hcp (hcp) earnings report: q4 2014 conference call...
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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
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 22
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.
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 22
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
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 22
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.
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 22
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
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
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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.
LauraleeMart in(President,CEO):
Thankyou,Paul.
BeforeIcloseoutthecallandopenthelinesforquestions,Iwouldliketodiscussourlargestoperatorandportfolioconcentration,HCRManorCare.SeveralofyouhavenotedthismorninganongoingcivilinvestigativedemandinvolvingHCRManorCarementionedinour10-Ktoday.Thisongoinginvestigationbeganin2013andwaspreviouslydisclosedin2013auditedfinancialstatements,whichweprovidedaspartofour201310-Klastyear.
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 22
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:
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 22
(OperatorInstructions)
OurfirstquestioncomesfromthelineofJoshuaRaskinfromBarclays.
JoshuaRaskin(Analyst-BarclaysCapital):
Lauralee,IknowyouwerejusttalkingalittlebitaboutManorCare.IguessmayquestionaroundthepotentialassetsalesandwhatpromptedthatdiscussionandIguesswhendidthesediscussionsstartandwhatpromptedthat?
Thenrelatedtoit,haveyoualreadyidentifiedthepotentialassetsthatwillbesoldandanysortofmagnitudeorsizewouldbehelpful.Idon'tknowifthere'satargetedcoverageratiowhenyou'realldone.ThenIthinkyousaidnoneofthiswasinguidance,butjustwanttomakesurethatwasthecase,too.
LauraleeMart in(President,CEO):
Firstofall,noneofitisinguidance.Ifyouwillrecall,wedidselloneassetwiththemlastyear.WecalledittheBeckleyassetanditdidhavebenefitforbothofus.We'vehadanongoingdialogueof,aretheremoreassets?Asyouknow,anyportfolioprobablyhas10%to15%assetsthatdon'texactlygetthesweetspotandthiswouldfitthatprofile.
Sotogether,we'veidentifiedthoseassets,focusingonwhatarenon-strategic.Theportfolioisgoingtobelistedwithanagent.It'searlyatthispointintimetotellyouwhatthemagnitudeofthatis.WhatIwouldsayisyouallknowthatthisisagoodmarkettogotointermsofsellingassets,andthatwouldbethegoal.
JoshuaRaskin(Analyst-BarclaysCapital):
Anysortofcoloraround--justsortofthinkingaboutthereinvestment,intermsofthepotentialsizeofthis,itsoundslikeyouguyshavecometogetheranditsoundslikethisisdifferentcommentarythanwhatyou'vesaidinthepast.Iunderstandyou'reconstantlyevaluatingportfolios,butshouldwethinkaboutthisasamaterialpieceofyourcurrentrelationship?
LauraleeMart in(President,CEO):
50assetsoutofover300isn'tgoingtobematerial,particularlysincethesearethenon-strategic.Butdirectlytoyourquestion,whatwehaveagreedwithHCRisthatwewillworkthisverysimilartowhatwedidwithBeckleyandthatis,wewouldgivethemrentcreditat7.75%ofanyproceedswiththeideathatbothofusarehighlymotivatedtogetthehighestlevelproceedsoutofthistransaction.
JoshuaRaskin(Analyst-BarclaysCapital):
Okay.Justmorebroadly,onSNFs,doesthis,thesortofeventsthathavetranspiredinthelastyearorso,andthewrite-down,doesthischangethewayyouthinkaboutyourexposuretoskillednursingandmaybecommentaryoncurrentrates?Yousaidthisisagoodenvironmenttosellinto.So,shouldwethinkaboutHCP,broadlyspeaking,probablyreducingexposuretoSNFs?Isthatfairtoexpect?
LauraleeMart in(President,CEO):
Wecontinuetohaveotheroperatorsthatwedobusinesswithsowe'renotatallnegativeonthespace.It'sbeenaspacethat'sbeenchallenged,noquestion,bychangesinregulations,butthatbeingsaid,it'saveryimportantpartofthehealthcarelandscapeandit'sapartthatweplantobeapartof.
JoshuaRaskin(Analyst-BarclaysCapital):
Okay,perfect.Thanks.
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 22
Operator:
OurnextquestioncomesfromthelineofVikramMalhotraofMorganStanley.
VikramMalhotra (Analyst-MorganStanley):
Lauralee,justfollowinguponthat,inyourinitialbudgeting,whenyou'velookatthose50assetsandthemetricsassociatedwiththem,canyougiveusanykindofbroadideaorcolor,helpusthinkaboutwhatthecoveragelevelscouldlooklikewhenallthatiscompleted?
LauraleeMart in(President,CEO):
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.
VikramMalhotra (Analyst-MorganStanley):
Justonthat,doesthemasterleaseneedtohave--areanyamendmentsrequiredtokindofmakethosesalesoristhatallwithinthelease?
TimSchoen(CFO):
No,no,wehavetheabilitytoselltheassets.
VikramMalhotra (Analyst-MorganStanley):
Toyourpoint,likeyousaid,basedonthepricingyouareseeing,canyoukindofgiveusasenseofwhatyou'reseeingforkindofthequalityofassetsinthemarketplaceintermsofpricing?
PaulGallagher(CIO):
Ithinkwe'llletmarketdeterminewhatthepriceisgoingtobe.
VikramMalhotra (Analyst-MorganStanley):
Okay.OnelastclarificationontheputsandtakesrelatedtotheEBITDAR,theManorCareEBITDAR,canyoujustremindus,Ithinktherateincreasewentin,inthenewfiscalyear.ButjustkindoflookingatthedeclineintheEBITDAR,I'mjustwondering,basedonyourdiscussionswithManorCare,wasthereabigimpactfromeitherexpensesandcanyoumaybejustgiveussomecolorontheshiftthatoccurredthislastquartertoMedicareAdvantage?
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LauraleeMart in(President,CEO):
Inthefourthquarter,theprincipalimpactwaswhatIhadmentionedandthatwastheytookbackin-housefoodservicecapabilities.Sotherewasamodestchargetodothingslikebuildinventoriesandsoforth.Sonotanongoingimpact,butitdidimpactthequarter.
VikramMalhotra (Analyst-MorganStanley):
Okay.Thanks.
Operator:
OurnextquestioncomesfromthelineofJuanSanabriafromBankofAmerica.
JuanSanabria (Analyst-BofAMerrillLynch):
Hi,goodmorning,guys.IwasjusthopingyoucouldspeaktocashflowgenerationandliquiditypositionofManorCareandwhat'dyouexpectthecompanytoreinvest?Doyouexpectthemtobeabletoputin$90millionto$100millioninCapEx?Ifyoucouldjustreminduswhat'srequiredbyyourlease.
LauraleeMart in(President,CEO):
Right.Well,theyendedwith$128millionofcash.Theyalsohaveplannedassetsalesoutsideofthe50modestthatarecashproceedstothem.TherequirementforCapExonoursisjustalittleover$30million.Soagain,aswegetandlookattheirfinancialforecast,whichtheyprovidedtous,theybothcoverourlease,aswellastheirobligations,sowe'reverycomfortable.
TimSchoen(CFO):
IwouldexpectthemtobealittlebitmorecautiouswiththeirgrowthCapEx.
JuanSanabria (Analyst-BofAMerrillLynch):
Onethingtobearinmind,whenthiswasoriginallyformedintoanOpCo/PropCo,Carlislespentquiteabitofmoneyatthefacilitylevelandforthefirstcoupleofyearsofourlease,wehadwhatwedeemedkindoftobeabovemarketCapExspendintheportfolio.
Thelion'sshareofwhatthey'vebeenspendinghasbeenonnewvaluecreationandnewopportunities.Wehaveexpectedthattheongoingmaintenancetocomedowntoamorenormalizedrunrate,whichisthe$300millionthatLauraleetalkedabout.What'sthatlevelnow?
LauraleeMart in(President,CEO):
Itwasjustatouchover$70millionin2014formaintenanceCapEx.
JuanSanabria (Analyst-BofAMerrillLynch):
Okay.Thanksforthat.Justswitchinggearstotheseniorhousingportfolio,couldyoujustcommentifyou'reseeinganypressureoncostsatall;particularlylabor,giventhestrongemploymentnumberswe'veseen.Asasidenotetothat,ifyoucouldjustcommentonyourHoustonexposureandwhatyou'reseeingonthegroundthere,withwhat'sgoingoninoilaswellaselevatedsuppliestherelocally?
PaulGallagher(CIO):
Yes,Icantalkalittlebitaboutthat.Wehaven'tseenmuchinthewayoftheemploymentotherthantheissueswithrespecttointegrationinourBrookdaleportfolio.Thatsaid,withrespecttoHouston,inourportfolio,
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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.
JuanSanabria (Analyst-BofAMerrillLynch):
Okay,great.Justonelastquestionfromme,ifcouldyoujustcommentonwhatdrovethesequentialdeclineinoccupanciesinSNFportfolio.IsthatthecontinuedshifttoMedicareAdvantage?
TimSchoen(CFO):
Yes.
JuanSanabria (Analyst-BofAMerrillLynch):
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.
MichaelKnot t (Analyst-GreenStreetAdvisors):
Thenwhenyouthinkaboutyour--thelion'sshareofyourHCRinvestmentisintheformoftherealestate,thatyouhavesliverintheoperator,asyouthinkaboutfutureoutcomeswithyourrealestate,howwouldyouthinkabouttheopportunityorpossibilityofshiftingsomeofthatrealestatepocketintotheoperatorpocket?
PaulGallagher(CIO):
Well,ifyou'retalkingabouttradingrealestateorrentforownershipinterestintheOpCo,therearecertainlimitationsthatwehaveasaREIT.Butfromourstandpoint,we'regoingtodowhat'sinthebestinterestoftheHoldCo,whichisboththepropertyandtheoperationsandweworkcloselywithManorCaretofigureoutwhatisthebestwaytomaximizevalueoftheentirestructure.
MichaelKnot t (Analyst-GreenStreetAdvisors):
Okay.JustwithrespecttothatdisclosurethatwasintheManorCarepartofyour10-Klastyear,what
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promptedtoyouputitintheactualHCPportionthisyearasopposedtolastyearorwhynothavedonethatlastyear?
TimSchoen(CFO):
WejustwantedalltheriskfactorsofHCRinoneplace,Michael.You'llnoticethateveryyearwegobackandreorderriskfactorsbyorderofimportance,sowestartwithtenantconcentrationandthenwementionalltherisksassociatedwithHCRandthenfollowupwithBrookdale.Soit'sreallyjustanorderingoftheriskfactors.That'sreallywhatdroveit.ThentoputeverythingassociatedwithHCRinonelocationforthereader.
MichaelKnot t (Analyst-GreenStreetAdvisors):
Okay,soit'snotafairassessmenttosaythatyourviewoftheriskinessofthatsituationishigherthanayearago?
TimSchoen(CFO):
No,Ithinkitjustcontinuestoprogress.
MichaelKnot t (Analyst-GreenStreetAdvisors):
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.
SmedesRose (Analyst-Citigroup):
Sowhatkindof--sorry.
TimSchoen(CFO):
Smedes,whatwestartedonisthefirstphase.Iknowyou'reaNewYorkguy,butifyoutakea20-storybuildingandyoucutitinphases,we'vejuststartedthefirstphase,whichisabout253,000feetandthat'sadjacenttoourOysterPointproject,whichis100%leasedtoday.Sothatgivesyoualittlebitmorecolor.
PaulGallagher(CIO):
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Ithinktheotherthingthat'salittleuniqueaboutthis,we'vedonequiteabitofdevelopment.Imentionedthe900,000squarefeet.Wedidalittleover800,000squarefeetwithGenentech.ThisisgoingtobethefirstinSouthSanFranciscothat'sgoingtobefullycontainedwhereyou'regoingtohavelargegreenspace,you'regoingtohaveamenityspace,bothfoodandactivitiesandexercise.
You'regoingtohaveafullserviceboutiquetypehotelonsiteandthisissomethingthat'sgoingtobeveryuniqueinthemarketplace.We'vegotverygoodresponsebackfromthemarketplaceasaresultofourannouncement.
SmedesRose (Analyst-Citigroup):
Okay.Thanks.Inyouropeningremarks,youmentionedyouhadhiredacquisitionprofessionalsthatwouldlookatarangeofacquisitionsizes,includingsmallerones.Areyouseeingmoreattractiveopportunitiesonsmallerassetsorarelargerportfolioshardertotrackdown?Isthereanykindofadditionaldetailthere?
LauraleeMart in(President,CEO):
Isaidmid-sizedtransactionsandyoucanseeitinouractivities,ourmedicalofficethatweinvestedinthisquarter.
PaulGallagher(CIO):
Ithinkifyoulookacrossthespectrum,medicalofficeandlifesciencearegoingtobemoreoftheone-offtypebuildings.Obviously,thereareportfoliosthere,butalotmoreone-offbuildingswhereastheskillednursingandtheseniorhousingaremuchmoreportfolio-based.
SmedesRose (Analyst-Citigroup):
Great,thankyou.
Operator:
OurnextquestioncomesfromthelineofDanielBernsteinfromStifel.
DanielBernstein(Analyst-StifelNicolaus):
Goodafternoon.NottokeepgoingontheHCPHCRleases,butistherealeaseterminationfeethatyoumightbeabletogetonthesaleofthoseassetsthatmightcontributetoyourcashposition?
TimSchoen(CFO):
No,wewouldjustredeploytheproceeds,Dan.We'dgettheproceedsfromthesaleandthengoaheadandredeploythose.ThinkaboutwhatwedidwiththeKindredassetslastyear.
DanielBernstein(Analyst-StifelNicolaus):
Okay.IsthereanyobligationinyourleasestofundCapEx?Ithinkyou'refundingsomeCapExforBrookdale,butdoyouhaveanyobligationsorlinesthattheycoulddrawupontofundtheirCapExiftheywantedto?
TimSchoen(CFO):
No,wedon'thaveanyobligationsundertheleasestofundtheCapEx,butwewouldlookatthatandwe'vetalkedaboutthatinthepastthatwewouldlookatprovidingthemgrowthcapitalifit'sanexpansionofanexistingfacilityoropportunitytoincreasetheirmarketpenetrationincertainmarkets.
PaulGallagher(CIO):
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Wedothatacrosstheboardinourportfolio.
DanielBernstein(Analyst-StifelNicolaus):
Okay.WhenI'mlookingatyourprojectionfor1.07fixedchargecoverage,howshouldIthinkaboutthatgoingthroughthequarters?Isthatgoingtodipdownclosertooneandthenpopbackupthesecondhalfoftheyearorisitgoingtoberelativelysteady?HowshouldIthinkaboutthepattern?
TimSchoen(CFO):
It'srelativelysteady,Dan,butit' llhavesomeseasonalitytoit.
DanielBernstein(Analyst-StifelNicolaus):
Justwanttogetoffthatrealquick,theCCRJVs,you'redevelopingsomepropertiesthatwillgointhere.ArethoseactuallyCCRCsthatyou'redevelopingtoputinthatjointventureorisitsomeothercombinationofassets?
PaulGallagher(CIO):
We'vegottwoscenarios.Oneiswe'rebuyingaloanthatwas--orapropertythatwasinourdevelopmentloanprogramandthat'sgoingtogointoourRIDEAjointventurewithBrookdale.We'realsodoingaground-updevelopmentjointventurewithFormationanduponcompletion,thatparticularprojectisalsogoingtogointoourBrookdaleRIDEAjointventure.
LauraleeMart in(President,CEO):
Thoseare90/10.
PaulGallagher(CIO):
Theloanaspectisassistedlivingandmemorycare.Thenewdevelopmentisgoingtobeindependentliving.
DanielBernstein(Analyst-StifelNicolaus):
Okay.Sothey'renotreallyCCRCs,butyou'restillgoingtomovethemintothatJV?
PaulGallagher(CIO):
Thesearepropertiesthatareadjacenttoeachother.BasedonthefeedbackthatwegotfromtheALandMemoryCare,itjustmadesensetogoaheadanddotheindependentlivingcomponent.
DanielBernstein(Analyst-StifelNicolaus):
CanyoutalkjustbroadlyabouttheopportunitiestheretodevelopmoreCCRCsandacquiremoreCCRCs?HowshouldIbethinkingabouthowfastyoucangrowthatjointventurewithBrookdale?
PaulGallagher(CIO):
Iwouldprobablylookatitmorefromanacquisitionstandpointasopposedtoadevelopmentplayandit'sreallygoingtobeafunctionoftheopportunitiesthatareoutthere.We'veactuallyseenacoupleofportfolioshereinthelastsixmonths.Wecontinuetomine.There'salotofnotforprofitsouttherethatcouldpotentiallyusesomeliquidity,sowe'reactivelypursuingthoseopportunities.
DanielBernstein(Analyst-StifelNicolaus):
Okay.I'veaskedplentyofquestions.I' llhopoff.Thankyou.
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Operator:
OurnextquestioncomesfromthelineofNickYulicofromUBS.
NickYulico (Analyst-UBS):
Thanks.GoingbacktothetalkofthepossibleassetsalesatHCRManorCare,whenyouwerehavingthosediscussionswiththemajorityownersofHCRManorCaretoexplorearentcutonthemasterleaseasawaytosortofeasethefinancialburdenofwhatlookslikeaprettytoughcapitalstructureatManorCarerightnow?
LauraleeMart in(President,CEO):
Well,justtoreiterate,HCR'sforecastsshowtheycanandwillpayourrentaswellasmeattheCapExobligationsofourlease,soletmestartwiththat.We'vealsosaidveryconsistently,iftheirrentrestructureistobeconsidered,itwouldneedtobebeneficialtoourshareholders.
AgoodexampleisourtransactionwithBrookdalewherewedemonstratedthatpositivetradescouldbemutuallymade,butwithoutsimilartypebenefitswithHCR,we'reveryhappytocontinuetocollecttherent.
Iwouldsay,though,thatwe'reveryfavorablypositiveabouttherecentjointdecisiontomarketupto50non-strategicproperties,becausethat'saveryconstructivewayforthemtoaddresspartsoftheirportfoliothatarenotnecessarilyadditivetotheirstrategy.
NickYulico (Analyst-UBS):
Okay.Soitsoundslikewecouldinferthatrentcutisprobablynotonthetablerightnowandsoyou'regoingdowntheassetsaleapproachfirsttoseeifthatmaybehelpsthings?
LauraleeMart in(President,CEO):
Yes.
NickYulico (Analyst-UBS):
Okay.RegardingthetermloanthatHCRManorCarehas,howclosearetheytobreachingthecovenantsinthattermloan?Iftheyarebreachedinthenext,whenevertheymightbebreached,whatdoesthatmeanforyourrentpayments?
LauraleeMart in(President,CEO):
Well,theyareincompliance.
TimSchoen(CFO):
Andtheyremainincompliancewiththeirtermloan,Nick,andthey'vegotroomtoremainincompliancethere.Anydefaultonanydebtover$25millionisadefaultunderourlease.
NickYulico (Analyst-UBS):
Okay.Thanks.IthinkRosshadfollow-up.
RossNussbaum(Analyst-UBS):
Hey,guys,Ijustwantedtofollowupontheassetsalequestion.So50propertiesisabout19%ofthe267SNFsthatyouhavewithHCR.SoI'mguessingthisisnotgoingtobetherightmath,butifyoutook19%ofyourinvestmentof$5.7billion,you'dbelookingat$1.1billionofassetvalue.
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Isitfairtosaythatweshouldnotbeexpectinganywherenear$1.1billionofproceeds,giventhatthesearetheweakerassetsintheportfolio?
LauraleeMart in(President,CEO):
Ithinkthatwouldbeanaccuratestatement.
RossNussbaum(Analyst-UBS):
Thesecondpartofit,Iguess,wouldbe,inthinkingaboutacaprate,Iknowitdoesn'tserveyoutodiscusscapratesaheadofasale,butjustbigpicturehere.Whilearentcutisn'thappeningtoday,itwouldseemtomethatthesethingsaregoingtogetsoldatsignificantlyhighercapratesonwhattheimpliedrentwouldhavebeenversuswhereyou'regoingtobeabletoredeploythoseproceedsintoday'slowercaprateenvironment.
Soinessence,shareholderswillbesufferingsomedilutionasaresultoftheseassetsales.Canyoutalkmaybetothatdynamicalittlebit?
LauraleeMart in(President,CEO):
Whatwe'vetalkedaboutis7.75%rentcreditonproceeds.Ifyou'llrecall,youareright,itisacompetitivemarketplace,butwe'vebeenhighlysuccessfulwiththeinvestmentsthatwe'vehadtobeabovethatnumberor--andbelievewecanbeclosetoit.Ithinkit'sinsignificanttheimpact.
PaulGallagher(CIO):
Weinvested$1.9billionin2014at7.1%.Sowe'lltakethatreinvestmentrisk.
RossNussbaum(Analyst-UBS):
Justtomakesureweallunderstandthat,thatrentcredit,you'resuggestingwhenwelookatthemasterleaseaftertheseassetssalesandwe'rethinkingaboutwhattheremainingrentisonthe,let'scallit217assets,you'resuggestingwejusttakethat7.75%rentcredit--I'mtryingtothinkofhowwebackintoit.
LauraleeMart in(President,CEO):
It'sagainsttheproceedsfromasale.Itdependsonwhattheassetsalesfor.Thatdollarnumbertimes7.75%.It'sindependentoftherentoftheassets.
RossNussbaum(Analyst-UBS):
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
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andimprovementstofacilitiesandthentherestwithgrowthCapEx,callit$25millionto$35million.I'mrounding,Mike,butitgetsyoudirectionallythere.
MichaelCarro ll(Analyst-RBCCapitalMarkets):
Youthinkgoinginto2015,they'lldothemaintenanceCapExandbemorethoughtfulaboutthegrowthinthenewCapEx?
TimSchoen(CFO):
Yes,that'sright.
MichaelCarro ll(Analyst-RBCCapitalMarkets):
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.
MichaelCarro ll(Analyst-RBCCapitalMarkets):
Great.Thanks.
Operator:
OurnextquestioncomesfromthelineofRichAndersonfromMizzoSecurities.
RichAnderson(Analyst-MizzoSecurities):
Goodmorning.WhenIwrotemynotethismorning,Isearchedthe201310-Kandthere'snodoubtthatthedisclosureoftheissuewithHCRManorCarewaswaymoreobscurethanitisinthe2014disclosureandyour201410-K.
Soifnothinghaschangedthereinyourmindandit'sjustkindofseehowitgoes,whydidyouescalatethedisclosure?Further,whynotjustputitinyourpressrelease,particularlyconsideringthesensitivityeveryonehasaroundthistenant,whynotbeafullopenbookandmakesureeveryone'sawareofwhat'sgoingon?
PaulGallagher(CIO):
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Oh,didyouputoutanotethismorning,Rich?
TimSchoen(CFO):
Toansweryourquestion,wegothroughourriskfactorseveryyear,butwejustwantedtoputalloftheriskfactorsassociatedwithHCRinoneplace.Theywerethroughoutour10-KdocumentpreviouslyandasIsaidpreviously,whenIansweredthequestion,werankedourriskfactors.
HCRisobviouslyourlargesttenantconcentrationandweputalloftheriskfactorsassociatedwithHCRinoneplace.Wedidthat,Rich,becauseobviously,thecoverageratiohasbecometighterin2014.
LauraleeMart in(President,CEO):
TheotherthingIthinkisimportantistheseinvestigationsarevery,verytypicaloftheindustry.YouhavesimilarfilingswithKindred,youhavesimilarfilingswithGenesisinskilled.HCRhasalonghistoryofheyqualitycareandalonghistoryofcompliancewithregulationsandsotheybelievethey'reincomplianceandwesupportthatdecision.
RichAnderson(Analyst-MizzoSecurities):
SoacoordinatedeffortbytheDepartmentofJustice,theDepartmentofHealthandHumanServices,theOfficeofInspectorGeneral,allthese,thisisparforthecourseforany--
LauraleeMart in(President,CEO):
Fortheindustry.
TimSchoen(CFO):
It'snotuniquetoHCR,Rich,andit'snotnewnews.It'sbeenouttheresince2013.
RichAnderson(Analyst-MizzoSecurities):
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.
RichAnderson(Analyst-MizzoSecurities):
Okay.Thankyou.
Operator:
OurnextquestioncomesfromthelineofDerekBowerfromEvercoreISI.
DerekBower(Analyst-EvercoreISI):
Couldyoutalkabouthowyou'rethinkingaboutthesourcesofcapitalforfutureinvestments,givenyour
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leveragetargetsarenowaboveyour40%long-termtarget?
TimSchoen(CFO):
I'msorry,canyourepeatthat?
DerekBower(Analyst-EvercoreISI):
Yourcurrentleverageisaboveyour40%long-termtarget.Iwasjustcurioustoknowhowyou'rethinkingaboutfundingneedsforfutureinvestmentactivity.
TimSchoen(CFO):
AsImentionedinmypreparedremarks,we'realittlebitaboveourtargetbecausewe'veutilizeddebtforthebenefitofourcurrencyhedging.Butifyoutookourorganiccashflowfromthisyear,weexpecttoreturntothat40%leverageratio.Youshouldcontinuetothinkthataswelookatacquisitionsthatwewouldfinancethatona40partsdebt/60partsequitybasis,sonorealchange.It'sjustthatweutilizedthedebtforhedgingpurposesbecausewehaddonemoretransactionsintheU.K.latein2014.
DerekBower(Analyst-EvercoreISI):
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?
LauraleeMart in(President,CEO):
That'sbuiltintotheforecast.It'sbuiltintoManorCare.
TimSchoen(CFO):
It'salsobuiltintothebudgetedcoverageof107timesaswell.
TayoOkusanya (Analyst-JefferiesandCompany):
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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.
ToddStender(Analyst-WellsFargoSecurities):
Sure,justtherepositionedassets.I'mjustlookingatthethreerepositionedlifesciencefacilitiesthatyou'vegot:Sacramento,SouthSanFrancisco,andSanDiego.Whatdothosereturnprofileslooklikenowthatyou'reputtingmoremoneyintothebuildings?
TimSchoen(CFO):
Onanincrementalbasis,Todd,thoseareuparoundthehighteens,orinonecase,almost20%onadditionalinvestedcapital.Onanoverallbasis,theywouldbeinthe7%to7.5%range.
ToddStender(Analyst-WellsFargoSecurities):
Okay,that'shelpful.Theseven-yearleaseonthebiotech,the30,000-squarefootbuilding,isthatavacantbuildingrightnow?
TimSchoen(CFO):
Yes.
ToddStender(Analyst-WellsFargoSecurities):
Thanks.Paul,Ithinkwhenyouweregoingoverthemedicalofficebuildingforecastfor2015,itsoundedlikeyou'reexpectingadeclineinmedicaloffice.DidIhearthatright?
PaulGallagher(CIO):
Wehavetwotenantsthatweknowaregoingtovacateandintheguidance,itshowsthemleavingthespace.We'reactivelylookingtobackfillthatandhopefully,wecangettenantsintheresoonerthanexpected.
TimSchoen(CFO):
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page21of 22
Todd,thesamestoryimpactofthatisweexpectabout2%same-storegrowthintheMOBsegment.AbsentthosecoupleofbuildingsthatPauljustmentioned,wewouldbeclosertothe2.75%to3%growthraterangeforMOBs.
PaulGallagher(CIO):
Ontheradarscreen,ourguysdoaprettygoodjobofbeingproactiveongettingthosespacessold.Hopefully,wecangetthatspacere-leasedquicker.
ToddStender(Analyst-WellsFargoSecurities):
Thatwasmynextquestion.Thanks,Tim.
Operator:
OurnextquestioncomesfromthelineofMichaelMuellerfromJPMorgan.
MichaelMueller(Analyst-JPMorgan):
Thanks.Hi.Ifyoudosellthe50properties,canyougiveusasenseastohowsignificantthefixedchargecoveragebenefitcouldbe?Justaroughmagnitude,areyouthinkingfive,10basispoints?Coulditbemorethanthat?
LauraleeMart in(President,CEO):
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..
ToddLukasik(Analyst-Morningstar):
Okay,great.Ithinkyoumentioned1.65timeEBITDARMcoveragetostartout.Isthatalevelthatyouwouldexpecttobemaintainedovertimeoristhateithertoohighortoolowatthispoint?
CompanyName:HCPIncCompanyTicker:HCPSector:Financial
Industry:RealEstateEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page22of 22
PaulGallagher(CIO):
No,wewouldexpecttothegrow.That'sthenorm,overintheU.K.,istoquoteanEBITDARMnumber.IfyouequatethattoamorenormalEBITDARnumber,it'sabouta1.35timecoverageandit'sprettymuchamarket-typecoverageintheU.K..
ToddLukasik(Analyst-Morningstar):
Okay,great.Thanks.That'sallIhad.
Operator:
Thankyou.Thisdoesconcludethequestionandanswersessionoftoday'sprogram.I'dliketohandtheprogrambacktoLauraleeMartin,PresidentandChiefExecutiveOfficer.
LauraleeMart in(President,CEO):
Thankyouverymuch.Again,thankyouallforjoiningusandletmeclosebyremindingyouthatMay11isourInvestorDayinNewYork.Wehopetoseemanyofyouthere.Thankyousomuch.
Operator:
Thankyou,ladiesandgentlemen,foryourparticipationintoday'sconference.Thisdoesconcludetheprogram.
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