hcp incorporated (hcp) earnings report: q1 2016 conference ... · today, we are announcing a major...

CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate

EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1

HCPIncorporated(HCP)EarningsReport:Q12016ConferenceCallTranscriptThefollowingHCPIncorporatedconferencecalltookplaceonMay9,2016,12:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JohnLu;HCP;EVPLauraleeMartin;HCP;President&CEOMikeMcKee;HCP;ExecutiveChairmanTimSchoen;HCP;CFOJustinHutchens;HCP;CIO

OtherPart icipants

VikramMalhotra;MorganStanley;AnalystNickYulico;UBS;AnalystJuanSanabria;BoAMerrillLynch;AnalystRossNussbaum;Nussbaum;AnalystChadVanacore;Stifel;AnalystSmedesRose;Citi;AnalystMichaelCarroll;RBC;AnalystKevinTyler;GreenStreetAdvisors;AnalystTayoOkusanya;Jefferies;AnalystToddStender;WellsFargo;AnalystJeffGaston;KeyBanc;AnalystJohnKim;BMOCapitalMarkets;AnalystMichaelMueller;JPMorgan;AnalystRichAnderson;MizuhoSecurities;AnalystAndrewRosivach;GoldmanSachs;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheHCPConferenceCall.

(OperatorInstructions)

Pleasenotethiseventisbeingrecorded.

NowI'dliketoturnthepresentationovertoyourhostfortoday'sconferencecall,JohnLu,ExecutiveVicePresident.Youmaygoahead,sir.

JohnLu (EVP):

Thankyou,Operator.

Today'sconferencecallwillcontaincertainforward-lookingstatements,includingthoseaboutourguidanceandthefinancialpositionandoperationsofourtenants.Thesestatementsaremadeasof

today'sdate,andreflectourgoodfaith,beliefsandbestjudgmentbasedoncurrentinformation.

Thesestatementsaresubjecttotherisks,uncertaintiesandassumptionsthataredescribedinourpressreleasesandSECfilings,includingourannualreportonForm10-Kfortheyearended2015.

Forward-lookingstatementsarenotguaranteesoffutureperformance.Actualresultsandfinancialconditionmaydiffermateriallyfromthoseindicatedintheseforward-lookingstatements.

Futureeventscouldrendertheforward-lookingstatementsuntrue,andthecompanyexpresslydisclaimsanyobligationtoupdateearlierstatementsasaresultofnewinformation.

Additionally,certainnon-GAAPfinancialmeasureswillbediscussedonthiscall.WehaveprovidedreconciliationsofthesemeasurestothemostcomparableGAAPmeasuresinoursupplementalinformationpackageandearningsrelease,bothofwhichhavebeenfurnishedtotheSECtoday,andareavailableonourwebsiteatwww.hcpi.com.

Also,duringthecall,wewilldiscusscertainoperatingmetricsincludingoccupancy,cashflowcoverage,andsame-propertyperformance.Thesemetricsandotherrelatedtermsaredefinedinoursupplementalinformationpackage.

IwillnowturnthecallovertoourCEO,LauraleeMartin.

LauraleeMart in (President&CEO):

Thankyou,John.WelcometoHCP's2016FirstQuarterEarningsConferenceCall.Joiningmethismorningare,MikeMcKeewho,weannouncedthismorning,hasbeenelectedExecutiveChairman;TimSchoen,ChiefFinancialOfficer;JustinHutchens,ChiefInvestmentOfficer;andJohnLu,EVPofCorporateFinanceandInvestments.

Wehavealottocovertoday.

First,letmehighlightsomeadditionsandchangestoourleadershipteam.First,asImentioned,MikeMcKeehasbeenelectedExecutiveChairmanofthecompany.MikehasbeenoneofourlongesttenuredBoardmembersandhaveservedasNon-ExecutiveChairmanoftheBoardsince2013.He'stheformerViceChairmanandCEOofTheIrvineCompany,andrecentlyhasbeenCEOofBentallKennedy,aleadingrealestateinvestmentmanager.MikeandIhaveworkedcloselytogethersinceIbecameCEOandIlookforwardtoworkingevenmorecloselywithhiminhisnewroleatthisimportantpointinthecompany'shistory.

IamalsopleasedtoannouncethepromotionJustinHutchenstoChiefInvestmentOfficer.Justincontinuestobeanincreasinglyvaluablecontributortoourstrategyandexecution.Inaddition,weannouncedKaiHsiao,formerCEOofHolidayRetirement,hasjoinedHCPasEVP,SeniorHousingAssetManagement.

Asmostofyouknow,afteradecadeofoutstandingservicetoHCP,TimSchoenhasacceptedanewpositionasPresidentofBioMedRealty.ThiswillbehislastearningscallwithusasourCFO.Wesincerelythankhimallthebestinhisnewopportunity.I'malsopleasedtoreporttherecruitmentprocessforTimreplacementiswellunderwayandwehopetohavedefinitivenewssoon.

Today,weareannouncingamajorstepinaddressingissuesrelatedtoourHCRManorCareportfolioinvestment,andwantdescribeinsomedetailwhatimpactthatstepwillhaveonHCPgoingforward.Andofcourse,wewilladdressourquarterlyresults,andupdateyouonotherimportantinitiatives.

Beforewebegin,pleasegototheInvestorRelationssectionofourwebsitewherewe'veposteda

presentation,whichwe'llrefertoduringourremarks.LetmeturnthecallovertoMiketobeginourdiscussionofthespin-offtransaction.

MikeMcKee (ExecutiveChairman):

Thankyou,Lauralee.

IwanttostartbyexpressingmygratitudetoLauralee,ourBoard,ourexecutiveteamandastellargroupoffinancialandlegaladvisorswho'vebeenworkingexceptionallyhardinpreparationfortodayandthedaystocome.Sinceitsinception,IhavebeenabigbelieverinHCPandmorethananytimeinourhistory,Ibelievethebestdaysforthiscompanyareahead.

Foranumberofmonthsnow,ourteamhasconductedacomprehensivereviewofallofouravailableoptionsregardingourHCRManorCareportfolioconcentration.Aspartofthatprocess,wealsohaveengagedCarlyleandHCRManorCareleadershipinourdiscussions.Aswereviewedouroptions,welandedontwokeygoalsasweendeavoredtomaximizevaluetoourshareholders.

First,webelieveasfiduciarieswearestewardsoftheinherentvalueexistinginourHCRManorCareHoldings,andweneedtopreserveandrealizeasmuchofthatvalueaspossible.Andsecond,weneedtoeliminatetheoverhangthatexistsfromthecurrentchallengesfacingHCRManorCaresothattherestofourbusinesscanflourish.

Aswefocusedonthosegoals,andreviewedouroptions,formanyreasonsitbecamecleartotheBoardthatthebestpathwayforwardwastopursueaspin-offtransaction.Wedonotseethespinasanendinitself,butasameanstoanend.Soletmerunthroughthelogicbriefly,whichwe'veoutlinedonslidesoneandtwoofthepresentation.

Withalong-termperspective,webelievethereissignificantvalueembeddedinourHCRportfoliothatispresentlynotbeingrecognizedbythemarket.Wearelong-termbelieversinthepost-acuteandskilledspace.

Justseveralweeksago,thefederalgovernmentannouncedaproposedincreaseinratesforcareinthisspace,andhighlightedtheessentialservicesthatareprovidedinthecontinuumofcarebypost-acuteandSNFfacilities.AsweexploredouroptionsforaddressingHCRManorCare'schallenges,itwasapparenttousthatHCPisnottheoptimalinvestmentvehicletomaximizethevalueinourHCRManorCarerealestate.

Incomparison,SpinCoasastandalonebusinessfocusedonitspost-acuteandseniorhousingassetswithadedicatedmanagementteam,willbeabletoemployawiderrangeofstrategieswithoptionalitytomanage,sellortransitionassetsasdesiredprovidinganattractiveinvestmentalternativeforinvestors.Sothespintransactionresultsinthecreationoftwoseparatebusinessplatforms,eachwithamorestrategicfocus,strongmanagementteams,adistinctivebusinessstrategyandinvestmentprofile,andanappropriatecapitalstructuretosupporteachcompany'sindependentobjectives.

BeforeIturnitovertoLauraleetogiveyoumoredetailsonthespinandtheimpactitwillhaveonHCPpost-spin,letmehighlighttwoimportantpoints.First,weareverypleasedtoannouncethatMarkOrdanisjoiningourteamtoplayacriticalroleinexecutingthespin.MarkhasjoinedusasaSeniorAdvisorasweprepareforthespinandwillbecomeCEOofSpinCouponexecution.

ManyofyouknowMarkfromhisdaysasCEOofSunriseSeniorLivingandmorerecentlyasChairmanofWPGlimcher,amongothersignificantroles.InidentifyingandrealizingtheembeddedvaluelockedinHCRManorCare,webelievewehavethebest,themostexperiencedleaderavailabletotakeonthisassignment.

Andlastly,Iwouldnotethatlikeanyspin,weexpectSpinCotobesuccessful,butmoreover,welookforwardtoreturningHCPtoahealthycompetitiveandgrowingcapitalproviderintheevolvingworldofhealthcare.

Sonow,letmeturnitbacktoLauraleetogiveyousomemorebackground.

Thankyou,Mike.

Letmedrawyourattentiontoslide3ofthepresentation.SpinCo'sportfoliowillbeprimarilyconcentratedinHCRManorCare'spost-acuteandassisted-livingfacilitiesandwillalsoincludethe$250milliondeferredrentobligationthatwasnegotiatedinconnectionwiththeMarch2015leaseamendmentaswellasthe9%investmentinHCR'soperatingcompany.

Withasingularfocusonaportfolioofprimarilypost-acuteandseniorhousingassets,aflexiblecapitalstructure,andafocusedmanagementteamledbyMark,webelieveSpinCowillbewellpositionedtotakeadvantageofdynamicsthatareuniquetotheskillednursingspaceandprovideinvestorswithanattractiveinvestmentreturnfortheriskprofile.

SpinCoisintendedtobeconservativelycapitalizedtowithstandpotentialuncertaintyfromitstenantconcentration.ProceedsfromtheSpinCodebtfinancingwillbedistributedtoHCPandimportantly,SpinCowouldhaveexpandedflexibilitytomanage,sell,ortransitionassetsasrequiredinataxefficientmanner.HCPshareholdersareexpectedtoreceivesharesofSpinCoviaapro-ratadistribution.Followingthedistribution,HCPshareholderswillownsharesinbothHCPandSpinCo,andthenumberofHCPsharesownedbyeachshareholderwillnotchange.SpinCoexpectstofileitsinitialForm10registrationstatementwiththeSECinthenext30daysandthespinoffisexpectedtobecompletedinthesecondhalfofthisyear.

TurningtothehighlightsforHCPonpagefour,webelievethespingivesHCPtheabilitytoreconfirmourselvesasabluechip,innovative,relationship-orientedhealthcareREIT.Wewillhaveastrongfinancialprofile,ahallmarkatHCPformostofour31-yearhistorywithapremierportfolioweightedtowardsprivatepay.We'llbefocusedonourcoregrowthbusinesses,seniorhousing,medicaloffice,andlifescience.

Thequalityofourportfolioincomepostspinincreasestremendouslywithayounger,welllocatedassets,improvedtenantconcentration,andamorestableincomestreamthatis95%privatepay.Importantly,withaninvestmentgradebalancesheetandanimprovementinourcostofcapitalovertime,wewillbewellpositionedtoaccelerateouraccretiveexternalgrowthopportunities.

,putsaframeworkaroundHCP'sfinancialprofileproformaforthespintransaction.ThecashproceedsgeneratedfromborrowingsofSpinCoandourplannedassetsaleswillbeusedtorepayhighercoupondebtallowingHCPtomaintainacreditprofilethatsupportsitsgrowthgoingforwardwithsubstantialliquidityandnodebtmaturitiesthroughtheendof2018,animprovedweightedaveragecostofdebt,andanextendedtermonremainingdebtmaturities.Ourfinancingplantargetsanetdebt-to-EBITDAratiointhemid-sixtimesrangewithamanageableamountofassetsales.Andweareintheprocessofevaluatingopportunitiesforanadditionalcapitalrecyclingactivitiestofurtherreduceleveragetoourtargetratioofsixtimes.

Nowturningtoslide6,IwillwalkyouthroughasnapshotofeachofourassetclassesinproformaHCPpost-spin.Thisisanimportantdiscussionbecauseforquitesometime,adisproportionateamountofourconversationswithyouhavebeendominatedbyquestionsaroundourHCRManorCareinvestment.

Wecannowfocusonthestrengthofourremainingportfolio.Letmestartwithourlifesciencebusiness,whichisledbyJohnBergschneider,whohasbeenwiththisportfoliofor16years.Lifesciencehadanexceptionalquarterwith9.6%same-storegrowth,occupancyof98%,andwe'vealreadyaddressedorinnegotiationsfortwo-thirdsofour2016leasematurities.

Our$3.7billionportfolioof7millionsquarefeetisconcentratedinpremierbiotechclusters.WearethelargestowneroflabspaceontheWestCoastwithleadingpositionsinSanDiegoandtheSanFranciscoBayareaincludingthemostactivesouthSanFranciscosubmarketwith30%plusmarketshare.

Ourincomeisdiversifiedamongmorethan130tenantswith86%ofourincomefrompublicorwellestablishedprivatecompanies.Thecurrenthealthofthelifescienceindustryisoneofthestrongestwe'veseeninrecenthistorydrivenbythreeindustryfundamentals,accesstocapital,consolidationandcollaborationamongresearchcompanies,andastreamlinedFDAprocesswhichhasresultedinanincreaseinthenumberofdrugapprovals.

Lookingahead,ourrecentleasingsuccessandstrongtenantdemandwillcontinuetoresultinacceleratedorganicgrowth.Inadditiontotheco-developmentprojectunderway,wehaveampledevelopmentcapacityincoastal,landconstrainedmarketsinSanFranciscoandSanDiego.Wecanexpandandbuildanadditional2.6millionsquarefeetofproduct.

Next,medicaloffice,our$3.6billionmedicalofficeportfolioalsodeliveredasolidquarterwith3.3%same-storegrowth.Demandformedicalofficespacehasincreasedsignificantlyoverthepastseveralyearsandourstrongretentionrateshavehelpedkeepourmedicalofficeportfoliooccupancyconsistentlyabout90%for10consecutivequarters.

Ourleasingmomentumcontinuedinthefirstquarterwithmorethanhalfofthisyear'sleaseexpirationsalreadyaddressedorinnegotiations.Wehaveoneofthelargestmedicalofficeplatformsinthecountrywithover17millionsquarefeetledbyTomKlaritchwhohasrunthisportfoliofor17years.Medicalofficeisarelationship-centeredbusiness.Wehaverelationshipswithover200hospitalsandhealthsystems.95%ofourbuildingsareaffiliatedwithahealthsystemand83%arelocatedoncampuswithahospital.

OurgoalistobeaffiliatedwiththeTop1or2hospitalsystemsineachmarket.Inaddition,wecurrentlyhavefouroncampuspropertiesunderconstructionandwe'veseeninterestfromvarioushealthsystemstoaddadditionaloncampusspace.Thesedevelopmentprojectswereoff-markettransactions,theresultofourrelationshipwiththeaffiliatedhospitalsystem.Lookingatsectorfundamentals,medicalofficeisastableassetclasswithapositiveoutlookfordemand.

Finally,ourseniorhousingportfolioisledbyKendallYoungwhohasbeenwithHCPforsixyears.Wehavea$9.6billionportfolioofprimarilyprivatepayseniorhousingcommunities,geographicallydiversifiedacrosstheUnitedStatesandtheUK.WearepartneredwithleadingoperatorssuchasBrookdaleandSunriseintheUSandMariaMallabandintheUK.Andwecontinuetoexpandourportfoliowithbothexistingandnewrelationships.

Giventhesector'sfundamentals,cateringtoanagingdemographic,seniorhousingwillcontinuetobeacorefocusforHCPasevidencedbythe$1.7billionofinvestmentswehavemadeinthisspacesincethebeginningof2015.Now,I'llturnthecallovertoJustintodiscussourseniorhousingtransactionsandperformance.

Just inHutchens (CIO):

Thankyou,Lauralee.I'llstartbyofferingaverywarmwelcometoKaiHsiao.I'veknownKaifornumberofyears.AsLauraleementionedearlier,hehasjoinedusastheEVPofSeniorHousingAssetManagement.Kaibringsawealthofoperatingexperiencetoourteam.Hehasspentthepastsevenyearswithholiday

retirementcorporation,thenation'slargestoperatorofindependentlivingcommunitiesincludingthreeyearsasthecompany'sCEO.

Hemadesignificantcontributionsleadingthecompany'sreturntomarketleadershipbyboostingoccupancyandmargin.Kaiwilloverseetheperformancemanagementofourportfoliowithanemphasisonvaluecreationthroughbusinessanalytics,marketanalysis,financialoversight,andassetrepositioning.

He'sliterallybeentheshoesofourcustomersandwillbeaperfectcomplementtotheHCPbrandpromiseofbuildinghealthypartnerships.IamconfidentthatKai'soperatingexpertisecombinedwiththeinvestment-savvyKendallYoung,ourEVPofSeniorHousingInvestmentswillaccelerateourseniorhousingplatformforsuccess.

NowI'lldiscusstransactionsdemonstratingdiversificationofouroperators.Duringthequarter,weacquiredaportfoliooffiveprivatepaycommunitiesandoneskillednursingfacilityfor$95million.Allthecommunitiesweredevelopedwithinthepasttwoyearsandaretriple-netleased.Weenteredintodefinitiveagreementstoacquireaportfolioofsevenprivatepayassistedlivingcommunitiesfor$190million,withanexpectationtocloseinthesecondhalfoftheyear.TheportfoliowillbemanagedbySeniorLifestyleCorporationinaRIDEAjointventure.Withthesetwotransactions,weareaddingfivenewrelationshipswithtwonationaloperatorsandthreeregionaloperators.

Wehavealsoagreedtothesaleofhalfofour80%ownershipinterestinourBrookdaleRIDEAIIjointventureportfoliotoafundoperatedbyColumbiaPacificAdvisors.Weexpectthistransactiontocloseduringtheyear.ThistransactionresultsinreducedBrookdaleconcentrationaswellastheadditionofawell-capitalizedjointventurepartnerwithsignificantindustryknowledgeandfutureco-investmentopportunities.

Movingontoourportfolioperformance,ourentiretriplenetportfoliohasanEBITDARMcoverageof1.27andEBITDARcoverageof1.07.RelativetoBrookdale,weareinadvanceddiscussionswiththemregardingupto25non-strategiccommunitieswhichweintendtosellortransfertootheroperators.Weexpecttheleasecoveragein2016toimproveuponremovingthesecommunities.It'simportanttoemphasizethatallofourleasesarebackedforBrookdale'scorporateguarantee.

OuroperatingportfoliocontinuestoperformwellwithsolidsequentialgainsinoccupancyandNOI.Oursame-storeoperatingportfolioreportedaverystrongfirstquarterwithyear-over-yeargrowthof9.2%,drivenbyimprovedoccupancyrateandexpensemanagement.OccupancyhasimprovedthelastthreeconsecutivequartersandtheQ1annualrateincreasewasthestrongestwe'veseeninseveralyears.

Weremainactivelyengagedwithallofouroperatorsthroughouractiveassetmanagementplatform,continuouslyreviewinglocalmarketdynamics,operatingtrendsandthephysicalconditionofourportfolio.Ourstrategiccapitalexpendituressetusapartasacapitalpartneranddistinguishesourcommunitiestotheresidentsasahigh-qualityproductinanattractivepricepoint.

Ouroperatingportfolioisconcentratedinmarketswithstrongdemographicsandpopulationgrowthhigherthanboththeindustryandourpeergroupaveragesforthe75pluscohortintotalpopulation.Only6%ofourportfolioislocatedwithinthetop10MSAsfornewconstruction,andatalocallevel,wecontinuetoperformwell.Wehavepositionedourportfoliowithappropriateaffordabilitytoresidentsinourlocalmarkets,whichhasresultedinstronggrowthandprospectsforfuturegrowthdespiteincreasedsupplyforthebroaderMSAs.

Withthat,I'llhandthecallovertoTimtotalkaboutourfinancialresultsandupdatedguidance.

T imSchoen (CFO):

Thankyou,Justin.Letmestartwithourfirstquarterresults.Forthequarter,wereportedNAREITFFOof$0.68pershare,whichincludes$0.01pershareoftransaction-relatedcostsinconnectionwithourinvestmentactivities.Excludingtransaction-relatedcosts,wereportedFFOasadjustedof$0.69pershareandFADof$0.66pershare.

BothmetricsarelowerthanprioryearprimarilyimpactedbyitemsthatwehavepreviouslyannouncedrelatingtoHCRManorCare.Specifically,theleaseamendmentthattookeffectonApril1lastyearandthe33assetsalesthatwehaveclosedto-datereducedbothFFOandFADby$0.03pershare.FFOwasfurtherreducedby$0.08persharefromplacingtheHCRleaseoncashbasisbeginningonJanuary1thisyear.

Firstquartersame-storecashNOIperformancedeclined50basispointscomparedtotheprioryear,reflectingtheHCRManorCareleaseamendmentinApril2015.ExcludingtheHCRManorCareportfolio,weachievedsolidsame-storecashNOIgrowthof3.2%fromourhighergrowthprivatepaysegmentofSeniorHousing,LifescienceandMedicalOffice,representing75%ofourportfolio,ledbya9.6%increaseinLifeScienceand9.2%increaseinRIDEA.

Movingontocapitalrecyclingandbalancesheet,wehaveannounced$1.3billionofcapitalrecyclingandrefinancingactivitiesfor2016,whichwillbeusedtopermanentlyfundouryear-to-dateacquisitionsandreducefuturedebtmaturities,including$740millionofexpectedproceedsfromtheanticipatedRIDEA2jointventuretransactionthatJustinjustdiscussed,fromsellinga40%stakeintheventureandfinancingwiththird-partydebt.

Inaddition,wereceived$90millionfromthesaleofanon-coreLifeScienceasset,amedicalofficebuildinginApril,andwe'vepreviouslyannounced,weexpect$310millionfromthefirsttrancheofGenentech'spurchaseoptiononourLifeScienceCampusinSouthSanFrancisco,whichisexpectedtocloseinNovember,anda$130millionfromthesaleofHCRManorCare'snon-strategicassetsduringtheyearinclusiveof$62millionfromassetsoldduringthefirstquarter.Intotal,westillanticipateproceedsof$350millionaftersellingtheremainingassets.

Ourfinancialleverageincreased50basispointsto45.5%andnetdebt-to-adjustedEBITDAincreasedto6.2timesatquarter-endaswetemporarilyfinancedourfirstquarteracquisitionsonourrevolver.Afterpayingdowndebtusingtheproceedsfromourcommittedsalestransactionsjustdiscussed,weexpectthesemetricstoimprove.Further,weendedthequarterwith$1.3billionofliquidity.

Finally,ourincreased2016guidance.The2016guidanceupdatedtodayrepresentsourperformanceexpectationsforourentireHCPportfolioanddoesnotreflectthespintransactionannouncedthismorning.OurguidancedoesreflecttheimpactoftheRIDEA2transactionandourannouncedinvestmentincapitalrecyclingactivities.

Withthatsaid,theportfoliocontinuestoperformwellandcombinedwithourrecentacquisitionactivity,weareraisingguidanceandexpectHCP'sfullyear2016NAREITFFOtorangefrom$2.76to$2.82pershare.Excludingtransactionrelateditems,weexpectFFOasadjustedtorangefrom$2.77to$2.83pershareandweareraisingourFADguidancetorangebetween$2.65and$2.71pershare.Wearereaffirmingoursame-storecashNOIgrowthforecastof1.5%to2.5%andweareprojectingthemajority75%ofourportfoliofromtheprivatepayseniorhousing,lifescience,andmedicalofficesegmentstoincreasebetween2.3%and3.3%whenyouexcludeHCRManorCare.

LetmeclosebyexpressingmygratitudetotheHCPteam.Ihaveworkedalongsidemanyofyouinavarietyofrolesandfeelfortunatetohavebeenpartofatalented,industry-leadinggroupofprofessionalsthatgrewandexpandedtheHCPportfoliooverthepastdecade.SoletmeendbysimplysayingthankyouandturnthecallbackovertoLauraleeforherconcludingremarks.

Thankyou,Tim.Solookingatslide8,thebottomlineis,webelievethespin-offistherightmoveattherighttimeforbothHCPandHCR.Weareproudofourhigh-qualitydiversifiedhealthcareportfolio.

Wedifferentiateourselvesinthemarketwithourbuildinghealthypartnershipsapproach,executedbyseasonedsectorleadersandinvestmentteamswithoperatingexperienceandknowledge.WefurtherconfirmthisdifferentiationwithourannouncementofKaiHsiaojoiningourteam.

ProformaHCPhasaninvestment-gradebalancesheetwithsignificantliquiditysupportedbyahigherqualityportfolioincomefromastableprivatepayincomestream.Weareeliminatingexposuretoanindustrywithreimbursementmodelsintransition,whileourshareholdershavetheopportunitytorealizesubstantialupsidepotentialinSpinCoasaninvestmentvehicletooptimizethelong-termsolutionforHCRManorCareassets.

BycapitalizingonthedifferenceincostofcapitalbetweenHCP'sandSpinCo'srespectivehealthcaresectors,HCPwillbebetterpositionedtodeliverconsistentreturnswhileacceleratingourinternalandexternalgrowthprofile.

Insummary,HCP'sapproachofbuildinghealthypartnershipscombinedwithanimprovedcostofcapitalwillleadtoaccretiveinvestmentgrowth.

Withthat,I'llnowasktheoperatortoopenthelinesforquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

VikramMalhotra,MorganStanley.

VikramMalhotra(Analyst-MorganStanley):

Congratsguysongettingallthetransactionsdone.I'msureit'sbeenveryhecticandTim,congratsonagreatstinthere.We'llmissyou.

T imSchoen (CFO):

Thankyou.

SoquicklyjustfirstontheSpinCo,Iwasjustlookingthroughitsortof,IthinkyouhighlightedtheSpinCowillbestructuredasaREITinitially.Doesthatmeanyoumaylookatsomealternativestructuresortheremaybeotherstructuresdowntheroad?

Well,wetriedtodoandIthinkwe'vedoneitverywellisgivespinallthetoolstorealizethevaluethat'sembeddedintheHCRportfolio.SocontrarytoHCP,whichisacommittedblue-chipREIT,theyhavechoices,andtheycanusethosechoices.SotheyareaREIT,butitdoesn'tprohibitthemfrommakingotherchoicesastheythinkaboutwhattheywanttodotomaximizethatvalue.

Okay.Andthen,asa--justareminder,theassetsthatare--those50assets,thatsalewillbecompletedpriortothespin?

Itis.It'sgoingtohappeninthesecondhalfofthisyear,andIwouldexpectthatitshouldmostlygetdoneifnotveryshortlythereafter.

Okay.Andthen,justontheBrookdaletransaction,canyougiveussomesenseofwhatthecap--whatthatrepresentsintermsofthecaprate?

Sure.Onatrailingbasis,it'sabout6.5cap.

Okay,6.5.Andthenjustlastone,onjustonseniorhousing,IbelievethereisasmallamountofNOI,Ithinkits0.5%coming,whichIdon'tthinkit'sBrookdale,butit's--theleaseisupforrenewalthisyearandIthinkit'saround1timescovered.Canyoujustgiveusanythoughtsonwhatyoudowiththatlease?

Sure.Thatisaportfoliothat'sleasedtoAtriaandwe'restillindiscussionsintermsofnextstepsforthoseproperties.

Operator :

NickYulico,UBS.

NickYulico (Analyst-UBS):

Thanks.Iwashopingtogetsomemorefinancialdetailsonthespin,particularly,withthedebtthatSpinCoisgoingtoraise,whatlevel,whatamount,whattypeofrate,G&AforSpinCoandthenalso,whatwecanthinkaboutasadividend?

Okay,thereisanumberofquestionsinthere.Soletmetakethefirstone.Aswehaveinthedeckthatwepresentedtoyou,wewillberaisingplusorminusabout[$2.75billion]ofproceedsofwhich$740millionisrightthereto,aswethinkaboutHCPafter,butifIgotothat$2billionandthinkaboutspin,whatwe'vebeentoldbyadvisersisthatthereis,getoutthereinthemarketplacethatdefinitelycanbeachievedataboutafivetimesleverageatmarketlevelrent.Andso,whatwe'veassumediswecangetproceedsonthatbasisandtheadditionalamountthatgetstothe$2billionwillbeassetsalesthatHCPwilldo.Thatwillthenfocususonabouta6.5timesleverage.

Relativetodividend,I'mgoingtoanswerthatbothHCPandspin,untilthespinhappens,ourcurrentdividendpolicywillcontinue.Post-spin,obviously,thedividendpolicyforspinwillbesetbytheBoardofthatcompany,butifIthinkaboutHCPpost-spin,goingbacktoourinvestmentthesis,therewillbeaveryhighqualityprivatepayportfolio,definitelyfocusedonhavingaverystronginvestment-gradebalancesheetandIexpectthatwewillhaveadividendpolicythatisfocusedontotalshareholderreturn,whichmeansgrowthinthecompanyandgrowthinourdividend.AndIthinkyouhadonemorequestionthatImighthavelost.Therewasthreeinthere.

No,Iguessforallofthisviadetails,Imeandoyouexpecttobeputtingtheseoutinalittlebitmoreprecisewayoverthenextcouplemonthssowecanfigureouthowto?

Verygoodquestion.TherewillbeaForm10thatwillcomeoutinaboutamonth,whichwilldefineallofthis,theinvestmentthesisofspinandallthoselevelofdetails.So,we'veannouncedthattransaction,thatForm10isinprocessandthenyou'llhavealotmoreinformation.

Okayandthenturningtothespin,youtalkedaboutthatyouengagedCarlisleandHCRindiscussions,butdidyougetapprovalfromHCRManorCaretodothisspin?Doyouneedtogetapprovalandmaybeyoucouldtalkaboutwhatotherapprovalsyoumightneed,regulatoryapprovalsatthestatelevelorotherwiseforthespintohappen?

Yes,thisMikeMcKee.WhatwementionedconversationswithHCRManorCareandCarlisle,that'sanongoingprocess.Wedothatroutinelyandhaveforalongtime.Theyareawareoftheplanswehaveannouncedtoday,butwedonotneedtheirpermission.Wedon'tneedstateregulatoryapproval.TherearesomeSECfilings,butfrankly,themechanicsareprettyroutineandwedon'texpectanybarrierstoexecutingthespininatimeframeofaboutthreetofourmonths.Soitisaverycleantransactionfromthatperspectiveandwe'llbeworkingonitwithMarkOrdanintheweekstocome.

JohnLu (EVP):

IthinkRosshasafollow-upquestion.

RossNussbaum(Analyst-Nussbaum):

Yes,goodmorningeveryone.Mike,Iguessthisquestionisforyou.WhenIreadthepressreleaseandIseeyourthreemainareasofresponsibilitybeingstrategicgrowth,leadershipdevelopment,andcompletingthespin-off.Normally,thoseareresponsibilitiesthatIwouldthinkofasbeingalignedwiththeChiefExecutiveOfficerofthecompany.Somaybemyquestionhereis,what'sthemessagethattheinvestmentcommunityshouldbereceivingherethattheseprimaryresponsibilitiesaregoingtoanexecutivechairmanroleandnottoLauralee?

Well,Ithink,thewayI'dansweryourquestionis,ifyoustepbackalittle,you'llseethatourmanagementteamhasgonethroughasignificanttransitioncertainlyoverthelastcoupleofyearsandreallyimportantlyeveninthelastsomemonths.WehaveanewCEOforthelastseveralyears,moreclosely,wehaveanewCIO,wehaveanewGeneralCounsel.WearewellonourwayinoursearchforanewCFO.We'veannouncedMikeadditionasanExecutiveChair.WeannouncedtodayKaiHsiaocomingin,inhiscapacity.

Whenyoulookatthatteamthathasbeenassembled,onethingIwouldnoteisthatfouroftheseleadershavebeenCEOsofverynotableorganizationsbeforetheycametogetherhereasateamandevenonourP&Lleadershipfront,Ithinkyou'veheardinthepastwe'reveryproudthat,TomKlaritchandJohnBergschneiderandKendallYoungareverywellknownintheirrespectivesectors.Thisteamthat'sbeenassembledandtransitionedhasprettyimpeccablerealestate,healthcare,operatingcompany

financeandinvestmentcredentialsandtheBoardisveryconfidentintheabilityofthisteamtoworkcloselytogetherandverywelltogether,whichisveryimportanttous.

Myroleis--Iseeitascomplementary.LauraleeandI'veworkedverycloselytogetheroverthecoupleofyearsthatshehasbeenhere.Asyouknow,shesteppedintoquiteasetofissuesandhashadherhandsfull.Ithinkthatwhenwelookedatthisrole,wenotedthatthereisalotgoingonmanyfrontsandwehaveanewteamcoalescing.We'vegotanumberofstrategicinitiatives,oneofwhichweannouncedtoday.We'vegot75%ofourbusinessthatwethinkcanstanduptoandmaybe,inourpersonalviewisasgoodasanyhealthcareportfoliointheworldandwewanttogrowthat.So,thereisalottodoaroundhere,there'salotthat'sbeenhappeningandIjustseemyroleascomplementarytoworkingwiththisteam.

Intermsofleadershipdevelopment,letmejustspendasecondonthat.It'sourdesireto,asabestpractice,developtheleadershipthatwehaveandthat'sjustnotatthetoplevelbutlayersdown.TheBoardwouldverymuchliketohaveasuccessorortwoforeverykeypositionwehaveinthecompany.We'renotabigheadcount-typeCompany,sotobeabletodothatwilltaketimeandemphasisandwethinkthattherearesometoolsthatwecanapply,whichwilltakesometoptalentandbringthemuptonewlevelsofleadership.SoI'llbespendingsometimeonthataswell.

So,weseeallthisascomplementary.Ithinkifyoulookatthedynamicnatureofallthethingsthataregoingoninourbusiness,wewanttohavetheresourcestoaddressthingsreal-timeonmultiplefrontsandwethinksomeofthesechangesaregoingtoallowthat.

Operator :

JuanSanabria,BoAMerrillLynch.

JuanSanabria(Analyst-BoAMerrillLynch):

Ijustwantedtofollow-uponNick'squestionontheleverageatSpinCo.Didyousayyouwerelookingtoraiseabout$2billionofdebtatSpinCoorI'mnotsureiftherewasamaterialamountofpotentialothernon-coredispositionsthatwouldgetyoutothatsomethatyouhighlightedinyourpresentationasfarascapitalcomingbacktoHCP.

No,Ididnotsay[therewouldbe]$2billionatSpinCo.That'stheamountofcapitalinadditiontotheRIDEA,wetargettohaveHCPbeattherightlevel.TheamountofdebtatSpinCo,weexpecttobeaboutfivetimesleverageratioonmarketlevelrentsatSpinCoandthat'sanumberthatwe'vevalidatedthroughouradvisorsthattheyfeelisachievableinthemarketplacejustgivenyieldandrisk-reward.

Sothatwouldbebasedonpotentiallya[red-cut]figure,andisthatfivetimesthenetdebt-to-EBITDAnumber?

Yes,that'showweweretoldtheywouldunderwriteit.Itdoesn'tmeanthere'sanychangeintheEBITDA,butthat'showtheywouldunderwriteit.

AndthenonG&A,sohowmuchincrementalG&Aarethetwoentitiespost-spin.HowmuchactualG&Aarewetalking,howmany[testsynergies]?

IwouldsayitsimmaterialandthosedetailswillcomeoutwhenwedotheForm10.

AndhowaboutforproformaHCP,isG&Agoingtogodown?Iknowyou'veaddedKaiorareyounetlosingG&Aandyou'represumablygoingtohavesomeheadcountgowithSpinCo,howshouldwethinkaboutproformaHCPwherethedetailswon'tbeinaForm10.

TherewillbeservicesthatwewillcontractSpinCooutofHCP,butIthinkit'sprematuretohavemuchmorethanthatatthistime.Again,wethinkit'snotmaterialandweexpectsortofthesimilarrunrateratio.

Andjustabigstrategicquestion.WasthereacontemplationtodoastrategicreviewofHCPasawhole,notjustManorCare?

ThisisMikeMcKeeagain.Overthelastthreeorfourmonths,wetoldyouonthelastearningscallthatweweregoingtolookatallofouroptionsandwehaverunaprocessthathasdonethat.We'vehadanumberofmeetingsattheBoardlevel,manymoreatthemanagementteamlevel.We'vebeenadvisedbysomeveryexperiencedfinancialandlegaladvisorsandwewentthroughacomprehensiveprocessandlookedatallofouralternatives.AnumberofthosealternativesremainopenwithSpinCoandaswe'vetriedtoemphasizetoday,wethinkthatvehicleisamuchmoreflexiblevehicletoopenupafullmenuofoptionsthataren'taseasilyaccommodatedatHCP.

SowelookforwardtoexecutingthespinandthenhavingMarkOrdanandhisteamcontinuetokeepopenavenuesthatgoafterthatvalue.SoIcanassureyouthatthere'vebeenhundredsofhoursofanalysis,discussion,prosandcons.Obviously,someofthatstaysintheBoardroom,butIcancertainlyassureyouit'sbeenquitecomprehensive.

Great.Andjustalastquickquestionforme.What'stheproformaexposuretoBrookdaleofHCPandcouldyoujustremindus,IthinkyoutalkedaboutasecondlegofBrookdaledispositions,whatthequantumthereisandviewsonvaluationforthoseassets?

Sure,thisisJustin.Post-spin,theconcentrationwillbeaboutathird.Ishouldmentionthatwefindittobeadouble-edgedswordtosomedegreebecausewethinkBrookdale'sonsolidfooting,newmanagement,freshapproach,certainlyouroperatingportfolioisseeingreallygoodresults,butwe'remindfulofconcentrationsandcapitalrecycling.SotheRIDEAIItransactionImentionedpresentedopportunityforus.

Meanwhile,we'reinregulardiscussionswithBrookdaleintermsofhowtounlockvaluewithinourtriple-netportfolio.Imentioned25assets,thevaluationrelativetothoseassetshasn'treallybeendetermined.Icantellyou,ourintentionistoeithersellassetsorintheeventthatthosenon-coreassetsforBrookdaleareinfactacoreassetforaregionaloperator,wemayplacethosewithanewoperator.

Theintentistobecashflowneutral.Therewillbealittlebitofpickupduetosomeoftheperformanceoftheassetsandsowe'reactuallyexpectingaslightimprovementinourcashflowcoverage[above1and1.5times]asaresultofthetransaction,butalotofthedetailsarestillbeingdiscussedandwe'llhavemoredowntheroadasthatmaterializes.

Operator :

SmedesRose,Citi.

SmedesRose (Analyst-Citi):

Ijustwantedtoknow,arethereanychangestoyourEBITDAoutlookforManorCareversuswhatyouprovidedinthefourthquarter?

No,actuallyManorCaresequentiallyhadanimprovementinthefirstquarterandthatperformancestillstaysintheguidancethatwegaveyoulastquarter.

SmedesRose (Analyst-Citi):

AndwhenyousaidthatmarketlevelrentsatthenewSpinCo,whatsortofcoverageratiosdoyouthinkaremarketlevelnowfor[sniff]portfolio?

ThisisJustin.Thereisrangeswe'veactuallyspokentointhepastandyoucangetustightasabout,maybeblendedat(inaudible)anddependingonthespecificasset,youmaygoalittlehighercoverage,higheryieldincertainmarketsandcertainhigherqualityassets,youmightbeonthelower*endofthatnumber.

RememberthatSpinCowillhaveboththepost-acuteskilledassets,whichManorCareisinthemarketplaceknownashavingveryhighqualityrealestateaswellastheArdenCourtsmemorycare,whichistheprivatepayseniorhousingassets.

Operator :

KevinTyler,GreenStreetAdvisors.

KevinT yler (Analyst-GreenStreetAdvisors):

Mike,justaquickfollow-uponRoss'squestion.Post-spin,doyouplantomovetoalessactiveroleorareyouplanningtobeinvolvedintheday-to-dayactivitiesforthelonger-termatthispoint?

JohnLu (EVP):

Well,I'msignedupformylonger-term.Itmightnotbeyourlonger-term,butit'snotashort-termassignment,letmeputitthatway.Ithinkthatwe'vegot--we'reveryexcitedafteracoupleofyearsofalmostanobsessionwithHCRManorCaretogetbacktothegrowthprofilewe'reusedtooverour30plusyears.So,wedon'treallyhaveatimehorizon.

I'mnotgoingtobedaytodaymanagingthecompany.That'sLauraleeandtheteam'sjob,butIamgoingtobeactiveinmyrolefocusedonintheneartermcertainlyhelpingMarkOrdanandtheteamexecuteSpinCo,butwe'vegotalotofotherthingstodo,andsoI'msurethat'llkeepmerelativelybusy.

Okay,thanks.Andthen,inthedeck,youmentionedawiderangeofstrategiesavailabletobepursuedbySpinCo.Canyoujustelaboratealittlebitfurtheronthoseandthenmaybehowquicklyweshouldexpectthemtoplayout?

Istherearangeofexpectations,wementionedarentcut,isarangeofexpectationsthat'sbeendiscussed?Howshouldwethinkaboutquantifyingthat?Andthenlastly,ontheManorCarepiece,isthereanyupdateasitrelatestotheDOJ?

Letmetakethelastonebecauseitsrealquick.Nochange,reallynothingtoupdateyouon.Ithinkit'searlytodiscusswhat'sgoingtohappenatSpinCo.WhatwehavedoneisgiveSpinCoallthetoolstooptimizewhattheycando.Idon'tthinkweneedtoremindyouthataREITislimitedtoownershipoflessthan10%.

We'vedonecertainthingsintermsofthestructurethatSpinCocandointermsofpositioningtheassetsundervaluation.Sothisstructurespinreallydoesnotforecloseonanyoptions.It'sjustwaytooearlytohavethatplaythrough.

Ialsothinkthereisarecognitionthatabsentsomedivineintervention,thisisaprocessthat'slikelytotakesometimeandit'snotjustrelatedtoHCRManorCare,butthewholespacepost-acuteandSNFs,asyouallknow,isinachallengedperiodoftime.

Aswesaidinourpreparedremarks,wethinkthatoverthelongterm,thisisanecessaryarea,onethatthegovernmentwillsupport,andonethatwillbeevenmoreimportantlong-terminthecontinuumofcareasthere'sanemphasisofmovingpatientswhocan'tgohomeoutofhospitalsandintothiskindofcare.

Butrightnow,theissuesfacingtheindustryarecomplexandmanyandwecan'tpredictatthistimehowlongitwilltakefortheindustrytostabilizeandwehavebeenratherpatientatHCPinmyopinionabouttryingtoseeifthereissomerecoveryonthehorizon.Butrightnow,wecan'tpredictwhenthatis.

So,oneofthemotivationsinmovingtothespinwastherecognitionthatifyoucan'tpredictthatandyouhaveanoverhangonthe75%ofthebusiness,whichwethinkisprettyterrific,spinjustmakesalotofsensetoustonotonlytogivemoreflexibilityaroundoptions,butalsotorecognizethisislikelytotakesometime.

Okay,thanksfortheaddedcolor.Andthen,justonelastoneandkindofanitpickeronthedeck,butyoumentionedthatHCPcouldprovide[seller]financingatmarkettermsforalimitedperiodoftimetoSpinCo.Iguess,Iwasjustwondering,isthereanorderofmagnitudethat,thatcouldgoupto?Isitfreereignorhowareyouthinkingaboutthatpartofthepotentialarrangement?

Well,overall,we'regoingtokeeptheleverageandthebalancesheetatSpinCoconservative.So,don'tassumethere'sgoingtobeasignificantamountofdebtplacedonusinsellerfinancing.Also,ifwedoprovidesellerfinancing,it'sbecausewethinkitistherightthingforHCPPrimetodosoandthatitwouldbeagoodinteriminvestmentforusatthisplacethrough.So,again,that'sstilltobedetermined,

flexibilityaroundit,butallofthefinancingstructuresatbothHCPandSpinCoaretohavebalancesheetsthatsupporttheinvestmentthesisofbothcompanies.

Operator :

ChadVanacore,Stifel.

ChadVanacore (Analyst-Stifel):

So,justthinkingaboutthespinManorCare,arethereanyexpectedchangestoManorCareleasetermspostspinthatcouldbeonmaturities,brands,escalatorsoranyothermaterialitems?

Wearenot--thatwillreallybeadeterminationofspin.We'renotanticipatinganythingatthistime.

Okay.Andthen,doyouexpectanychangestorentorrentcoverageonthatportfolio,proforma,forthespinanddispositions?Iknow,rightnow,yousaidyou'reexpectingrentcoveragetobe1.06to1.16?

Spinisgoingtohaveitsownmanagementteam,itsownboard.Theyaregoingtobelaser-focusedonattheoutsetbeingthelandlordhere.Ithinkthatwithduerespect,SpinCowon'tprobablybeinexistenceforafewmonthsnow,andthey'llhavetorespondtofactsontheground.Wedon'tknowandit'shardtopredictwhat'shappeningandit'sverydynamic.

SoIthinkitwouldn'tbehelpfulfranklytotrytolookoutalittlebitandwonderwhathappen.Weknowwhat'shappenedinthelastquarterortwo.Weknowthatthey've--basically,asLauraleesaidalittlebitago,they'removingforward,andweassumethatwillcontinuebutwe'renotinapositionaslandlordtoreallyhavevisibilityofthat.SoIthinkit'shardtopredict.

Alright.Impliedbythestatementthatyou'dleveredupcommensuratewithwhatthemarketwouldbear,whatwouldyouestimatethedifferencebetweencurrentrentsandmarketlevelrentsarerightnow?

IthinkJustinaddresseditwhenhetalkedaboutcoverage.SoIthinkthatwouldreallybethemathandyoucandoityourownway,butmarketgenerallylooksatcoveragelevels,andIthinkthat'ssolelytheunderwriter.So,lookatitwhentheyputtheirdebtonit.

Alright.ButLauralee,rightnow,we'relookingatjustalittleoveronetimesrentcoverage,andyousayfivetimeswhatamarketlevelrentwouldbeandthatimpliesthatmarketlevelrentsarebelowwheretheyarenow.Wouldthatbeappropriatetothinkabout?

Thatishowthedebtunderwriterswillunderwriteit.That'scorrect.

Andthen,whatdoesthecontemplatedcapitalstructurelooklikeforSpinCo?Isitsecureddebt,isit

unsecured,isittobedetermined?

Itistobedeterminedbutagain,wewouldlookforthebestfinancingtomakeSpinCoandtheirinvestmentthesissuccessful.

Alright.Andthen,youmentionedinthepressreleaseabouttaximplications.Iknowthisquarteritlookslike$49millionofincometaxassociatedwiththegainondisposals.WhatkindoftaxwillthenshouldweexpectpostSpinCo?

Chad,that's--the$53millionthatwetalkedabout,that'sapotentialtaxliability.Theactualamountwillbedependentonhowthetransactiontakesplace.Butfromafederalperspective,we'veclearedthroughaholdingperiodandthetaxliabilitythat'sassociatedwiththeHCRManorCareassetsisreallyatastatelevel.Buttheultimateexposurewillbedependentonthetransactionthatgetsexecuted,butitwouldn'tbeanylargerthan$49million.

Alright.Andthen,arethereanyupdatesontheManorCarepotentialDOJsettlement?

Alright.Onelastquestionfromme.WhatdoyouthinkthemarketisnotgettingrightaboutthisManorCareportfolioasapartofHCPthatitwillbe--thatyouthinkwillberecognizedasstand-aloneentity?

That'sreally,Ithinkaninterestingquestion.WethinkSpinCoisgoingtobeaveryinterestingcompanyactually.Oftenspinsaremotivatedbyadesiretoseparateoffassetsthatareadragontheoverallbusinessandcertainlythat'sthecasehere.Buthavingsaidthat,asmentionedearlier,manystillconsiderHCRManorCareasaleaderinthisspacebasedontheirqualityofcareandclinicalcapabilitiesandthequalityoftherealestate.Sothere'salotfromMarkOrdantoworkwithhereandwebelieve,inadedicatedvehicle,he'llbeabletobettertranslatetothemarketthepotentialintheplatform.

There'sbeenalotoffocusonit,notjustthroughusbutmoregenerallyinthespace,butwethinkthededicatedvehiclewillallowmoretransparencytotheextentwehaveit.Again,asalandlord,you'resomewhatlimited,you'renottheoperator,butnevertheless,wethinkthatwithhisbackgroundinhealthcare,inrealestate,asCEOofseveralspinsorturnaroundsandasuccessfultrackrecord,thatheisuniquelypositionedtobothtranslatetothemarket,butalsofindthepathofdifferentalternativesthatunlocksthemostvalue.

ImightaddonethingtothatintermsofvalueatHCP.Ithinkoneofthethingsthat'sverydifficultforthemarketplacetolookatisreallythevalueofthe75%ofourbusiness,becausewhilethatisanoverhang,it

meansthatwedon'thavethegrowthdynamicsthatwewouldhaveifwithacleanercostofcapitalandaclearvisionbythemarketplaceofwhatwecandowiththatportfolio.SothereisawaytooptimizetheSpinCo,butitgivesaveryclearpathofwhatHCPisandthepotentialoftheportfolio,thegrowthdynamicsandwhatthemanagementteamscandowiththat.

Operator :

MichaelCarroll,RBC.

MichaelCarroll(Analyst-RBC):

CanyouguystalkalittlebitaboutthesequentialimprovementsthatHCRManorCarewouldbeabletoachieve?Whatdrovetheoccupancyimprovementandisthatsustainable?

Therewasaseasonallyhighercensusimprovement.TheywerecomingoffofaparticularlybadQ4.Sotheyactuallyhadabout20%increase,upabout$21millioninQ1.Fluseasonwassoft,butitwasalsoalittlelatethisyear.Soperformanceisrelativelystable.

Andthen,canyoukindofdescribewhyfourthquarterwassoweak,andisitpossiblefor,Iguess,thesecondhalfperformancethatwesawin2015toreoccurinthefuture?

Thisisabusinessthat'sclearlyseasonal.Andquitefrankly,we'resurprisedbyQ4,becausetypicallythefourthquarterinskillednursingindustryisstrong.WewouldhaveexpectedittoliftoverQ3,itdidn'thappen.WewerepleasedtoseetheQ1performance.Thereisusuallyasoftnessinthesummermonthsandthenitpicksupagaininthelaterpartoftheyear.Wecan'tpredictthatnow.Certainly,hadalittlesurpriseeveninsecondhalfoflastyear,butthusfar,thingslookstable.

Andthen,Lauralee,canyoutalkalittlebitaboutHCP'snewleveragegoals?Ithinkyoutarget6.5times,isthat6.5timesjustuntilthespinoccurs,andthenyouwanttogetbackclosertoyouHCP'slongertermgoalsthattheyhavesetordoyouplanonrunningwithalittlebithigherleverage?

No,ourlong-termgoalistogetdowntothe6times.Whatwehaveinthe6.5timesiswhatweseeaverydefinedplanthatwecanguideyoutobothwithproceedsfromspinandwithassetsalesandrelativelyfrictionlesspayoffofhighcoupondebtandsothatgetsustothe6.5times,butourlong-termgoalistogetdownto6timesifnotbelow.

Okay,great.Andthen,sorryifImissedthisearlier,butdidyouguysmentionwhythesame-storeforecastforthetriplenetseniorhousingportfoliohasdropped?Areyouexpectingamendmentsthereoristhisreally[atyoursales]?

T imSchoen (CFO):

Inthesame-store,thereisarentcutthatwasgiventhatwasassociatedwiththetransactionwedidacoupleofyearsagoatBrookdale,wheretheyextinguishedthepurchaseoption.Soit'sabout$7million

hittoourtriplenetincomeduetothatrentcut.

Andthatwasn'tcontemplatedintheguidancethatwasgiveninthefourthquarter?

Yes.Ithinkyou'rereferencingtheslightdowntickMike.It'sactuallylittleweakerperformanceinthefirstquarterfromSunrise.

Okay,butitlooksliketheRIDEAgrowthwaspickeduphigher.Therearechangestothetriple-netleasesthen?

LetmejustaddresstheRIDEApart.Absolutely,performancewassolidthere.Same-storewasup9%andthentheoverallportfoliohadreallystrongdouble-digitgrowthoverpriorquartersequentially.Sowefeelgreatabouttheoperatingportfolioperformance.WehavenotadjustedanyguidancerelativetoourRIDEAoperatingportfolioatthistime,it'searlyintheyearasImentioned,skillednursingfeesandalsoisseniorhousing.So,youwanttoseetheyearplayoutalittlebitmoreandwe'llconsidermakingadjustmentstoourexpectationsintermsofouroperatingportfoliogrowth.However,atthispointintime,itlookslikewecomeouttowardsthetop-endofourrangeintermsofexpectationsthere.

Operator :

AndrewRosivach,GoldmanSachs.

AndrewRosivach (Analyst-GoldmanSachs):

I'mcurious,I'mguessingaspartofthisprocessyou'reseeingtheperformanceofpreviousspinsandifyouownHCPnow,youalsoownSpinCoandCCPhashadatoughrun,WPGwhereMr.Ordan[workedatitthetopfront]aswell,whatarekindofthelessonslearnedandwhyyouthinkthisspincandobetter?

ThisisMikeMcKee.We'velookedatalotofspins,somehavedonewell,somenotsowell.Youreferencedacouple.IguesswhatIwouldfocusonhereisthatanumberofspinsarespinningoffassetsthatarenotwellreceivedinthemarketplacereallyforreasonsthataren'trelatedtosomeofthereasonsthatwe'redealingwithpost-acuteand[sniff]here.InonecaseitwasBmalls,inanothercase,itmightbelesserqualityfacilities.

Wereallyaredealingherewithanindustryleaderandyoucantalkabouttheindustrybeinginsomestress,butIdon'tthinkanybodywouldsaythatthisisbadrealestateorthatthekindofqualityofcarethat'sgoingonhereisn'ttopquality.Sothere'salottoworkwithhere.Initspurestform,itisaworkouttypeofsituation,butIwouldsaythatinsomeofthebrainstormingwe'vedone,therearelotsofoptionsoutinthemarketplacebecausethewholespaceisintransitionandtryingtocopewithmanyofthesameproblems.

Sowethinkthatthere'sawidearrayofstrategiesthatcouldbeconsideredonceit'sinadedicatedvehicle.SoIthinkthebasicanswer,inmypriorlife,wehadaopen-endfundthatwascutconsistentlyinthethirdquartileonperformance.Wedidalookandwewayoverweightedtosuburbanofficeforhistoricalreasons.

Wecompletelyflippedthatandgotoutofitandnowhavetopquartileperformance.IthinkwhenSimondidtheirspin,theywerelookingattheBmalls.Bmallsareinatoughspacerightnow.SoIdon'tthinkyoucankindofcorrelateoneassetclasstoanother.Ithinkyou'vegottolookatthedynamicsofeachoneontheirmeritsandIthinkwebelievethatthere'salottoworkwithhere.

No,Ihearyou,Ijustfeelthisislike[sniffs]arebecomingkindofanalogoustobeingtheBmallsofhealthcare,ifyouwill?Youguyshavedoneaspin,Ventashasdoneaspin.Justtotaketheanalogy,didyouexploreatalliftherewasaprivatemarketthatwaswillingtoowntheseassetsandareyoudoingaspinasaresultofbeingunabletoexecuteasale?

Well,firstI'dsaythatthedemographicsofhealthcareandpost-acuteisalotdifferentthanBmalls.SoI'djustpointthatout.Intermsofsales,thereisanumberofoverhangsherethataretemporarytoadegree,DOJisoneofthem.SoIthinkintermsofsales,youhavetolookattheinherentvalueandit'samatteroftiming.We'vealreadybeeninthemarketwith50properties.Ithinkwe'vegot37or38thathavebeensold.Sowe'reprettywellawareofpricingandwhat'savailableoutthereandanythingwillbedoneon--intermsofmoreassetsaleswillhavetobedoneovertime.

It'snotgoingto--anumberofpeopleinthemarkethavelookedtousandweagreewiththeadvicethatweneedtodosomethingprettyspecificandtodaywe'reannouncingsomethingprettyspecific,butasIsaidearlier,it'sgoingtotaketimeonanumberoffrontstokindofworkwiththisportfolioandmaximizeitsvalue.Sothat'stherationaleforputtingitinadedicatedvehicle.

AndreallyIspeedaround,Ithinkallofusweretryingtolikedothequarterandspinatthesametime,itlookedlikeyourinterestincomedroppedalotquarter-to-quarterspecificallyonaseniorhousinginvestment.Whatwasthat?

T imSchoen (CFO):

Ataquarter-over-quarterbasisAndrew,wehadsomeone-timegainslastyearrelativetoourseniorhousingdevelopmentloanprogram(multiplespeakers)itselfthisquarter.Sothat'sreallywhatthefluxis.

Operator :

TayoOkusanya,Jefferies.

T ayoOkusanya(Analyst-Jefferies):

Firstofall,IjustwantedtosaycongratulationstoTim,hedefinitelywillbemissed.Andthenquestionwise,IthinkIjustwantedtogobacktothequestionof,it'sbeenaskedoneortwotimes,butIfeellikewe'vebeendancingarounditalittlebitandthisideaofwithManorCare,whatexactlyasanindependentREITorSpinCo,whatwillSpinCobeabletodothatitcouldnotbedoneunderHCPjustkindoftoanextentHCPprovideddiversification,HCPprovidedalowercostofcapital.WhatcanSpinCoreallydotomaximizeshareholdervaluethatjustcouldnotbedoneundertheHCPplatform?

Well,ifwethinkabouttheinvestmentthesis,sayingthatthisisanentitythatisabletorespondtoandwhetherthechangesintheindustrycomingfromreimbursement,whatwe'vedoneisnotonlyputtheassetsinacapitalstructurethatwillbeconservativethatitcanworkwiththat,butifwethinkaboutthe

limitationsoftheREIT,wecanonlyown10%.

We'reputtingour10%ownershipintoSpinCo.We'realsoputtingourDROintoSpinCo,whichthemarketplacehasnotvalued,yetithasagreatdealofvaluewhenyouthinkabouttraitsandsoforthintotheoperatingcompanyandwiththeflexibilitythatitcandodifferentthingsasitthinksaboutwhatitwantstodowiththeleaseinplacetomaketradesornotandoptimizewhatithasandwe'vealsogivenitacapabilitythathaveabasisintheassets,whichwedidnothavebeforethatitcandomorethingswiththeassetsintermsofsellingthem,etcetera.

Sothere'sjustalotoftools,butinHCP,ourshareholdersexpectconsistencyandthat'sveryhardtodeliverwhenthereisanunknownexpectation.TheinvestmentthesisofSpinCoisyoumightexpectsomeunexpected,butifthosethingshappen,it'sprobablybecausevaluewascreated.Soit'sjustadifferentinvestmentthesisthatisbetteroptimizedoutsideofHCPandthat'swhatwefeelweneedtodoforshareholders.

Butalongthoselines,ifSpinCoisgoingtobeaREIT,IwouldthinkagaintheaverageREITshareholderwantsstabilityofcashflows,that'swhywe--theREITthatcangenerateconsistentearningsistheonethattradesatahighermultiple,likewhywouldIwanttoownSpinCoifthere'sgoingtobeallthisuncertaintyandallthisvariabilityrightoffthebat.LikeI'mjustalittleconfusedaboutthevalueIgetfromSpinCoasaninvestor?

Well,Ithinkthatagain,I'lladdalittleabit,Lauraleehitonit.AsaREITandasadiversifiedREIT,aswiththekindofcreditratingandsoforththatwehave,wearegenerallyapassiveinvestor.Wecannotownmorethan9.9%oftheequity.Ifsomeofthesefacilitiesdowntheroadneedtobeoperated,wecan'tbeanoperator.Thereareanumberofthingsthatmightoccur.Wedon'tknowwhichpathwewillultimatelygodown,butSpinCocan,Ithinkitwasreferredtoearlier,wewillsetitupasaREIT,itwillbeaREIT,itdoesn'thavetostayaREIT.HCPisgoingtobeaREITperiodintheparagraph.Sowhenyoustarttokindofgodowntheoptionsthatwe--Itoldyouwespendalotoftimethinkingaboutnumerousoptions,anumberofthemwereforeclosedbecauseofthevehicleHCPthattheassetsareheldin,SpinCowon'tbesorestricted.

JohnLu (EVP):

I'lljustaddthat,intermsofthevariability,whenwedidthevaluationlastquarterandestablishedanewcarryingvalueoftheassetstoamarketlevelleaserateandcoverage,therewasareductioninourcarryingvalue.InthecaseofSpin,Iwouldexpectthatthey'reprobablygoingtolikelystartout,marketwillgivethemwhattheythinkthevalueis,itwasanimpairmentonoursideanditwillbe,justtherealityfromthestart.

Youknow,I'dsayoneotherthing,SpinCoisveryinterestingtous,we'reexcitedaboutMarkOrdanandwhathecanbringtothatvehicle,butaswesaidearlier,andIdon'tthinkweshouldmoveawayfromit,thisisaboutHCP.WhenyoulookatwhatSimondidforexample,peoplesaywell,thatspinwaslacklusterafterawhile,butitdidahellofalotforSimonProperty.SoweexpectthatHCPisgoingtohaveaverystronggrowthprofileandsomeoftherelationshipswehave,thatwewanttoexploitaregoingtobeatourfrontdoornow.SoIthinkalthoughwe'respendingalotoftimeandshouldtoday,aboutSpinCo,weneedtoreallybeexcitedaboutwhat'sgoingtohappenwithHCP.

Okay.Fairenough.Isthisatax-freespin-offtoHCP?

No.itdoesn'tqualifyasatax-freeunderthecode.However,takenintwopiecesforourshareholders.Effectively,theneteffectisitwilloperatelikeatax-freereturnofcapitalandthenequallyimportantforHCP,wedonotexpectthatwewillrecognizeanytaxableincomeatthecorporateREITlevel.Sonet-net,thisisanoptimumstructure.

Gotit,okayandthenjustonemore,ifyoumayindulgeme,inthenewguidance,youdidmaintainyourcashsame-storeNOI,yourRIDEAnumberisforcashsame-storeNOItogoup,butthenumbersfortheoverallseniorhousingportfoliocamedown?Canyoutalkalittlebitaboutwhatyou'reexpectingonthetriple-netsidethen?

Yesthetriple-netcamedownforacoupleofreasons.Oneis,it'sprimarilyrelatedtotherentcutthatBrookdalereceived.Thatwasagreedtoacoupleofyearsago,it'spartofthetransactionwherewe[continuetopurchaseoptions,about$7million]reduction,sothatwasanimpactonthetriple-netsideandthenasyounoted,we'reofftoastrongstartontheoperatingportfolio.

Operator :

ToddStender,WellsFargo.

T oddStender (Analyst-WellsFargo):

I'mnotsureifImissedthis,butwhatistheamountofthedividendthat'sSpinCowillpayHCP.Hasthatbeendeterminedyet?

Whatwe'vetalkedaboutisthattherewillbedebtproceedsraisedatSpinCothatwillcomebacktoHCP,butthat'snotadividend.Theirdividendpolicywillbesetbytheirboard,butthat'llbetotheirshareholders.

JohnLu (EVP):

Itwillbemoreofadistribution?

Right.

Okay,butthemoneybacktoHCP,isthatnotthecase?

That'sadistributionbacktous.

TherewillbeadistributionbacktoHCP.Ithinktheexactamountwe'llannounceaswegetclosertothespin,becauseitdependsonjustmarketconditionsatthetime.SoIdon'tthinkweshouldgiveyouanumbernowbutthatwillcomeoutaswegetclosertothetimeofexecutingthespin.

Okay.Andwhataboutthe61HCRManorCare,theseniorhousingpropertiesthatarelargelymemorycare,whathappenstothose?

TheywillbeintheSpinCoatthistime.

Okay.Andthen,justIguess,whathappenstotheHCPdividendrate?Andonthecomment,youguyshavehadalong-standinghistoryofbeingadividendachiever,howdoesthistransactionaffectthecurrentrate?

Again,asIsaidearlier,ourcurrentdividendpolicywillstayinplaceuntilthespiniscompletedandthenpost-spin,wewillbelookingatwhatistherightcapitalstructure,dividend,etcetera,butourfocusisontotalshareholderreturnandinthat,it'sgrowthforourshareholderswhichincludesthedividendgrowth.So,atthispointintime,thatdividendpolicy,thatwillbethepolicybutadividendhasnotyetbeenset.

Okay.Andthenjustfinally,Justin,youtalkedabouttheBrookdaleconcentrationcertainlyisgoingtodeclinethesaleoftheRIDEAportion,butyoumentionedadditionalfacilities,youmighteitherswitchofftheoperatororsell.WhatistheBrookdaleconcentrationultimatelygoto?Wonderifyoucouldtalkaboutatargetmaybe?

Youknowwhat,I'mgladyouaskedthatbecauseIwantedtomakeanotherstatementregardingtheRIDEA2transaction.Thebeautyofitisthatweremainanownerinall49assets.Welikerelationship,weliketheassets,welikethemarketsandwe'reenjoyingstrongperformanceoverthepastcoupleofquartersandwe'llcontinuetodoso.Asanowner,we'rejustgoingtoownlessofitandwe'redoingthetransactionwithajointventurepartnerthatwecangrowwithovertimeandperhapsintimewemightbeinterestedinbuyingtheassetsback.Wewouldn'trulethatout.

Soitwasawaytoaddressconcentration,addressrecycling,butstillmaintainingarelationshipthatwehavealotofconfidencein,andthat'llbeanongoingdialogwe'llhavewithinvestors,because,asIsaid,we'reprobablygoingtobeaboutdowntoathirdofourportfolio.We'llbeBrookdalepost-spincertainlytoMike'spointsandLauralee'spoint,wewillgrowagain,that'sourintentandthat'llhelpdiversificationandIgavesomeexamplesearlierofsometransactionsthatarebringingnewoperatorstoourcompany,weanticipatemoreofthat.

Andtheninregardstothetriplenetdiscussions,there'sbeen25non-coreassetsidentifiedsofarwithBrookdale.There'llbemorediscussionswithBrookdale.Wehaveagreat,veryfluiddialogwiththem,andwe'reatcontinuousandconstantdiscussionsabouthowtocreatevaluewiththatportfolio.So,theremaybewaystoreduceevenmoreconcentrationwiththetriplenetbutIthinktheoverridingmessagehereisthatweliketherelationship.

Operator :

JordanSadler,KeyBancCapital.

Jef f Gaston (Analyst-KeyBanc):

ThisisJeffGastonhereforJordon.So,afewquestionsforyou.Youmentionedearlierthatthespin-offplantargetsamidsixtimesdebt-to-EBITDA.Isthatdayoneafterthespin-off?

We'vetalkedabout6.5timesatHCPPrime,themaincompanyandagain,whatwehaveisaplanthatwiththespinproceedscomingback,withthedebtatthespin,withtheproceedscomingbacktoHCP,withtheRIDEAsalethatwejusttalkedaboutandidentifiedassetsalesinadditiontothat,thatwewouldgettothat6.5times.So,thatiswhatwe'redefinitelytargetingaswemovethroughthespinprocessandgetthatcompleted.

Andthen,soifyouguysaregoingtobeat6.5times,what'syourstrategyforgrowthgoingtobe?Howdoyouplanonfinancingit,post-spin?

Ourfinancingplansare60-40aswelookatnewinvestments.We'reverycommittedtobeingatalowerleverage,andwe'llmovetodothatassoonaspossible,butwethinkthatwecanbecompetitiveatthatlevelandbedefinitelyagrowthcompanyinthemarketplace.

Andthen,withtheexitfromtheSNFportfolio,doesthatkillyourfivebyfivestrategy,areyoumovingtoafivebyfour,howareyouthinkingaboutthatlonger-term?

Wewentoutoffivebyfivestrategyforawhile,butwhatwe'reveryfocusedonisourthreeassetclassesthatare95%privatepay,ourseniorhousing,ourmedicalofficeportfolioandourlifescience.Wethinkthesearehigh-qualityportfoliosthatgiveusalotofgrowth.Weprimarilyfocusonowningrealestate.Intermsofstructure,thereistimeswhenwedodebt,butit'stogettotheownershipofrealestate,wethinkthat'swhatREITsaresupposedtodoasaninvestmentthesis.

SoourplanwhichwelaidoutIthinkprettyclearlybothintheinvestordeckandhopefullyinmycommentstocamethroughthatwe'regoingtobeinthepremierpartofthehealthcaresectorandwethinkthatofferssignificantopportunitiesforgrowthandreturnsforourshareholders.

Andthen,withtheSpinCobeingatroughlyfivetimesleverage,Iguess,couldyouspeaktowhetheryouthinkitwillbeagrowthvehicleorisitgoingtobefocusedprimarilyonbeingaworkoutvehicle?

No,Ithink,Imentionedearlierit'saninterestingquestionbutIthinktheinitialfocuswillbeontherelationshipwithManorCareandwe'llbetryingtomovetheassets--notmovethem,butworkwithManorCareifpossibletogettoagoodresult.

Andinthatsense,thereisaworkoutfocustoitbecausetheinitialfocusisthefactthatwedon'tthinkrespectfullythemarketiscreditingasmuchvalueasisthere,andweneedtotryandfindawaytounlockthattousethewordwe'veusedquiteabittoday,andthatwillbetheprimaryfocusfromtheget-go.

Ithinkwealsosaidearlierthatit'saspacethatisverydynamicatthispoint.SotheremaybeotheroptionsavailabletoSpinCobecauseitsitsinaprettyinterestingpositionwithinthatspace,butthosearethingsthatreallyMarkOrdanwillbefocusedonandIdon'tthinkhewantstoenterthisassignmentwithprejudgmentaboutwhatistheoptimalpathforward.

Andthen,justtoclarify,earlier,IthinkJustinmentionedmarketlevelcoveragewas1.3times.WasthatEBITDARorEBITDARM.

It'sEBITDAR.

Andthen,finalquestion,doyouguyshavea--areyouguysabletosharewhatthecurrentleverageatManorCareisonanetdebt-to-EBITDAbasis?

T imSchoen (CFO):

Notonnetdebt-to-EBITDAbasis.Theonlyotherdebttheyhaveisabout--theonlyotherdebttheyhaveattheOpcois[about$380million,$390million]oftermdebt.Thatcapitalstructurehasbeeninplaceforsometime,Jeff.

Operator :

MichaelMueller,JPMorgan.

MichaelMueller (Analyst-JPMorgan):

Justacoupleofquickones.First,isitcorrectthatwhentheForm10comesout,ifthereisarentreduction,that'snotgoingtoshowupinthere,that'sgoingtobesomethingwe'llfindoutaboutdowntheroad.Isthatcorrect?

TheForm10willoutlinetheinvestmentthesisandwhatinvestorsshouldexpectinSpinCo.Soagain,prematuretotalkaboutanythingintermsofrestructuring.

Right,IthinkyourassumptioniscorrectthattheForm10won'treallyaddressthat.Again,there'llbe,Markwillbedoingroadshowsandallofthataswegetclosertoexecution.We're[threeorfour]monthsoutandthosearethingsthatarebestaddressedwhenwe'rereallyontopofexecutionbecausethemarketwilltelluswhereweare.

MichaelMueller (Analyst-JPMorgan):

Okay.Andthenforthe$2.75billionof,Iguess,capitalbeingeffectivelyraised,howshouldwethinkabouttheuse?Firstofall,isallthat--shouldwethinkofthatbeingraisedatthetimeofthespin-off,soallthatcapitalwillbeintheRIDEAIIwe'vedonethedebtwillbeplaced,soyou'llhavethat$2.75billion.And

then,what'sthetimeframetodeploythat,becauseIknowthedebttalksaboutrepayingmaturitiesthrough2018.Doyouplanonacceleratingprepaymentsorsittingoncashorhowshouldwethinkaboutthat?

Yes,theplanisthatwewouldaccelerateprepayments.AsIpointedout,thatdebtisaprettyhighcouponblendedat6.4butwe'vegotpartsofitthatare6.7,6.8,soit'sagoodoptimumtimetopaythatoffandthenbeyondthat,itwouldbedeterminedonwhatwedointermsofgrowthgoingforwardetcetera.Sothegoalistobeat6.5timesleverageorlessatthecompletionofthespin.

Operator :

RichAnderson,MizuhoSecurities.

RichAnderson (Analyst-MizuhoSecurities):

So,doIjustkindofstepbackandlookatthebigpicture,investorsinHCPleveragegoesupatleastfornow,G&Aasapercentofrevenuegoesup,youprobablyhaveadividendcuttonormalizethesituation.AndthenonSpinCo,youcouldconvertitintoanon-REIT,that'snotgoodforREITinvestors.YoucouldhaveandprobablywillhaveanotherrentcutandthenyouhavetheDOJoverhang.

Soalotofunknowns,right,thatarestilloutthereandwhileIappreciateyouwantingtokindofgettothisandresolveitandmoveforwardinadecisivemanner,didyougiveanythoughttoholdingoffandwaitingtillyouhadalittlebitmoreinformationtosharewithinvestors,sothattheycanmakealittlebitmoreofaneducateddecisiononwhattodohereornow?Justcurious,whydidyoudecidetodothisnowwhenwedon'thaveawholelotofinformation?

Well,Ithinkifyoulookatanumberofspintransactions,whatwe'redoinghereintermsoftimingofannouncementisprettystandard.We'vegotalotofworktodotoexecute.Wewantedtogetleadershipinplace,wewantedthatknowntothemarketandifwefeltthat--asIsaidearlier,thatwithinthenextmonthortwoorthreethatfactsonthegroundwouldchangedramatically,wemayhavecomewithadifferentstorytoday,butwedon'tseethathappening.Sowefeltthatitwasthebestcoursetoannounceadirection.

Wethinkwe'vegottherightplan,therightpeopleinplace,thatitopensupoptionalityandmoreimportantly,wethinkthatitputsHCPontherightcoursetoreallybeavery,verycompetitiveforceinthismarket.Sowewanttoexploitsomeofthoserelationshipsthatwe'vebuilt.Wherewe'vehadsomehandcuffsonthis,wewanttotakethehandcuffsoff.Sothat'swhywe'reannouncingthisandeventhoughitwilltakealittletime,whatwe'retellingyougoodbitaboutHCP,howyouevaluateSpinCowillhappenoverthenextcoupleofmonths,anditwillbeiterativebutwethoughtitwasreallytherightcoursetogoaheadandannounceit.

Justworriedalittlebitaboutafalsepositivereactionherebecausewedon'tknow.Thereissomuchthatinvestorsaregoingtogetthisstubcompanyandtheydon'treallyknowwhatthey'regetting.Andthen,maybeIcouldtrytohelpwithalittlebitofthatandifyoubackintoarentcoverage,IthinkitwasJustinorTimthatmentioned1.3timesEBITDARisthemarket,andyoustartwitha0.85timesEBITDARcoveragethatyoureportedtoday,thatgetsyoufrom,callit$460millionofannualizedrevenuetomaybesomethinglike$300millioninSpinCo.Sothen,yougetto[1,3times$300million],tryingtothinkisthatabout$1billionworthofdebtthatwecouldseeSpinCoexecuteon?Isthatafairway?Ismypath

reasonablethere?

Well,Rich.Ithinkyouare(inaudible)yourmodelwhichIamsuregoingtodobutagaingoingbackto,wepositionedSpinCotobesuccessfulwiththeseassets,whichIthinkisincrediblyimportantbecausetoday,wecan'tdothatwithinHCPandwe'vealsopositionedHCPcouldbehighlysuccessfulwiththebalancesheetthatwe'regoingtohave.

ImeantointerruptbecauseIdon'twanttodelaybutIknowit'salongcall,butnowI'mlookingatfivetimesEBITDAR,I'msorryfivetimesrevenuewouldbeabout$1.5billionindebt.I'mjustwonderingifthatremaining$2billionofraisethatyou'rethinkingaboutatHCP,isitfairthatabout$1.5billion-ishtypenumberwouldcomefromSpinCoandtherestfromassetsales?

Idon'tthinkyou'reoutoftherealmofpossibility.

Okay,thankyou.AndthenifIcouldjustaskmaybeaquestiontoTimandbytheway,Timgoodlucktoyou.Hope(inaudible)inthefuture,buttherewasarestructuringpaymentof$55millionfromBrookdale.Ithinkthatflowsorstartstowaneinthethirdquarterofthisyear.Isthatcorrect?Andifso,howshouldthatshowupintheP&L?

T imSchoen (CFO):

Itdoesstarttoweighinthisyearandasyousaid,itwasinthenextcoupleyears,butitwillonlyaffectFADandthat'sinourguidanceRichtoday.

Andfinally,maybeonemorebiggerpicturequestiononthedeal.Whatisthechancethatsomethingelsecanhappenbetweennowandspin-off?DothepartieshaveordoyouHCPhavetheflexibilitytocontinuetoseekoutotheroptions,whetherit'ssometypeofsaleofoneorbothoftheentitiesoranythinglikethat?Towhatdegreecanyoustillengageotherpartiestomodifythedealascurrentlycommunicated?

JohnLu (EVP):

Ithinkthatourintentionshavebeenannouncedtoday,we'regoingtopursuethisvigorously,butasthesametime,we'renotgoingtoforecloseanydiscussions.We'renotlimitedinthatrespect.So,ifthingsonthegroundchange,wedon'thavesignedagreements.We'renotreadytoexecute.Idon'twanttoputtoomuchofapointonthat,butIthinkjusttobecandidtoyourquestion,thisisanintention.It'sastrongintention,it'sadirectionthatwe'regoingtopursueandwe'llseehowthefactschangesastheweeksgoon.

Operator :

JohnKim,BMOCapitalMarkets.

JohnKim(Analyst-BMOCapitalMarkets):

YouspokeaboutevaluatingVentas'spin-offlastyear.Soincomparingyourannouncementwiththeirs,

theyhadbasicitemslikeNOI,FFO,anddividendannouncedatthepresentation.ItsoundslikeyoursisreliantonSpinCo'sboard,whichhasn'tbeenformedyet.Socanyoujustprovidesomeideaoftimingofwhenthesebasicparameterswillbeannounced?

Yes,theForm10willbecominginaboutamonth'stimeandthatwillcarryalotmore,ifnot,mostofthedetailsofyourquestions.

Okay,IthoughtyouansweredtopreviousquestionthattherentcutwouldnotbediscussedintheForm10.

It'stheoptionsthatSpinCotakes,theyhavetools,buttherewasnoindicationthatarentcutoranythingelsewouldbeintheForm10.

Wehaven'thadanydiscussionsaboutarentcutatthispointandwehavenoindicationthatarentcutwillberequiredpriortotheformationofSpinCooreventhereafter.SoIthinkthosearefactsonthegroundthatwedon'thaverightnow.Ithinkwhenyoustarttocompareotherspins,especiallyifyoutaketheVentasspin,theyownedtheirassets,theyoperatedtheirassets.There'salotmoreyoucanplananddowhenyouhavefullinformation.Wehavecertaininformationbutnotquiteasmuchmaybeastheyhadandwe'reinadifferentsituationhere.

Okay,soSpinCowillcomeoutasisandanychangesgoingforwardwillbepost-spin?

Basedonwhatweknowtoday,that'scorrect.

AndhaveyougivenanestimateasfarasthemergerrelatedcostsandendupbeingquitehighforVentasandgiveanestimateofthatandwhoisgoingtobepayingforit?

Wehavenotgiventhatyet.IthinkyoushouldexpectthatitwillbeadvisorfeesandthenwewillhavedebtprepaymentcoststhatwillbealsopartofthetransactionandthosewillallcomeoutaswehavetheForm10.

Andwhoisgoingtopayforit?

It'llbeHCP(multiplespeakers)otherthanthefinancingcostsatSpinCo.

MarkOrdan'semploymentcontract,howlongisthatfor?

Wehaveanagreementinprinciple,butthatwillalsobeannouncedintheForm10.

AndthenifIcouldjusttransitiontotheBrookdalejointventuresale,canyoujustwalkusthroughhowyouvaluetheplatformtodayversusyouroriginalcost.Iknowitcamethroughmultipletransaction?

Actually,whenBrookdaleenteredthejointventurewiththeHCP,itwas[about6.5cap].Theperformancehasbeenchoppysincethenuntilrecentlybecausewastherewasintegrationandtherewasadistractionduetothat,butwe'veenjoyedsomeimprovedperformance,butwhenyoulookatthecaprate,itlinesupprettymuchexactlyabouta[6.5cap].

Soletmejustwrapupandclosethecall.We'vepositionedSpinCoasaninvestmentvehicletooptimizethelong-termsolutionfortheManorCareassetsforthebestofourshareholdersandwe'vepositionedHCPforgrowthandconsistentreturnsfromourhighqualityportfolioandinvestmentgradebalancesheetandwelookforwardtoyourquestions,whichI'msuretherewillbemanyandwewillbeavailabletoyoualldaytoanswerthose.

Thankyouverymuchforalotoftimethismorningandweappreciateyoursupport.

Operator :

Theconferenceisnowconcluded.

Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.

THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

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