefortheyearfromimpairmentsandtransaction-relateditems,2014FFOasadjustedwas$3.04pershareandFADwas$2.57pershare,abovethemidpointofourlastguidanceforbothmetrics.

Onayear-over-yearbasis,the1%persharegrowthratesforbothmetricsweremoderatedduetoanumberoffavorableone-timeitemsrecognizedin2013,includinggainsfrommonetizingourU.K.Barchesterdebtinvestment,Brookdalestock,andHydeParkseniorhousingdevelopmentproject.

Absentthese2013favorableone-timeitems,onarecurringbasis,FFOasadjustedpershareincreased3%andFADincreased5%in2014.Our2014cashdividendsof$2.18pershareresultedinanFFOasadjustedpayoutratioof72%andanFADpayoutratioof85%,providing$160millionofretainedfreecashflowaftermaintenanceCapExtofundour2014investmentactivity.

Movingontoinvestmentandfinancingtransactions,duringthefourthquarter,weinvested$813millionledbyaGBP395millionor$630millionloanfacilitysecuredbyacarehomeportfoliooperatedbyHC-One.

Atclosing,GBP363millionwereinitiallyfundedyielding8.2%,ofwhichthemajoritywasmatchfundedwithafour-yearGBP220milliontermloanat1.8%inJanuaryof2015,withtheremainderfundedinpoundsterlingonourrevolver.AlsoinJanuary,weraised$600millionof10-yearseniorunsecurednotesata3.4%coupon.

ProceedswereusedtopaydowntheentireU.S.dollarportionoutstandingunderourrevolverandprefundallofour2015debtmaturities,whichconsistof$400millionofunsecurednotesdueinMarchandJuneatablendedrateof6.5%,therebyrealizingafavorable300-basispointrefinancingspread.Takingintoaccountthe$930millionofdebtraisedinJanuary,wesubstantiallyincreasedourliquidityfrom$1.3billionatyearendto$2.2billioncurrently.

Ourlong-termcommitmenttoastrongbalancesheethasremainedconsistent.Webegan2014withfinancialleverageof39.2%,slightlybelowourlong-termtargetof40%.Weopportunisticallytookadvantageofthisbalancesheetcapacitytofinance2014acquisitionsprimarilywithdebtproceeds,whichwasmotivatedinpartbycurrencyhedgingbenefits.

Asaresult,financialleverageincreasedto41.5%atyearend2014andisforecastedtoreturntoa40%levelbytheendofthisyear,principallydrivenbyorganiccashflowreinvestedinourportfolio.Fixedchargecoveragewasstableat4.1timesin2014,thesecureddebtratioimprovedto5%representinga180-basis




pointreductionasaresultofourstrategytofinancemortgagematuritieswithunsecurednotesatalowercost.

Next,ourfull-year2015guidanceanddividend:ourguidancedoesnotincludetheimpactofanyfutureacquisitions,dispositions,orearlyrepaymentofdebtinvestmentsandreflectsthefollowing:2015NAREITFFOisprojectedtorangefrom$3.14to$3.20pershare,whichreflects$0.01pershareofacquisitionandpursuitcostsfortransactionsexecutedyear-to-date.Excludingthedealcosts,2015FFOasadjustedisprojectedtorangefrom$3.15to$3.21pershare,whichatthemidpointisprojectedtoincrease4.6%year-over-year.

2015FADisprojectedtorangefrom$2.73to$2.79pershare,whichatthemidpoint,representsastrong7.4%growthratecomparedto2014.Theearningsincreasefrom2014isdrivenby,one,ourcashsame-storegrowth;two,afullyearbenefitfromaccretiveacquisitionscompletedduringthelast12months;andthree,refinancingbenefitfrom2015debtmaturitiesmentionedearlier,offsetslightlybyhigherG&AasweexpandedP&Lbusinessdevelopmentteams,includingourinternationalplatform,andthepre-fundingofour2015debtmaturitiesinJanuary.

Cashsamepropertyperformanceisprojectedtoincreasebetween2.75%and3.75%thisyearwithsame-storecapturing90%ofouroveralloperatingportfolio.Paulwilldiscusstheoutlookbysegmentsinafewminutes.Notethat2015earningsprojectionsaredescribedinmoredetailonpage12oftoday'searningsreleaseonaper-sharebasis.

Letmequicklyrunthroughafewassumptions.G&Aisforecastedtobe$90million,includingstock-basedcompensationof$24million.Amortizationofbelowmarketleaseintangiblesanddeferredrevenueof$4million,amortizationofdeferredfinancingcostsof$20million,straightlinerentsof$27million,DFLaccretiontotaling$137million,ofwhich$72millionisreportedinincomefromdirectfinancingleaseswiththeremaining$64millionreflectedinincomefromjointventures.

DFLandotherdepreciationof$27million;leaserestructurepaymentsof$23millionrelatedtothe2014BrookdaleTransaction;our49%shareofFFOcontributionfromtheCCRCjointventuretorangefrom$24millionto$26million;andFADcontributiontorangefrom$46millionto$50million,inclusiveofnon-refundableentrancefees;Leasingcostsandsecond-generationtenantandcapitalexpendituresof$86million.

Inaddition,totaldevelopment,redevelopment,andfirst-generationcapitalinvestmentof$315million,including$80millionin2015forthePhaseIlifesciencedevelopmentatTheCoveinSouthSanFrancisco.Regardingour2015dividend,lastmonth,weincreasedourquarterlydividendfrom$0.545to$0.565,markingthe30thconsecutiveyearofdividendincreasesandcontinuingHCP'srepresentationastheonlyREITintheS&P500DividendAristocratsIndex.

Theannualizeddividendof$2.26persharerepresentsanincreaseof3.7%,or$0.08pershareover2014.Aftertakingintoaccounttheincreaseinthedividendandbasedonthemidpointofourguidance,ourprojected2015FFOisadjustedandFADpayoutratiosremainlow,improvingto71%and82%,respectively.Asaresult,weexpecttoretain$230millionincashflowafterdividendsandrecurringcapitalexpenditurestocontinuegrowingourportfolio.

Letmeendwithaquickwordonourexpandeddisclosure.Asyoumayhavenoticed,thisquarter,wemadeavailableonourWebsiteadownloadablelistofpropertyaddressesforeachofour1,200assetsundermanagement.Addeddisclosureinoursupplemental,providingmetricsbymajormarketsforour68-propertyRIDEAportfolio,andasImentionedearlier,reportacquisitionandpursuitcostsasaseparatelineitemontheincomestatementforgreatertransparency.

Withthat,IwillnowturnthecallovertoPaul.Paul.




PaulGallagher(CIO):

Thankyou,Tim.

Letmestartwithanoverviewofourinvestments.2014representedanoutstandingyearofgrowthforHCPandourpartners,ledbythecreationofour$1.2billionstrategicjointventurewithBrookdale,therestructureofourlegacyEmeritustriplenetseniorhousingportfolio,andourexpansionintotheinternationalmarkets.

Together,wecompleted$1.9billionworthofinvestmentsacrossfourofoursegmentswithablendedcashyieldof7.8%,resultingina12%expansioninourtotalassetsundermanagement.Duringtheyear,weacquiredover1millionsquarefeetrepresenting$260millionofmedicalofficebuildings.

Acquisitionsforthequarterincludeda327,000squarefootportfolioofthreemedicalofficebuildingslocatedinLouisville,Kentuckyfor$51millionata7.5%cashyield,whichcomplementsour386,000squarefeetofexistingonMOBsonthreehospitalcampusesinLouisville.

Notably,sinceourlastearningscall,weclosedourGBP395milliondebtinvestmentinacarehomeportfoliooperatedbyHC-One,withan8.2%yieldtomaturity,bringingourtotalinternationalinvestmentstoover$1billionwithablendedyieldof9%.

Our2015investmentactivity,includingseveralnewdevelopments,isofftoastrongstart.Asannouncedlastweek,webrokegroundonthefirstphaseofTheCoveatOysterPoint,thepremierlifesciencedevelopmentatthegatewaytotheSouthSanFranciscomarket.TheCovewillbealeadsilverprojectandisplannedtofeaturea5.5-acreoutdoorgreenspace,astate-of-the-artamenitycenter,retailandhotelentitlements.

Uponfullbuildout,theprojectwillcomprisesevenbuildingstotaling884,000squarefeetwithahigh7%returnoncost.Thefirstphaseencompassestwoclass-Abuildingstotaling253,000squarefeetatatotalcostof$177millionandisexpectedtobecompletedbythethirdquarter2016.

Wealsoenteredintoadevelopmentagreementtoconstructa$37millionmedicalofficebuildingwithaprojectedreturnoncostof8.7%.The165,000squarefootMOBwillbeonthecampusofMemorialHermann'sCypress,TexashospitalinsuburbanHoustonandis25%pre-leased.Thisisourthirdground-updevelopmentMOBprojectinprocessandthesecondwithMemorialHermann.

OurMOBdevelopmentpipelinenowconsistsof$164millionofprojects.Weexercisedourpurchaseoptionrighttoacquireanewlydevelopedassistedlivingandmemorycarefacility,currently98.8%leased,inHouston,Texasfor$36million.Thefacilityisoneofseveninour$141millionparticipatingdevelopmentloanprogramwithFormationCapitalthatprovideswithustheopportunitytoconvertourdebtinvestmentsintoreal-estateownershipinanoff-markettransaction.

Theacquisitionisprojectedtocloseinthefirstquarterof2015,atwhichtime,wewillrealizea19%unleveredIRRonourdevelopmentloan.Includingthereinvestmentofourparticipationinterestof$5million,ourinvestmentprovidesayieldof6.6%.Uponclosing,theassetswillbecontributedtoourRIDEAjointventurewithBrookdale.

Inaddition,weenteredintoan85/15jointventurewithFormationCapitaltodevelopa117-unitindependentlivingfacility,adjacenttoournewdevelopmentIjustmentionedinHouston,Texas.The$29milliondevelopmenthasa10.9%returnoncostandwillalsobecontributedtoourRIDEAjointventurewithBrookdale.ThisisthesecondjointventurewithFormationCapitalandbringsourtotalseniorhousingdevelopmentpipelineto$77million.

InFebruary,wefurtherexpandedourrelationshipwithHC-OneandfacilitatedtheiracquisitionofMeridianHealthcarebyaddingaGBP108millionshort-termbridgetranchetoourexistingGBP395milliondebtinvestment.Bytheendofthefirstquarter2015,weexpecttoconvertGBP174millionofthedebtinvestment




intosale-leasebackon36carehomes.All36sale-leasebackfacilitieswillbelong-termleasedtoHC-Oneata7.3%initialyieldata2015EBITDARMcoverageof1.65times.

Nowletmereviewthehighlightsoftheportfolio'sperformance.Ourlifesciencesegmentreportedanall-timehighoccupancyof95.2%.Thestrongperformanceofourportfolio,coupledwithstrongdemandfromlifesciencetenantsandlowinventoryinSouthSanFranciscomarket,werekeyfactorsinourdecisiontoundertakethefirstground-upmulti-tenantlifesciencedevelopmentinSouthSanFranciscoinnearlyadecade.

Theseniorhousingportfolioperformedwellinthefourthquarter.Asyouareallaware,Brookdalereportedlowerthanexpectedresultsinthefourthquarterandlowerguidancefor2015,primarilyduetoa40-basispointsequentialoccupancydecreasedrivenbylegacyEmeritusassets.

However,HCP's68RIDEAfacilitiesoperatedbyBrookdaleexperiencedasequentialoccupancyincreaseof70basispoints,asaresultofoureffortstoidentifyandcommencethecapitalinvestmentplansforthelegacyemeritusassetsimmediatelyuponclosingthemerger.

OurRIDEAportfolioreportedanincreaseinoccupancyfromthepriorquarterof70basispointsto86.7%,includinga50-basispointincreaseinthe48assetstransitionedfromEmeritus.AsTimmentioned,weaddedanewpageinthesupplemental,page22,whichprovidesmetricsbymajormarketforall68propertiesinourRIDEAportfolios.

Lookingatourseniorhousingtriplenetportfolio,cashflowcoverageandBrookdaletriplenetportfolioremainedunchangedfrompreviousquartersat1.12timesand1.11times,respectively.Wedoexpectthecoveragetosoftenslightlyinthefirsthalfof2015andreboundinthelatterhalfoftheyear,asBrookdaleimplementstheintegrationoftheformerEmeritusassetsandacceleratetheirCapExspendingtoimprovetheunderlyingperformanceofthisportfolio.

AsTimmentioned,HCP'sportfolioproducedfull-yearsamepropertygrowthof3.3%,representingthesixthconsecutiveyearthatwe'vegeneratedorganicgrowthabove3%anddemonstratingtheconsistencyofourrealestateportfolioanchoredbytriplenetleaseswithcontractualrentincreases.

Lookingto2015,wehaveapositiveoutlookwithsame-storecashNOIexpectedtorangefrom2.75%to3.75%.Bysegment,medicalofficeisprojectedat1.5%to2.5%lowerthanthemidpoint,duetotwolargetenantvacancies.Seniorhousingandpostacutesame-storegrowth,3%to4%eachandhospitalgrowthat1.5%to2.5%,alldrivenbycontractualrentsteps.Lifescienceisprojectedtogrowat3.5%to4.5%,drivenbystrongleasingactivity.

Insummary,wecontinuedtoachievesolidgrowthacrossourentireportfolioin2014,drivenbystrongsame-storegrowthfromallfivesegments,accretiveinvestmentsinfourofourfivesegments,includingsignificantgrowthinourinternationalplatformandadvancementsinourdevelopmentpipeline.

Withthat,I'dliketoturnitovertoLauralee.


Thankyou,Paul.

BeforeIcloseoutthecallandopenthelinesforquestions,Iwouldliketodiscussourlargestoperatorandportfolioconcentration,HCRManorCare.SeveralofyouhavenotedthismorninganongoingcivilinvestigativedemandinvolvingHCRManorCarementionedinour10-Ktoday.Thisongoinginvestigationbeganin2013andwaspreviouslydisclosedin2013auditedfinancialstatements,whichweprovidedaspartofour201310-Klastyear.




Theinvestigationisongoingandassuch,hasbeenconsistentlydescribedinHCRManorCare'sauditedfinancialstatementsthelasttwoyears.OurregulatorycounselhasdiscussedtheDepartmentofJusticeinquirywithHCRManorCare'sregulatorycounselandHCRbelievesthatitisinmaterialcompliancewithallapplicablelawsandregulationsandthattheyarefullycooperatingwiththeinquiry.InvestigationssuchasdescribedbyHCR'sfinancialstatementsaretypicaloftheindustry,ascanbeseeninsimilarfilingsofKindredandGenesisSkilled.

TurningtoHCR'soperatingperformance,inDecember,followingreceiptofHCR's2015preliminarybasefinancialforecast,alongwiththeiryear-to-dateoperatingperformance,weimpairedthecarryingvalueofourequityinvestmentinOpCo.HCR'spreliminarybasefinancialforecastsindicatethatHCRwillcontinuetomeetitscontractualobligationsunderthemasterleasewithHCP.

Theirfourthquarterresultswereconsistentwithexpectations,ifweexcludeone-timecostsrelatedtotakingbackfoodservicecapabilities,whichtheyhadpreviouslyoutsourced.Trailing12-monthnormalizedfixedchargecoveragewas1.08timesandnormalizedleasecoverageof0.81timesatthefacilitylevel.

HCRendedtheyearwitha$128millioncashbalanceafterspending$95milliononcapitalexpendituresin2014.Theirtotalyearresultsfor2014,particularlythesecondhalfoftheyear,wereimpactedbythecontinuedshiftinMedicaretoMedicareAdvantage,whichunfavorablyimpactsreimbursementsforbothlengthofstayanddailyrate.Despitethechangingreimbursementlandscape,HCRdidcontinuetoincreaseitsmarketshareandadmissionsin2014.

Theyalsodeliveredaveryimpressive9.6%year-over-yearEBITDAgrowthintheirhospiceandhomehealthbusiness.HCR'sstrategyfocusesonhigheracuity,postacuteserviceswheretheycontinuetodemonstratepositivequalityandpatientoutcomes.

TheirtestresultswithUnitedHealthregardingclinicalcareareexceedingexpectations.HCRispositionedtobenefititsvariousproposalsdesignedtodeliverhigherqualitycareatlowercosts,suchasbundlepayments,sizeneutralorepisodicpaymentsareimplemented.

WecontinuetohavediscussionswithHCRonhowwecansupportthesuccessoftheirbusiness,whilealsoimprovingourleasecoverage.Aspartofthosediscussions,wehavejointlyagreedtomarketforsaleanidentifiedpoolofupto50non-strategicproperties.

TheproceedsatanysaleareanticipatedtobereinvestedbyHCPandinreturn,provideHCRrentreliefwhichwillimprovebothfixedchargecoverageatthecorporatelevel,aswellasimprovementinfacilitylevelcoverage.Becauseoftherequiredtimetomarketatransactionandtotransferlicensesatthepropertylevel,theimpactofanysalewilllikelybeseeninthelatterpartofthisyearorearly2016.

Switchinggears,onMay11,wewillbecelebratingour30thanniversarywithanInvestorDayheldattheNewYorkStockExchangeinNewYorkCity.WehopeyouwilljoinuswhereyoucangettoknowourP&Lleaders,KendallYoung,SeniorHousing;DarrenKowalske,Hospitals/Post-Acute;TomKlaritch,MedicalOffice;JonBergschneider,LifeScience;andJohnStasinos,International,aswellasothersonourManagementteam.

LetmeclosebyagainsayinghowproudIamoftheresultsdeliveredbyHCPprofessionalsin2014.Wehaveonlybeguntoshowyouthepotentialgrowthandperformancewecandeliver.

Operator,canyounowopenthelinesforquestions?

QUESTIONS&ANSWERS

Operator:



©2014TheStreet,Inc.AllRightsReserved Page8 of 22

(OperatorInstructions)

OurfirstquestioncomesfromthelineofJoshuaRaskinfromBarclays.

JoshuaRaskin(Analyst-BarclaysCapital):

Lauralee,IknowyouwerejusttalkingalittlebitaboutManorCare.IguessmayquestionaroundthepotentialassetsalesandwhatpromptedthatdiscussionandIguesswhendidthesediscussionsstartandwhatpromptedthat?

Thenrelatedtoit,haveyoualreadyidentifiedthepotentialassetsthatwillbesoldandanysortofmagnitudeorsizewouldbehelpful.Idon'tknowifthere'satargetedcoverageratiowhenyou'realldone.ThenIthinkyousaidnoneofthiswasinguidance,butjustwanttomakesurethatwasthecase,too.


Firstofall,noneofitisinguidance.Ifyouwillrecall,wedidselloneassetwiththemlastyear.WecalledittheBeckleyassetanditdidhavebenefitforbothofus.We'vehadanongoingdialogueof,aretheremoreassets?Asyouknow,anyportfolioprobablyhas10%to15%assetsthatdon'texactlygetthesweetspotandthiswouldfitthatprofile.

Sotogether,we'veidentifiedthoseassets,focusingonwhatarenon-strategic.Theportfolioisgoingtobelistedwithanagent.It'searlyatthispointintimetotellyouwhatthemagnitudeofthatis.WhatIwouldsayisyouallknowthatthisisagoodmarkettogotointermsofsellingassets,andthatwouldbethegoal.


Anysortofcoloraround--justsortofthinkingaboutthereinvestment,intermsofthepotentialsizeofthis,itsoundslikeyouguyshavecometogetheranditsoundslikethisisdifferentcommentarythanwhatyou'vesaidinthepast.Iunderstandyou'reconstantlyevaluatingportfolios,butshouldwethinkaboutthisasamaterialpieceofyourcurrentrelationship?


50assetsoutofover300isn'tgoingtobematerial,particularlysincethesearethenon-strategic.Butdirectlytoyourquestion,whatwehaveagreedwithHCRisthatwewillworkthisverysimilartowhatwedidwithBeckleyandthatis,wewouldgivethemrentcreditat7.75%ofanyproceedswiththeideathatbothofusarehighlymotivatedtogetthehighestlevelproceedsoutofthistransaction.


Okay.Justmorebroadly,onSNFs,doesthis,thesortofeventsthathavetranspiredinthelastyearorso,andthewrite-down,doesthischangethewayyouthinkaboutyourexposuretoskillednursingandmaybecommentaryoncurrentrates?Yousaidthisisagoodenvironmenttosellinto.So,shouldwethinkaboutHCP,broadlyspeaking,probablyreducingexposuretoSNFs?Isthatfairtoexpect?


Wecontinuetohaveotheroperatorsthatwedobusinesswithsowe'renotatallnegativeonthespace.It'sbeenaspacethat'sbeenchallenged,noquestion,bychangesinregulations,butthatbeingsaid,it'saveryimportantpartofthehealthcarelandscapeandit'sapartthatweplantobeapartof.


Okay,perfect.Thanks.




Operator:

OurnextquestioncomesfromthelineofVikramMalhotraofMorganStanley.

VikramMalhotra (Analyst-MorganStanley):

Lauralee,justfollowinguponthat,inyourinitialbudgeting,whenyou'velookatthose50assetsandthemetricsassociatedwiththem,canyougiveusanykindofbroadideaorcolor,helpusthinkaboutwhatthecoveragelevelscouldlooklikewhenallthatiscompleted?


It'spremature.Again,wewerejustgettingthepackagetogethertosell,andwhatwedon'tknowisdowesellallofthem,partofthem,orwhatever.Itisgoingtobebasedonbestproceedsandwhatmakessenseforbothofus.Soit'sjustearlyinthatprocess.

Generallyspeaking,though,theseareassetsthatwerenotcontributingtothecoverageoftheportfolio,sothere'sbenefitsbothintermsofproceedsandtheirimpactontheoverallcoverage.

PaulGallagher(CIO):

OnethingthatIwouldsay,whenweoriginallyunderwrotethesale-leaseback,wehadidentifiedwhatthesub-performingassetshadbeen.We,onaregularbasis,sitdownwithManorCareandgothroughandreviewthat.

Sometimesitexpands,sometimesitcontracts.Givenwhereweseepricingtoday,itmakessense,giventheenvironmentandthefactthatalotoftheshort-termnoisewithrespecttoreimbursementseemslikeitmightbe,atthispointintime,thatitwastherighttimetoevaluateandpullthetriggerandgotomarketandseewhatwecouldgetfortheseassets.


Justonthat,doesthemasterleaseneedtohave--areanyamendmentsrequiredtokindofmakethosesalesoristhatallwithinthelease?

TimSchoen(CFO):

No,no,wehavetheabilitytoselltheassets.


Toyourpoint,likeyousaid,basedonthepricingyouareseeing,canyoukindofgiveusasenseofwhatyou'reseeingforkindofthequalityofassetsinthemarketplaceintermsofpricing?

PaulGallagher(CIO):

Ithinkwe'llletmarketdeterminewhatthepriceisgoingtobe.


Okay.OnelastclarificationontheputsandtakesrelatedtotheEBITDAR,theManorCareEBITDAR,canyoujustremindus,Ithinktherateincreasewentin,inthenewfiscalyear.ButjustkindoflookingatthedeclineintheEBITDAR,I'mjustwondering,basedonyourdiscussionswithManorCare,wasthereabigimpactfromeitherexpensesandcanyoumaybejustgiveussomecolorontheshiftthatoccurredthislastquartertoMedicareAdvantage?





Inthefourthquarter,theprincipalimpactwaswhatIhadmentionedandthatwastheytookbackin-housefoodservicecapabilities.Sotherewasamodestchargetodothingslikebuildinventoriesandsoforth.Sonotanongoingimpact,butitdidimpactthequarter.


Okay.Thanks.

Operator:

OurnextquestioncomesfromthelineofJuanSanabriafromBankofAmerica.

JuanSanabria (Analyst-BofAMerrillLynch):

Hi,goodmorning,guys.IwasjusthopingyoucouldspeaktocashflowgenerationandliquiditypositionofManorCareandwhat'dyouexpectthecompanytoreinvest?Doyouexpectthemtobeabletoputin$90millionto$100millioninCapEx?Ifyoucouldjustreminduswhat'srequiredbyyourlease.


Right.Well,theyendedwith$128millionofcash.Theyalsohaveplannedassetsalesoutsideofthe50modestthatarecashproceedstothem.TherequirementforCapExonoursisjustalittleover$30million.Soagain,aswegetandlookattheirfinancialforecast,whichtheyprovidedtous,theybothcoverourlease,aswellastheirobligations,sowe'reverycomfortable.

TimSchoen(CFO):

IwouldexpectthemtobealittlebitmorecautiouswiththeirgrowthCapEx.


Onethingtobearinmind,whenthiswasoriginallyformedintoanOpCo/PropCo,Carlislespentquiteabitofmoneyatthefacilitylevelandforthefirstcoupleofyearsofourlease,wehadwhatwedeemedkindoftobeabovemarketCapExspendintheportfolio.

Thelion'sshareofwhatthey'vebeenspendinghasbeenonnewvaluecreationandnewopportunities.Wehaveexpectedthattheongoingmaintenancetocomedowntoamorenormalizedrunrate,whichisthe$300millionthatLauraleetalkedabout.What'sthatlevelnow?


Itwasjustatouchover$70millionin2014formaintenanceCapEx.


Okay.Thanksforthat.Justswitchinggearstotheseniorhousingportfolio,couldyoujustcommentifyou'reseeinganypressureoncostsatall;particularlylabor,giventhestrongemploymentnumberswe'veseen.Asasidenotetothat,ifyoucouldjustcommentonyourHoustonexposureandwhatyou'reseeingonthegroundthere,withwhat'sgoingoninoilaswellaselevatedsuppliestherelocally?

PaulGallagher(CIO):

Yes,Icantalkalittlebitaboutthat.Wehaven'tseenmuchinthewayoftheemploymentotherthantheissueswithrespecttointegrationinourBrookdaleportfolio.Thatsaid,withrespecttoHouston,inourportfolio,




between2013and2014,wespentabout$14millioninCapEx,whichisalittleover$8,000perunit,sothattheywouldremaincompetitive.We'veseenyear-over-yeargrowthinnetportfolioinHoustonof7.6%andover320basispointsofoccupancyandover500basispointsinrate.

Sowe'reseeinggoodresultsasaresultofkindofbeingproactiveonthefrontendinrepositioningthoseparticularassets.WithrespecttoHoustonandwhatwe'reseeingondevelopmentandwhathaveyouthere,absorptionstillexceedstheinventorygrowthby110basispoints;however,constructionishigh.

We'vehadgoodsuccesswiththeleasingofthepropertythatwearebuyingandasaresultofthat,we'vehadnumerousinboundinquiriesabouttheindependentsideandsincethesewillbecomplementingfacilities,wethinkthisistherightinvestmenttobedoingatthispointintimeinHouston.


Okay,great.Justonelastquestionfromme,ifcouldyoujustcommentonwhatdrovethesequentialdeclineinoccupanciesinSNFportfolio.IsthatthecontinuedshifttoMedicareAdvantage?

TimSchoen(CFO):

Yes.


Great.Thankyou.

Operator:

OurnextquestioncomesfromthelineofMichaelKnottfromGreenStreetAdvisors.

MichaelKnot t (Analyst-GreenStreetAdvisors):

Hey,everyone.QuestionforyouonManorCarecoverage,Ithinkonpage26,youguysshoweda1.08normalizedcoveragefor2014andasIrecall,whenyoutooktheimpairmentcharge,Ithinkyougavea1.07numberfor2015.Soisthatafairassessmentthatyouthinkthatcoverageisbasicallygoingtoremainflatduringthecourseofthisyear?

TimSchoen(CFO):

That'sright.Basedontheirbasefinancialforecast,that'sright,Michael.


Thenwhenyouthinkaboutyour--thelion'sshareofyourHCRinvestmentisintheformoftherealestate,thatyouhavesliverintheoperator,asyouthinkaboutfutureoutcomeswithyourrealestate,howwouldyouthinkabouttheopportunityorpossibilityofshiftingsomeofthatrealestatepocketintotheoperatorpocket?

PaulGallagher(CIO):

Well,ifyou'retalkingabouttradingrealestateorrentforownershipinterestintheOpCo,therearecertainlimitationsthatwehaveasaREIT.Butfromourstandpoint,we'regoingtodowhat'sinthebestinterestoftheHoldCo,whichisboththepropertyandtheoperationsandweworkcloselywithManorCaretofigureoutwhatisthebestwaytomaximizevalueoftheentirestructure.


Okay.JustwithrespecttothatdisclosurethatwasintheManorCarepartofyour10-Klastyear,what




promptedtoyouputitintheactualHCPportionthisyearasopposedtolastyearorwhynothavedonethatlastyear?

TimSchoen(CFO):

WejustwantedalltheriskfactorsofHCRinoneplace,Michael.You'llnoticethateveryyearwegobackandreorderriskfactorsbyorderofimportance,sowestartwithtenantconcentrationandthenwementionalltherisksassociatedwithHCRandthenfollowupwithBrookdale.Soit'sreallyjustanorderingoftheriskfactors.That'sreallywhatdroveit.ThentoputeverythingassociatedwithHCRinonelocationforthereader.


Okay,soit'snotafairassessmenttosaythatyourviewoftheriskinessofthatsituationishigherthanayearago?

TimSchoen(CFO):

No,Ithinkitjustcontinuestoprogress.


Okay.Thanks.That'sitforme.

Operator:

OurnextquestioncomesfromthelineofSmedesRosefromCiti.

SmedesRose (Analyst-Citigroup):

Ididwanttoaskyou,onTheCovedevelopmentthatyouannounced,youmentionedforanotherdevelopmentyou'vepreleased25%.HaveyoubeguntopreleaseonTheCovedevelopmentaswell?

PaulGallagher(CIO):

No,andpartofwhat'sdrivingthatisthemarkethasreallychangedinSouthSanFranciscofromthestandpointofkindofleadtime.We'veactuallyseendecisionmakingshortenquiteabit.Wewereupwithseveralofourtenantsthislastweekrightaftertheannouncement,allveryexcitedabouttheopportunity,allinneedofexpansionspace,butwethoughtthatgivenwhat'sgoingonwithoccupancyandvacancyinthemarketplace,whatwe'veseenwithrentalrateswherewe'veseenrentalratesincreaseasmuchas65%inthemarketplaceinthelast18months,itwastherighttimetocomeoutofthegroundforspace.

Ourportfoliothere,we'vegot900,000squarefeetthatwe'vedevelopedadjacenttoTheCove.It'sbasicallyfullatthispointintime.It'sjustamatteroftimethatwewillhavepeopleoccupyingthespaceandthereceptionwasquitestrong.


Sowhatkindof--sorry.

TimSchoen(CFO):

Smedes,whatwestartedonisthefirstphase.Iknowyou'reaNewYorkguy,butifyoutakea20-storybuildingandyoucutitinphases,we'vejuststartedthefirstphase,whichisabout253,000feetandthat'sadjacenttoourOysterPointproject,whichis100%leasedtoday.Sothatgivesyoualittlebitmorecolor.

PaulGallagher(CIO):




Ithinktheotherthingthat'salittleuniqueaboutthis,we'vedonequiteabitofdevelopment.Imentionedthe900,000squarefeet.Wedidalittleover800,000squarefeetwithGenentech.ThisisgoingtobethefirstinSouthSanFranciscothat'sgoingtobefullycontainedwhereyou'regoingtohavelargegreenspace,you'regoingtohaveamenityspace,bothfoodandactivitiesandexercise.

You'regoingtohaveafullserviceboutiquetypehotelonsiteandthisissomethingthat'sgoingtobeveryuniqueinthemarketplace.We'vegotverygoodresponsebackfromthemarketplaceasaresultofourannouncement.


Okay.Thanks.Inyouropeningremarks,youmentionedyouhadhiredacquisitionprofessionalsthatwouldlookatarangeofacquisitionsizes,includingsmallerones.Areyouseeingmoreattractiveopportunitiesonsmallerassetsorarelargerportfolioshardertotrackdown?Isthereanykindofadditionaldetailthere?


Isaidmid-sizedtransactionsandyoucanseeitinouractivities,ourmedicalofficethatweinvestedinthisquarter.

PaulGallagher(CIO):

Ithinkifyoulookacrossthespectrum,medicalofficeandlifesciencearegoingtobemoreoftheone-offtypebuildings.Obviously,thereareportfoliosthere,butalotmoreone-offbuildingswhereastheskillednursingandtheseniorhousingaremuchmoreportfolio-based.


Great,thankyou.

Operator:

OurnextquestioncomesfromthelineofDanielBernsteinfromStifel.

DanielBernstein(Analyst-StifelNicolaus):

Goodafternoon.NottokeepgoingontheHCPHCRleases,butistherealeaseterminationfeethatyoumightbeabletogetonthesaleofthoseassetsthatmightcontributetoyourcashposition?

TimSchoen(CFO):

No,wewouldjustredeploytheproceeds,Dan.We'dgettheproceedsfromthesaleandthengoaheadandredeploythose.ThinkaboutwhatwedidwiththeKindredassetslastyear.


Okay.IsthereanyobligationinyourleasestofundCapEx?Ithinkyou'refundingsomeCapExforBrookdale,butdoyouhaveanyobligationsorlinesthattheycoulddrawupontofundtheirCapExiftheywantedto?

TimSchoen(CFO):

No,wedon'thaveanyobligationsundertheleasestofundtheCapEx,butwewouldlookatthatandwe'vetalkedaboutthatinthepastthatwewouldlookatprovidingthemgrowthcapitalifit'sanexpansionofanexistingfacilityoropportunitytoincreasetheirmarketpenetrationincertainmarkets.

PaulGallagher(CIO):




Wedothatacrosstheboardinourportfolio.


Okay.WhenI'mlookingatyourprojectionfor1.07fixedchargecoverage,howshouldIthinkaboutthatgoingthroughthequarters?Isthatgoingtodipdownclosertooneandthenpopbackupthesecondhalfoftheyearorisitgoingtoberelativelysteady?HowshouldIthinkaboutthepattern?

TimSchoen(CFO):

It'srelativelysteady,Dan,butit' llhavesomeseasonalitytoit.


Justwanttogetoffthatrealquick,theCCRJVs,you'redevelopingsomepropertiesthatwillgointhere.ArethoseactuallyCCRCsthatyou'redevelopingtoputinthatjointventureorisitsomeothercombinationofassets?

PaulGallagher(CIO):

We'vegottwoscenarios.Oneiswe'rebuyingaloanthatwas--orapropertythatwasinourdevelopmentloanprogramandthat'sgoingtogointoourRIDEAjointventurewithBrookdale.We'realsodoingaground-updevelopmentjointventurewithFormationanduponcompletion,thatparticularprojectisalsogoingtogointoourBrookdaleRIDEAjointventure.


Thoseare90/10.

PaulGallagher(CIO):

Theloanaspectisassistedlivingandmemorycare.Thenewdevelopmentisgoingtobeindependentliving.


Okay.Sothey'renotreallyCCRCs,butyou'restillgoingtomovethemintothatJV?

PaulGallagher(CIO):

Thesearepropertiesthatareadjacenttoeachother.BasedonthefeedbackthatwegotfromtheALandMemoryCare,itjustmadesensetogoaheadanddotheindependentlivingcomponent.


CanyoutalkjustbroadlyabouttheopportunitiestheretodevelopmoreCCRCsandacquiremoreCCRCs?HowshouldIbethinkingabouthowfastyoucangrowthatjointventurewithBrookdale?

PaulGallagher(CIO):

Iwouldprobablylookatitmorefromanacquisitionstandpointasopposedtoadevelopmentplayandit'sreallygoingtobeafunctionoftheopportunitiesthatareoutthere.We'veactuallyseenacoupleofportfolioshereinthelastsixmonths.Wecontinuetomine.There'salotofnotforprofitsouttherethatcouldpotentiallyusesomeliquidity,sowe'reactivelypursuingthoseopportunities.


Okay.I'veaskedplentyofquestions.I' llhopoff.Thankyou.




Operator:

OurnextquestioncomesfromthelineofNickYulicofromUBS.

NickYulico (Analyst-UBS):

Thanks.GoingbacktothetalkofthepossibleassetsalesatHCRManorCare,whenyouwerehavingthosediscussionswiththemajorityownersofHCRManorCaretoexplorearentcutonthemasterleaseasawaytosortofeasethefinancialburdenofwhatlookslikeaprettytoughcapitalstructureatManorCarerightnow?


Well,justtoreiterate,HCR'sforecastsshowtheycanandwillpayourrentaswellasmeattheCapExobligationsofourlease,soletmestartwiththat.We'vealsosaidveryconsistently,iftheirrentrestructureistobeconsidered,itwouldneedtobebeneficialtoourshareholders.

AgoodexampleisourtransactionwithBrookdalewherewedemonstratedthatpositivetradescouldbemutuallymade,butwithoutsimilartypebenefitswithHCR,we'reveryhappytocontinuetocollecttherent.

Iwouldsay,though,thatwe'reveryfavorablypositiveabouttherecentjointdecisiontomarketupto50non-strategicproperties,becausethat'saveryconstructivewayforthemtoaddresspartsoftheirportfoliothatarenotnecessarilyadditivetotheirstrategy.


Okay.Soitsoundslikewecouldinferthatrentcutisprobablynotonthetablerightnowandsoyou'regoingdowntheassetsaleapproachfirsttoseeifthatmaybehelpsthings?


Yes.


Okay.RegardingthetermloanthatHCRManorCarehas,howclosearetheytobreachingthecovenantsinthattermloan?Iftheyarebreachedinthenext,whenevertheymightbebreached,whatdoesthatmeanforyourrentpayments?


Well,theyareincompliance.

TimSchoen(CFO):

Andtheyremainincompliancewiththeirtermloan,Nick,andthey'vegotroomtoremainincompliancethere.Anydefaultonanydebtover$25millionisadefaultunderourlease.


Okay.Thanks.IthinkRosshadfollow-up.

RossNussbaum(Analyst-UBS):

Hey,guys,Ijustwantedtofollowupontheassetsalequestion.So50propertiesisabout19%ofthe267SNFsthatyouhavewithHCR.SoI'mguessingthisisnotgoingtobetherightmath,butifyoutook19%ofyourinvestmentof$5.7billion,you'dbelookingat$1.1billionofassetvalue.




Isitfairtosaythatweshouldnotbeexpectinganywherenear$1.1billionofproceeds,giventhatthesearetheweakerassetsintheportfolio?


Ithinkthatwouldbeanaccuratestatement.


Thesecondpartofit,Iguess,wouldbe,inthinkingaboutacaprate,Iknowitdoesn'tserveyoutodiscusscapratesaheadofasale,butjustbigpicturehere.Whilearentcutisn'thappeningtoday,itwouldseemtomethatthesethingsaregoingtogetsoldatsignificantlyhighercapratesonwhattheimpliedrentwouldhavebeenversuswhereyou'regoingtobeabletoredeploythoseproceedsintoday'slowercaprateenvironment.

Soinessence,shareholderswillbesufferingsomedilutionasaresultoftheseassetsales.Canyoutalkmaybetothatdynamicalittlebit?


Whatwe'vetalkedaboutis7.75%rentcreditonproceeds.Ifyou'llrecall,youareright,itisacompetitivemarketplace,butwe'vebeenhighlysuccessfulwiththeinvestmentsthatwe'vehadtobeabovethatnumberor--andbelievewecanbeclosetoit.Ithinkit'sinsignificanttheimpact.

PaulGallagher(CIO):

Weinvested$1.9billionin2014at7.1%.Sowe'lltakethatreinvestmentrisk.


Justtomakesureweallunderstandthat,thatrentcredit,you'resuggestingwhenwelookatthemasterleaseaftertheseassetssalesandwe'rethinkingaboutwhattheremainingrentisonthe,let'scallit217assets,you'resuggestingwejusttakethat7.75%rentcredit--I'mtryingtothinkofhowwebackintoit.


It'sagainsttheproceedsfromasale.Itdependsonwhattheassetsalesfor.Thatdollarnumbertimes7.75%.It'sindependentoftherentoftheassets.


Okay.Thankyou.

Operator:

OurnextquestioncomesfromthelineofMichaelCarrollfromRBC.

MichaelCarro ll(Analyst-RBCCapitalMarkets):

Thanks.CanyoubreakouttheCapExspendbyHCR

ManorCare?WhatwasmaintenanceandwhatwasnewCapExorgrossCapExin2014?

TimSchoen(CFO):

Yes.IntermsofmaintenanceCapEx,it'sbeen$40millionto$50millionrange,Mike.Therearesomerenovations.Lauraleementionedthe$70millionnumber,socallit$20millionto$30millionofrenovations




andimprovementstofacilitiesandthentherestwithgrowthCapEx,callit$25millionto$35million.I'mrounding,Mike,butitgetsyoudirectionallythere.


Youthinkgoinginto2015,they'lldothemaintenanceCapExandbemorethoughtfulaboutthegrowthinthenewCapEx?

TimSchoen(CFO):

Yes,that'sright.


Okay.CanyoualsotalkaboutwhatwasthelogicofagreeingtoswitchtheU.K.debtinvestmentintoalease?AreyouplanningondoingthatonmoreoftheHC-Oneportfolioovertime?

TimSchoen(CFO):

I' llletPaulanswer.

PaulGallagher(CIO):

Wehadtheabilitytogetinandseetheperformanceofsomeoftheunderlyingassetsandworkedwiththeoperatortolockinkindoflong-termescalating-typeincomeasopposedtodebtthat,atsomepointintime,thatispre-payable.Theassetsaregood,high-qualityassets.We'vegotagreatoperatorthereandwelookforwardtothelong-termrelationshipthatwehavewithHC-One.

TimSchoen(CFO):

Mike,aswe'vementioned,wehaveabouta$1billionportfolioofdebtandwe'dliketoconvertthatintolong-termownershipofrealestateovertime.IthinkPaulhaspointedoutacoupleofthings.Oneisthesale-leasebackopportunitywithHC-One.TheotheronewasthedevelopmentloanthatPaulhadmentionedinhisscript.

Bothofthosearegoodexamplesofusingdebttocreatelong-termownershipofrealestate,andthenhavingniceattractivegrowthinthoseassetsovertime,soconvertingthatdebttoanequityownershipinrealestate.


Great.Thanks.

Operator:

OurnextquestioncomesfromthelineofRichAndersonfromMizzoSecurities.

RichAnderson(Analyst-MizzoSecurities):

Goodmorning.WhenIwrotemynotethismorning,Isearchedthe201310-Kandthere'snodoubtthatthedisclosureoftheissuewithHCRManorCarewaswaymoreobscurethanitisinthe2014disclosureandyour201410-K.

Soifnothinghaschangedthereinyourmindandit'sjustkindofseehowitgoes,whydidyouescalatethedisclosure?Further,whynotjustputitinyourpressrelease,particularlyconsideringthesensitivityeveryonehasaroundthistenant,whynotbeafullopenbookandmakesureeveryone'sawareofwhat'sgoingon?

PaulGallagher(CIO):



©2014TheStreet,Inc.AllRightsReserved Page18 of 22

Oh,didyouputoutanotethismorning,Rich?

TimSchoen(CFO):

Toansweryourquestion,wegothroughourriskfactorseveryyear,butwejustwantedtoputalloftheriskfactorsassociatedwithHCRinoneplace.Theywerethroughoutour10-KdocumentpreviouslyandasIsaidpreviously,whenIansweredthequestion,werankedourriskfactors.

HCRisobviouslyourlargesttenantconcentrationandweputalloftheriskfactorsassociatedwithHCRinoneplace.Wedidthat,Rich,becauseobviously,thecoverageratiohasbecometighterin2014.


TheotherthingIthinkisimportantistheseinvestigationsarevery,verytypicaloftheindustry.YouhavesimilarfilingswithKindred,youhavesimilarfilingswithGenesisinskilled.HCRhasalonghistoryofheyqualitycareandalonghistoryofcompliancewithregulationsandsotheybelievethey'reincomplianceandwesupportthatdecision.


SoacoordinatedeffortbytheDepartmentofJustice,theDepartmentofHealthandHumanServices,theOfficeofInspectorGeneral,allthese,thisisparforthecourseforany--


Fortheindustry.

TimSchoen(CFO):

It'snotuniquetoHCR,Rich,andit'snotnewnews.It'sbeenouttheresince2013.


We'veallbeentalkingaboutthisHCRcoverage.Whynotopenyourbookandsay,bytheway,wehavethisoutthere?Ican'timagineeveryoneknewaboutthis.Sowhynotbeanopenbookandsay,thisisoutthere.

Wejustwanttomakesureeveryone'sawareaswe'retalkingaboutrentcoverageandwhat'sgoingon,wealsohavethisissuetomakesureeveryone'sawareofandthenit'soutthereandeveryonehasthefullinformation.Justcuriouswhynotfullydisclosethewholeentirepicture?

TimSchoen(CFO):

Well,firstofall,Ithinkwehavefullydisclosedit.Secondofall,we'vebeenansweringquestionsabouttheseinvestigativedemandssince2013,soIdon'tknowwhatelsetotellyou.


Okay.Thankyou.

Operator:

OurnextquestioncomesfromthelineofDerekBowerfromEvercoreISI.

DerekBower(Analyst-EvercoreISI):

Couldyoutalkabouthowyou'rethinkingaboutthesourcesofcapitalforfutureinvestments,givenyour




leveragetargetsarenowaboveyour40%long-termtarget?

TimSchoen(CFO):

I'msorry,canyourepeatthat?


Yourcurrentleverageisaboveyour40%long-termtarget.Iwasjustcurioustoknowhowyou'rethinkingaboutfundingneedsforfutureinvestmentactivity.

TimSchoen(CFO):

AsImentionedinmypreparedremarks,we'realittlebitaboveourtargetbecausewe'veutilizeddebtforthebenefitofourcurrencyhedging.Butifyoutookourorganiccashflowfromthisyear,weexpecttoreturntothat40%leverageratio.Youshouldcontinuetothinkthataswelookatacquisitionsthatwewouldfinancethatona40partsdebt/60partsequitybasis,sonorealchange.It'sjustthatweutilizedthedebtforhedgingpurposesbecausewehaddonemoretransactionsintheU.K.latein2014.


Okay.Gotit,thanks.Lastly,doyouhaveanyupdatedthoughtsonpotentiallydilutingyourManorCareconcentrationthroughinvestinginotherpropertysegments?Iknowdespitethecompetitivenessofthemarket,wouldyoubemoreinclinedtobepurchasinglargermoreseniorhousingorMOBportfoliosjustsoManorCareislessofaheadwindorlessofanoiseforyouroverallstory?

TimSchoen(CFO):

I' llletourchiefinvestmentofficeranswerthat,butIthinkgenerallywelookatinvestingonanattractiverisk-adjustedbasisandthat'sthebedrockofourinvestmentdecisions.

PaulGallagher(CIO):

Overtime,withtheinvestmentsthatwe'vemade,we'veactuallywhittleddowntheexposuretobelow30%atthispointintime,sowecontinuetoworkonthat.

Operator:

OurnextquestioncomesfromthelineofTayoOkusanyafromJefferies.

TayoOkusanya (Analyst-JefferiesandCompany):

Yes,goodafternoon.Mostofmyquestionshavebeenanswered,butinregardstothelineofquestioningaroundtherentcuts,Iunderstandwhatmind-set,butinApril,whenyougettheadditional3.5%rentbumps,itseemslikethat'sbuiltintothe2015guidance.Ijustwantedtoconfirmwhetherthatwasalreadyaforegoneconclusionthatwasgoingtohappenorwhetheritcouldstillbepartofthenegotiationprocess?


That'sbuiltintotheforecast.It'sbuiltintoManorCare.

TimSchoen(CFO):

It'salsobuiltintothebudgetedcoverageof107timesaswell.

TayoOkusanya (Analyst-JefferiesandCompany):




Okay,soit'salsobuiltintothebudgetedcoverageat107,sothat'shelpfultoknow.Thankyou.

TimSchoen(CFO):

That'sright,Tayo.

Operator:

OurnextquestioncomesfromthelineofToddStenderfromWellsFargo.

ToddStender(Analyst-WellsFargoSecurities):

Hi,justacouplequestionsremain.Justlookingatlifescienceleasesassignedinthequarter,whatkindofreturnprofilesareyoulookingat?You'rerepositioningatleastthreeassets,Isee.You'reputtingmoneyintotheSouthSanFranciscobuilding.Canyoujusttalkaboutwhatthatreturnprofilelookslikewithnewadditionalcashbeingputin?

PaulGallagher(CIO):

I'msorry,Imissedthefirstpartofthatquestion.Canyourepeatthat?

TimSchoen(CFO):

Thedevelopment.


Sure,justtherepositionedassets.I'mjustlookingatthethreerepositionedlifesciencefacilitiesthatyou'vegot:Sacramento,SouthSanFrancisco,andSanDiego.Whatdothosereturnprofileslooklikenowthatyou'reputtingmoremoneyintothebuildings?

TimSchoen(CFO):

Onanincrementalbasis,Todd,thoseareuparoundthehighteens,orinonecase,almost20%onadditionalinvestedcapital.Onanoverallbasis,theywouldbeinthe7%to7.5%range.


Okay,that'shelpful.Theseven-yearleaseonthebiotech,the30,000-squarefootbuilding,isthatavacantbuildingrightnow?

TimSchoen(CFO):

Yes.


Thanks.Paul,Ithinkwhenyouweregoingoverthemedicalofficebuildingforecastfor2015,itsoundedlikeyou'reexpectingadeclineinmedicaloffice.DidIhearthatright?

PaulGallagher(CIO):

Wehavetwotenantsthatweknowaregoingtovacateandintheguidance,itshowsthemleavingthespace.We'reactivelylookingtobackfillthatandhopefully,wecangettenantsintheresoonerthanexpected.

TimSchoen(CFO):




Todd,thesamestoryimpactofthatisweexpectabout2%same-storegrowthintheMOBsegment.AbsentthosecoupleofbuildingsthatPauljustmentioned,wewouldbeclosertothe2.75%to3%growthraterangeforMOBs.

PaulGallagher(CIO):

Ontheradarscreen,ourguysdoaprettygoodjobofbeingproactiveongettingthosespacessold.Hopefully,wecangetthatspacere-leasedquicker.


Thatwasmynextquestion.Thanks,Tim.

Operator:

OurnextquestioncomesfromthelineofMichaelMuellerfromJPMorgan.

MichaelMueller(Analyst-JPMorgan):

Thanks.Hi.Ifyoudosellthe50properties,canyougiveusasenseastohowsignificantthefixedchargecoveragebenefitcouldbe?Justaroughmagnitude,areyouthinkingfive,10basispoints?Coulditbemorethanthat?


It'swaytoopremature.

PaulGallagher(CIO):

We'llletyouknowafterwehavesomepricediscovery.

MichaelMueller(Analyst-JPMorgan):

Okay,thatwasreallyit.Thanks.

TimSchoen(CFO):

Thanks,Mike.

Operator:

OurfinalquestioncomesfromthelineofToddLukasikfromMorningstar.

ToddLukasik(Analyst-Morningstar):

Couplequestionsonsale-leasebackoverintheU.K.,withtheleasingmarketthere,isitsimilartoexpectthesametypeofrentescalatorsthatyouguyswouldnormallyseeforaU.S.investmentofthattype?

PaulGallagher(CIO):

Weusuallyusewhat'sknownastheRPI,whichistheU.K.equivalentofCPI.Typically,wehavefloorsandceilings,verytypicaltowhatwehaveintheU.S..


Okay,great.Ithinkyoumentioned1.65timeEBITDARMcoveragetostartout.Isthatalevelthatyouwouldexpecttobemaintainedovertimeoristhateithertoohighortoolowatthispoint?




PaulGallagher(CIO):

No,wewouldexpecttothegrow.That'sthenorm,overintheU.K.,istoquoteanEBITDARMnumber.IfyouequatethattoamorenormalEBITDARnumber,it'sabouta1.35timecoverageandit'sprettymuchamarket-typecoverageintheU.K..


Okay,great.Thanks.That'sallIhad.

Operator:

Thankyou.Thisdoesconcludethequestionandanswersessionoftoday'sprogram.I'dliketohandtheprogrambacktoLauraleeMartin,PresidentandChiefExecutiveOfficer.


Thankyouverymuch.Again,thankyouallforjoiningusandletmeclosebyremindingyouthatMay11isourInvestorDayinNewYork.Wehopetoseemanyofyouthere.Thankyousomuch.

Operator:

Thankyou,ladiesandgentlemen,foryourparticipationintoday'sconference.Thisdoesconcludetheprogram.

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