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HCP Inc. (NYSE:HCP)

Q4 2008 Earnings Call

February 10, 2009, 12:00 pm ET

Executives

Ed Henning - Executive Vice President and General Counsel

Jay Flaherty - Chairman and Chief Executive Officer

Mark Wallace - Chief Financial Officer and Treasurer

Paul Gallagher - Chief Investment Officer

Analysts

Jay Habermann - Goldman Sachs

David Toti - Citigroup

Jerry Doctrow - Stifel Nicolaus

Mark Biffert - Oppenheimer

Michael Mueller - J.P. Morgan

Bryan Santino - Barclays Capital

Richard Anderson - BMO Capital

Rob Mains - Morgan, Keegan

Chris Haley - Wachovia

Rosemary Pugh - Green Street Advisors

Karen Ford - Keybanc Capital Markets

Dustin Pizzo - Banc of America

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter year-end 2008 HCP earnings conference call. My name is Chenille and I will be your coordinator today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder of this conference is being record for replay purposes.

Now I would like to turn the presentation over to your host for today’s conference, Mr. Ed Henning HCPs Executive Vice President and General Counsel. You may go ahead, sir.

Ed Henning

Thank you, Chenille. Good afternoon and good morning. Some of the statements made during this conference call contain forward-looking statements. These statements are made as of today’s date, reflect the company’s good faith belief and best judgment based upon currently available information and are subject to risks, uncertainties and assumptions that are described from time-to-time in the company’s press releases and SEC filings.

Forward-looking statements are not guarantees of future performance. Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement or at all. Events prior to the company’s next earnings announcement could render the forward-looking statements untrue and the company expressly disclaims any obligation to update earlier statements as a result of new information.

Additionally certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures as well as certain related disclosures in our supplemental information package and earnings release, each of which has been furnished to the SEC today and is available on our website at www.hcpi.com.

I’ll now turn the call over to our Chairman and CEO, James Flaherty.

James Flaherty

Thanks Ed. I am joined this morning by our Chief Investment Officer, Paul Gallagher and Chief Financial Officer, Mark Wallace. Let’s start with a review of our fourth quarter results and for that I turn the call over to Mark.

Mark Wallace

Thanks Jay and good morning. 2008 was a very successful year for HCP as we restructured Tenet Healthcare portfolio completed the transfer to Emeritus of 11 senior housing properties, substantially de-leveraged our balance sheet and delivered FFO growth of 5%. We were please to be added to S&P 500 Index and closed of 2008 with our credit matrix in very good shape.

Last year we generated net proceeds $2.4 billion, we raise $1 billion of equity capital, $656 million of proceeds from asset dispositions, $563 million during the placement of attractively priced Fannie Mae secured debt and $200 million from a senior unsecured term loan we just closed in the fourth quarter. Our overall leverage ratio stands at 48%, our secured debt ratio stands at 15% and our unsecured leverage ratio at 51%. We are comfortably within all financial covenants of our credit agreements.

For 2009 our debt maturities include our bridge loan with the balance of $320 million and matured in July 30, 2009 and $155 million of mortgage debt. For 2010 our debt maturities and amortization totaled $505 million and are comprised of $206 million of senior unsecured notes and $299 million relates to mortgage debt. Our institutional joint ventures have no debt maturing 2013 and only $13 million to $14 million of mortgage debt amortization in 2009 and 2010.

While floating rate debt represent 14% of our total debt, our Manor Care investment more than offsets that amount. At close of business yesterday we have $32 million of unrestricted cash and our $1.5 billion revolver which matures on August 1, 2011 at only $121 million drawn. Investment activity for the quarter was principally focused in our life science segment, we funded $31 million in construction and capital project this quarter bring our total funding to $158 million.

The Corn Shell of Oyster Point 2 Buildings A and B comprising 251,000 square feet were completed in the fourth quarter of 2008. Rent commits in the fourth quarter on building A and the first quarter of 2009 on building B. Rent recognition under GAAP will be deferred until related tenant improvements are complete. We also completed the Corn Shell and Oyster Point 2 building C comprising 78,000 square feet in the fourth quarter and continue to actively pursue tenants.

Turning now to our fourth quarter earnings, our results included several items I want to take a moment and walk you through. In December we transferred 11 senior housing properties from Sunrise to Americas and recorded a related impairment charge of $12 million or $0.05 per share associated with intangible lease assets as we discussed on our last call. We also recorded other real estate related impairment charges this quarter of $2 million or $0.01 per share principally related to a separate lease termination and expected disposition.

Last, we recognized a loss of $5.6 million or $0.02 per share related to marketable securities and hedge ineffectiveness. These costs were partially offset by a gain of $2.4 million in the quarter as we were able to negotiate the early repayment of $120 million of debt at a 2% discount. This gain is reflected in interest in other income.

For the quarter of 2008, we reported FFO per diluted share of $0.48 compared to $0.54 for the same period in 2007. In the aggregate the items I just outlined amount to $18 million, which includes impairment and merger related charges of $14 million. This compares to $4 million of merger related charges in the fourth quarter of 2007.

Same property cash NOI growth through the fourth quarter was 1.6% led by life science at 19%, skilled nursing at 2.7% and senior housing at 1.5%. A life science same property cash NOI growth continues to be driven by lease up of our rents at our rental summer campus in San Diego.

Senior housing same-store cash NOI growth were also reflects additional rents of $7.5 million from property level expense credits related to our Sunrise properties. Same-store cash NOI for the prior year included credits of $3.1 million. These credits however were offset by a reduction of $2.9 million in Sunrise rent which fluctuate with LIBOR interest rates and $2.4 million of additional rents received and recognized in the comparable 2007 period that related to 2006 property performance.

Regarding guidance for 2009, we expect reported FFO to range between $2.15 and $2.21 per diluted share. Our guidance for the full-year includes the following key assumptions. We expect to fund about $1.15 million in construction and capital projects this year principally in our life science and medical office sectors. Asset dispositions for the full-year are expected to be about $45 million with gains for GAAP earnings on these assets of about $35 million.

On investment management platform should generate $6 million in fee income, same property cash NOI growth is expected to be 2.5% to 3%, G&A should be $72 million or roughly 6.2% of total revenues. Income tax expense is expected to be $5 million for the full-year and last our guidance for 2009 contemplates no additional acquisitions of real estate or debt investments, no contribution to the asset in the joint ventures and excludes impairments or similar charges if any.

I’ll now turn the call over to Paul.

Paul Gallagher

Thank you, Mark. Before I go into details of our portfolio, I want to highlight where we stand on our portfolio lease expirations for all sectors in 2009 and our projected same property cash NOI growth for 2009.

Revenue from lease is schedule to expire in 2009, totaled $70.1 million and represent 8.4% of total portfolio revenues. Of these we have renewed or released space that will reduced our exposure to 6.2% of the portfolio revenue. 79% of the remaining exposure is in our MOB space where we historically have seen 75% to 85% pension rates. Cash NOI growth from our same property portfolio in 2009 is expected to range from 2.5% to 3%.

Excluding the temporary rent relief at our Irvine Hospital while our new tenant Hoag hospital invest up to $40 million in improvements, same property cash NOI and growth for the entire portfolio would be in a range of 3.5% to 4%. As I go to the portfolio in more detail, keep in mind senior housing data reflects on a Pro forma basis the transfer of 11 properties from Sunrise to Ameritas for the full-year, but closed effective December 1, 2008.

Senior housing; occupancy for our senior housing portfolio is 89.3% representing the 40 basis point decline quarter-over-quarter and is the fourth consecutive quarterly decline. Preliminary data from the fourth quarter indicate occupancies for our largest operators Sunrise, Brookdale and Ameritas which represents 73% of our units is 89.6%, 90.8% and 89.1% respectively with cash flow coverage’s of 1.0, 1.1 and 1.2 times respectively.

EBITDAR across our senior housing portfolio remain stable as operators focused on generating more ancillary revenue and implementing expense controls. Cash flow covers has increased year-over-year from 1.06 times to 1.17 times. Our senior housing year-over-year same-store cash NOI increased 1.5%.

Breaking it down, senior housing excluding Sunrise increased 6% driven by contractual rent escalators and the restructuring of our HRA portfolio. Sunrise experienced a 6.2% decline, due primarily to the timing of recognition of 2006 additional rents in 2007, as well as a reduction in LIBOR based rents.

We anticipate same property cash NOI growth for the senior housing sector to range between 1% to 2% impacted by the transfer of 11 properties from Sunrise to Ameritas. The transaction restructure was slightly lower rent in the first year as Ameritas transitioned the assets. Rent will then increase 11% on an annualized basis for the next four years.

Transition from Sunrise to Ameritas went smoothly, with no impact on occupancy, revenue, employees or residence. The property has been fully integrated into Ameritas and after 60 days Ameritas remains extremely confident that the properties will meet their forecast. One significant change made our Ameritas, an increase in marketing business component as a short-term we have optioned.

This has boosted Medicare occupancy and has converted the SNF component into a feeder for the remainder of the facilities. Our near-term leasing risk in senior housing consist of only one lease set to expire in 2009, with annual rent of $72,000. We are currently in negotiations to sell the facility to a local operator. We also have two loans to two operators that are due in 2009. We are discussing terms for extensions.

Hospitals; year-over-year cash flow coverage excluding our well perform HCA hospital and Medical City Dallas was 2.58 times. Year-over-year same property cash NOI declined 1.6%, which includes the facility where we terminated the lease and have negotiated terms to sell the asset. Excluding this facility same property performance would have increased to 1%.

Same property cash NOI for hospitals will declined between 10% and 11% as result of providing short-term rent relief at our Irvine hospital to the new tenant Hoag while the invest $40 million of reposition of facility. Excluding the rent relief same property cash NOI for hospital will be flat. The sale of our Tarzana Hospital in the third quarter, the plan sale of our Los Gatos hospital to the premier Bay Area (Inaudible) hospital and the transition of Irvine to Hoag result in a reduction in tenants concentration of NOI interest income from 6.5% in 2007 to just 2.9% projected in 2009.

Our near-term lease exposure consist of our Irvine hospital which is been addressed with our new lease to Hoag commencing February 20, 2009 and two rehab hospitals in Texas and Louisiana were the current operator is on holder as we transition to new operator.

Skilled nursing; our skilled nursing portfolio continues to perform well, year-over-year cash NOI increased 2.7% driven by contractual rent increases and cash flow covered remain stable at 1.51 times.

We are forecasting continued stability in our skilled nursing portfolio 2009 with same property cash NOI growth range in from 3% to 3.5%. Three leases with the same operator are set to expire 2009 with an annual rent of $1.3 million. However we have recent an agreement to renew all three leases. One loan receivable will to come due in 2009 which we expect to extend at current terms. For our HCR Manor Care investment year-to-date debt services coverage was 1.99 times, with occupancies remaining stable at 88%.

Preliminary, indications for the fourth quarter reflects stable occupancy and debt service coverage exceeding two times. In addition the company indicates census growth has been strong in the early part of the first quarter of ‘09 and as running significantly ahead of fourth quarter ‘08 levels.

Medical office buildings; occupancy for the fourth quarter was 90.3% with 2008 annualizing property cash NOI up 1.3% on the year-over-year basis. This was driven by increase cost recoveries and contractual rent increases, but was offset by the expiration of four master leases.

On the expense side savings as result of positive appeals of property taxes and reductions achieved in our insurance programs were offset by an increased utility cost, which were primarily the result of rate increase in Texas. We negotiated new utility contracts in Texas which will result in rate reductions of 33% effective the first quarter of 2009. In 2009 we expect same property cash NOI growth to range from 2% to 3%.

Our MOB portfolio has begin to experience some positive trends in leasing or tenants who had previously informed us they were vacating, in anticipation of occupying space they would have had an ownership interest in now are extending or renegotiating their leases with HCP. In fact the combine square footage of executed leases where the tenant has not yet taken occupancy and deals in active negotiations as increased from 645,000 square feet at the end of the third quarter to 880,000 at the end of the fourth quarter.

This is coupled with effectively how 500,000 square feet less or 17% to lease in 2009 versus 2008 thereby significantly reducing our release and exposure. During the fourth quarter 161 executed leases totally 440,000 square feel took occupancy of which 101,000 square feet related to previously vacant space and the remaining 339,000 square feet related to the renewal of previously occupied space. These renewals occurred at 3.5% higher rents.

Our recent activity during the quarter resulted in a retention rate of 74%, this is down slightly from previous quarters due to an 85,000 square foot tenant vacating in the quarter. For 2009 we have 2.1 million square feet of explorations which include 350,000 square feet of month-to-month leases and as previously mentioned its 500,000 square feet less space to lease in 2009 and 2008. Our current pipeline of leasing activity includes 320,000 square feet of executed leases and 560,000 square feet of active negotiations.

Medical office redevelopments include an 84,000 square foot property in San Diego California and 92,000 square foot in Sacramental California. The buildings will be converted from single tenant use to multi tenant MOB use. Both redevelopments are scheduled to complete in the third quarter of 2010.

We have executed agreements to develop two properties in Colorado and Texas totaling a 156,000 square feet with a projected cost of $33 million. Commencement of the construction is contingent upon certain free leasing thresholds which we anticipate achieving in the second quarter. During the quarter we completed the sale of two medical office building previously classified in discontinuing operations totaling 100,000 square feet, gross sales price of $7.5 million and a recognized a gain on sale of $600,000.

Life science; occupancy for life science portfolio was 91.1% at the end of the year or 2% sequentially from 89.1% at the end of the third quarter. The increase in occupancy was driven activities in Bay Area consisting of new recommencements of approximately 46,000 square feet and placing three buildings in South San Francisco into redevelopment.

Life science same property portfolio included 13 assets and cash NOI was up 19% year-over-year primarily driven by the repositioning at our rental building. Beginning in 2009, life science same property portfolio will include 93 assets including all the legacy SEUSA’s assets and we expect same property cash NOI growth to range from 12% to 12.5% in 2009.

During the fourth quarter we completed approximately 392,000 square feet of leasing, of which 278,000 square feet related to long-term 15 year lease renewals with Europe an affiliate University of Utah in Salt Lake City. The remaining 114,000 square feet remain related to five new renewals deals across several of our Northern California submarkets. Approximately 97% or 382,000 square feet of fourth quarter leasing activity related to previously occupied space resulting in mark-to-market increase of rents in access of 20%.

Our life science portfolio has limited lease expirations over the next two years. These expirations in 2009 totaled 464,000 square feet and represent only 1.2% of HCP’s annualized revenue. We have already addressed the 165,000 square feet or 36% of the expirations to 2009 at mark-to-market increase in rents of 32%.

Looking further into 2010, we have 560,000 square feet of expirations, which represent only 1.5% of HCP’s annualized revenue. We have already addressed 132,000 square feet or 24% of 2010 expirations and mark-to-market increase in rents of 7%.

HCP continues to show pipeline of leasing prospects in excess of 400,000 square feet for existing space. Despite the size of the pipeline the deals we’ve seen recently have been shorter in term with protracted negotiations as decision makers remain reluctant to enter into new long-term commitments.

Switching to our redevelopment and development activities, work began in September on 500 and 600 Saginaw at Seaport Center in Redwood City California representing two properties totally 98,000 square feet. Redevelopment plans including $6 million connector between the two properties as well as other improvements to covert these buildings for life science market. The redevelopment continues to be scheduled for completion in fourth quarter of 2009.

During the fourth quarter, we began the redevelopment of three buildings and a project known as Modular Labs for in the Bay Area. Upon completion the project represents 97,000 square feet of space that will be converted from office industrial to first generation life science space. These buildings will provide HCP with additional space targeting small-to-medium life science users in South San Francisco market and is scheduled to be completed in the third quarter of 2010.

HCP currently has eight buildings totaling 514,000 square feet and are committed redevelopment pipeline. Two of these buildings representing nearly 50% of the developmental space are 100% lease to Amgen with cash rent has recently commenced, but the tenant improvements remained to be completed. We continue to monitor the underlying credit and liquidity profile of our tenant base.

As previously discussed the composition of our tenant base is strong with almost 90% of our rents coming from public companies or well established private entities. With that review of HCP’s portfolio, I would like to turn it back to James.

James Flaherty

Thanks Paul. As this was our quietist quarter in several years, I’ll make a couple of comments and open it up for questions. Before doing so however, I did want to offer congratulations to George Chapman and his team on the occasion of healthcare REIT’s addition to the S&P 500. This is a significant accomplishment and hopefully one more step towards healthcare real estate being designated as one of the major food groups instead of burdened with the label of specialty/other.

I begin with a perspective on our five property sectors; one, skilled nursing now represent 10% of our portfolio with 2% in the form of owned real estate and 8% representing our HCR Manor Care investment. The operating lease portfolio covers at 1.47 times after management fees. For 2009 we anticipate same property cash NOI of between 3% and 3.5%. As the governments current fiscal year comes to September 30, we have had very good visibility on the near terms reimbursement outlook and it remains favorable. I will have more to say on HCR Manor Care in a minute.

Two, hospitals account for 9% of our portfolio with our HCA cover note investment representing 2% of that amount. This sector was significantly reshaped during 2008 as the completed restructuring of our Tenet hospital portfolio resulted in transitioning our three California properties with the transfer of our Irvine campus to Hoag Hospital, the sale of Tarzana hospital and the pending sales of Los Gatos hospital.

Our guidance for 2009 assumes a negative same property NOI result of between 10% and 11%. This is misleading as this incorporate the impact of rent concessions at Irvine hospital in exchange for a $40 million investment by Hoag in our property and the execution of 15 year lease agreement, X the effect of the Hoag rent relate our hospital same property cash NOI performance is expected to be flat in 2009.

HCA is our largest exposure in the hospital space; one their tenancy in our MOB portfolio; two, our Medical City Dallas Campus, which they operate; and three our Mezzanine investment in HCA cover notes. Last week, HCA reported a good fourth quarter with positive volume growth and growing EBITDA. The result of strong cost controls and healthy pricing.

At year end HCA had $465 million in cash and $1.8 billion of availability under its line of credit, sufficient liquidity to address maturities to 2011. HCA elect to begin ticking their cover notes effective January 1, of this year resulting in an additional 75 basis points of consideration to the holder of the notes. The market price of these bonds has rallied nicely since year-end.

Three; life science represents 25% of HCPs portfolio, this portfolio was 91.1% occupied year-end. For 2009 we anticipate same property cash NOI between 12% and 12.5% reflecting the strong leasing success achieved since it was acquired in August of 2007. Our two lean exposures in the space Amgen and Genentech are not only performing exceptionally well, but also recently the subject of great interest on the part of Big Pharma.

Four, MOBs represents 19% of the company and our performing nicely despite the current economic climate. Occupancy remains study at 90.3% and we anticipate same property cash NOI growing between 2% and 3% in 2009. Aside from HCA, our MOB tenancy includes high quality, non-profit hospital systems such as Swedish Medical in Seattle, Norton in Louisville, Ascension in Florida and Memorial Herman in Houston.

Five, senior housing constitutes the remaining 37% of HCP’s portfolio. Paul has detailed the current headwinds for the sector, which have resulted in a 150 basis points of occupancy decline year-over-year. However, with industry occupancies between 88% and 90%, a lack of significant new supply and the steady growth in demand from the Aging Baby-Boomer, that intermediate to longer-term outlook for this sector is very attractive.

There is an inordinate amount of miss-information in the marketplace regarding the performance of the HCR Manor Care. If one was naive and made the assumption that there existed no investors with mysterious motives.

One might conclude that a lack of transparency has created this misinformation and that this lack of transparency is understandable, given the nature of HCR Manor Care with no outstanding publicly traded debt like for example HCA. The misinformation has helped to trade investing opportunities, such as trading in HCP’s credit. I will now provide you with accurate information.

One, HCR Manor Care’s overall performance in 2008 continued to be exceptional the best in the industry. In 2008, the company enjoyed a double-digit increase in EBITDA. Cash flow from operations was a couple of $100 million better than original projections. During 2008, $150 million in debt was repurchased to repay and the company ended 2008 with over $300 million of cash on its balance sheet.

Two, for 2009, the company’s operating metrics are continuing at or near record levels and significant growth in earnings for 2009 is expected assuming moderate reimbursement increases. Capital expenditures have continued at the same level, as when the company was public with 20 upgraded or expansion projects underway.

Three, our debt investment has a five year maturity, as HCR Manor Care continues to rapidly de-leverage and grow its earnings, the company’s net leverage of maturities will be very manageable, providing it with multiple refinancing alternatives. These would include various debt sources, tight financing, REIT financing or selling new equity.

In the interim, HCP takes great comfort in known that Carlyle and the management teams have more than $1.3 billion of invested equity below us. Let’s leave reality for a moment, travel to a land far, far away and assume that the equity of HCR Manor Care is worth zero. What would that mean for HCP shareholders?

HCP’s position in the capital stock provides that the Opco debt and equity are structurally subordinate to the payment of the master lease. Giving effect to our purchase that 90% of par HCP’s investment yield would represent a 14.5% unleveled current cash return for the premiere portfolio operated by the premiere management team in the industry.

However, returning to reality now. The probability of this scenario accruing is comparable to the possibility that Stanford will be hosting noted came in next Januaries is BCS championship game.

The 2008 success we hadn’t delivering our balance sheet and minimal near-term debt maturities positions us nicely to be opportunistic with our capital. An example of this was the early payoff of January 2009, $120 million debt maturity, in December at a discount of $2.4 million. Such as recent positive outlook of HCP’s credit metrics is further evidence of our success in this regard.

We move into 2009 with nearly 100% of our reposition portfolio classified in same property cash NOI calculations for the first time. In a sense 2009 is the coming out party of the multitude of investment decisions HCP made over the past several years. We have reset the portfolio with less than 25% of the company’s 2005 portfolio remaining today. We have reset the balance sheet to our best leverage metrics in three years by accepting $0.14 per share of dilution in 2009 versus 2008.

The impact of our 2008 asset dispositions and equity issuances and we have reset a base line earnings platform, comprise of a stable diversified portfolio of high-quality operator tenant relationships with limited lease expirations and minimal government reimbursement exposure. Our active asset management program represents additional earnings upside with negotiable capital outlays.

Adjusting for the impact of the 2009 rent concessions at our Irvine hospital, HCP shareholders are the fortunate beneficiaries of just under $1 billion of net operating income with same property cash NOI expected to growth between 3.5% and 4% in 2009. I am hard pressed to identify another real estate portfolio of scale whereas positive of 2009 outlook. Besides in the real estate currently dedicated to serving Big Mac’s.

With that, we would be delighted to take your questions. Chenille?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jay Habermann - Goldman Sachs.

Jay Habermann - Goldman Sachs

Could you start I guess with the, you indicated $0.14 of dilution for ‘09 from the de-leveraging in the equity issuance and I guess as you stand today, you talked last year maybe asset sales could have reached 750 and you hit 650, but just perhaps some thoughts on additional asset sales and even further de-leveraging. Do you see that as a possibility as you move into the year? Or is it really more about the increasing NOI and obviously looking at opportunities as the year progresses?

James Flaherty

With respect to anticipated asset dispositions in 2009, the key assumptions that Mark took you through at $45 million in total for 2009, that’s our pending sale of our Los Gatos Hospital, the last piece of the triumph of California properties that we moved away from the tenant, that has a related gain by the way of $35 million. That’s all we’ve got in the plan. We moved, stepping back, if you go back to ‘07, we obviously moved very aggressively in the first three quarters of that year and added significant strategic portfolios to our company, these included the [plow] investment and in Manor Care investment and Medical City, Dallas. As we talked in the past, by about the third quarter of ‘07, kind of a bell went off as far as we were concerned and we moved aggressively into a very active disposition mode.

We’re fortunate that we’ve got that completed, the one transaction it hasn’t closed, which we anticipate it closing in April of this year, as Los Gatos away from that, we wouldn’t anticipate much if any dispositions. We’ve done exactly what we wanted to achieve with our portfolio across the five sectors and more importantly within the five sectors. We love the partnerships we have with the operator tenants and we are quite content now to grow those operator tenant partnerships within the five sectors. Separately, and this isn’t the reason, but just anecdotally, we don’t precede this to be a very attractive market to be doing anymore dispositions in given the choppiness in the capital markets.

So, I think the base line, everybody ought to take from this is that with the exception of the Los Gatos Hospital, we’re really not anticipating any other dispositions. That said, we are between the equity issuances, the two equity deals we did in ‘08 and the dilution from those asset dispositions netted against the interest savings that’s about a $0.14 delta in ‘09 versus ‘08 and then further more if you go back and look at ‘08 and add up just the gain that we reflected on the successful tenant settlement as well as the early lease termination we had up in the East Bay in the third quarter and the gain, we just had on the piece of debt, we retired early that’s about $0.19 of what we would characterize as more one-time items that were all in the ‘08 FFO.

So, you take those two together and that drives on top the 3.5% to 4% same property cash NOI growth assumption for ‘09 that drives our guidance that we went out with this morning.

Jay Habermann - Goldman Sachs

And maybe just turning to senior living you mentioned obviously the pressure on occupancy. Can you just give us some, you mentioned obviously longer-term you continue to be positive. Any sort of concerns here, shorter-term and I guess with the transition the 11 facilities to Ameritas, could you see more of those types of transactions?

James Flaherty

The first question do we have concerns, I mean you bet we’re watching in this space like a hawk kind of in weekly if not daily, depending on the operator Mr. Gallagher is chuckling, discussions in terms of where they stand relative to their business plan, their operating model in some cases their capital structure. So, we continue to be concerned, we are watching it very carefully. Not withstanding that, I think if you go back and look at the first part of this decade, which was the last time this space had gotten itself into some hot water.

You had industry-wide occupancies in the low 70s, an avalanche of new supply that had to be absorbed, which really took the first half of the entire decade that we’re into absorb all that. If you compare just those, occupancy and supply demand situation to where we are now at the end of the decade, we’re certainly bucking up against some strong headwinds here, but we’re still kind of high 80s in terms of occupancy there is very, very little supply coming on and I would suggest it would be next to nothing in terms of new supply that’s able to be financed in the next couple of years. I think when we come out of this whenever that is two, three years out, this is going to be a just a wonderful business and we’re very excited about the intermediate, forget about long-term intermediate prospects of this space. I’m sorry your second question Jay was what?

Jay Habermann - Goldman Sachs

In terms of just obviously on the near-term and then we are focusing on our longer-term prospects, but I was going to switch actually in terms of pricing, because you mentioned fore sellers? And I’m just curios, what sort of opportunities you are seeing not willing to sell today, but maybe looking at opportunities with fore sellers?

Mark Wallace

Yes, you haven’t seen a lot yet and I really think that goes directly to the strength of the healthcare sector. I don’t if you saw yesterday’s journal, the front page of section C, they talked about the profit picture remaining ugly and they went through every sector and the only sector that was showing ‘09 estimates up from ‘08, was healthcare. I kind of put my head up every now and then and look at lot of different businesses and things like that. I got to tell you in terms of a portfolio of scale, plus or minus of $1 billion of cash flow, I’m sure I’m missing something, but the only one I know out there that’s got a fundamentally better ‘09 outlook would be McDonald’s.

So, we’re feeling very, very fortunate. I think I started the last call with a quote from SMPG Economist talking about the likely demand for our healthcare generally as a necessity, I think that’s driving absolutely the formulation of our ‘09 business plan as well as the continued agent of the Baby-Boomer. So, we wouldn’t and particularly if you take a look at the other spaces, the key drivers that are really walloping what almost across the board are projected NOI decreases in ‘09 versus ‘08. We would not trade our space for any other space in the world period full stop.

Jay Habermann - Goldman Sachs

Actually, just back to the senior living, the second part of it was really more on the Ameritas, the further transitioning, if anything were to happen shorter term, are those opportunities still available with other operators either private or public?

James Flaherty

Yes, well, you got, there is just two sides to the equation, right. You got to have the supply of properties that might have some upside embedded in them, because it’s quite possible as we’ve seen in the Aureus transfer to Ameritas that there are efficiencies to be gained by transitioning some of those portfolios. So, you need that side of the equation and then you need the other side of the equation. You need to have a collection, small, no greater than one less than five of key operating partners that you could quickly transition these things with these communities too and have the confidence that they’re going to hit the ground running and there is not going to be any blips in terms of the transition, because we’re talking about seniors here and they are near and dear to everyone’s heart including ours.

So, I take both sides of that equation. The first side of that equation, the potential supply, as we’ve talked on our previous calls, the non-Mansion component of our Sunrise portfolio might very well set itself up as a portfolio of some communities that would be good candidates to transition and then if you take a look at our existing operator partnerships, for we’ve got very, very significant critical mass with folks like Ameritas and Horizon Bay and Atria and Aegis and Brookdale, we believe we could effect those additional transitions, if that opportunity presents itself very, very quickly and we feel quite frankly emboldened with respect to the opportunity given the enormous success that we have had with the one portfolio that we’ve transitioned to Ameritas.

Operator

Your next question comes from line of Michael Bilerman - Citigroup

David Toti - Citigroup

It’s David Toti on the line. Jay just a question, can you remind us how much is ahead of the Manor Care investment in terms of the capital structure?

James Flaherty

Where you’ve got an Opco/Propco set up, so we own the first loss piece in Propco, the total capital stack at face value for a Propco was $4.6 billion at the time of the buy-out. As I mentioned, we acquired our position at a discount of 10%, we bought our first loss position at $0.90 on the dollar and then you’ve got Opco, which has been the beneficiary date of the debt to the early debt retirements given the strong cash flow of that platform.

David Toti - Citigroup

Okay and have you guys, I know it’s a little bit earlier, but have you had any discussions about refinancing scenarios or extensions?

Mark Wallace

I think I’ve just spoken directly to that. It’s a five-year piece of maturity, we’re coming up upon one and a half years into it, which means we have three and a half years, a little bit over three and a half years remaining, at the rapid rate in which the company’s delevering, they will have a variety of refinancing alternatives available to them.

David Toti - Citigroup

Okay and then, just moving over to the recent transition of assets to Ameritas, are there any near-term plans for additional transfers?

Mark Wallace

Not beyond the answer I just gave you for the previous question.

David Toti - Citigroup

Okay and then lastly, relative to life sciences, can you give us an approximate yield expectation for some of that the redevelopment spending?

Paul Gallagher

On incremental dollars, we’re probably going to be in the neighborhood of about 12% or so.

Operator

Your next question comes from the line of Jerry Doctrow - Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Just a couple of things and maybe Jay start, one of the things I didn’t hear when Mark went through the assumptions on the guidance was just, what you are assuming about sort of debt structure and I guess I want to get a little clarity on that, but also just get your thoughts about how you see yourself kind of recapitalizing, maybe over the intermediate term, does the stock get rolled onto the line? How do you kind of repay or reset some of this maturing debt over the next couple of years?

James Flaherty

I think the quick take away is, we’ve recapitalized the company as I said. I think in my comments I said we’ve reset the balance sheet to move those closer.

Jerry Doctrow - Stifel Nicolaus

Right but you got like $600 billion or $600 million rather roughly next year for this year or $500 million next year so --

James Flaherty

That included the piece of $120 million of debt that we prepaid in December. So, we’re down to just $480 million in debt maturities in ‘09 and about $520 million ‘10 those are numbers I think --

Mark Wallace

Okay so I think, in this case if we turnout the lights and go to Mexico, the line is very substantial and that’s certainly there that will not be our intent. If you go back and look at the $8.5 billion of proceeds, we’ve raised in the last 24 months. You’ll see that much like the composition of our real state portfolio, which is diversified not just to across by property types, but across five investment products.

We’ve got multiple sources of capital within last two years to generate that $8.5 billion, we’ve gone to the equity markets, we’ve used down REITs, we’ve used unsecured debt, we’ve used secured debt, we’ve used joint venture transfers, and we’ve used asset dispositions. So, one of the things that we’re very cognizant of and one of the things that the rating agencies are very comforted by, is we always have multiple buckets, we never want to be in a situation where we just got one avenue to pursue in terms of an execution.

By looking where we sit today, several of those buckets remain open. They would include equity issuance, down REITs, secured debt and the joint venture transfers. I’ve already commented in the answer to an earlier question, I would not be expecting asset dispositions to be a primary driver next to nothing in terms of driver there and quite frankly, I think the unsecured debt markets for REITs are badly broken at this point.

So, we certainly have in terms of how we’re looking in our buckets, we certainly have nothing in that bucket. So, I think here we’re going to continue to look at attractive secured debt opportunities, I think near-term. We’ve in the last two years we’ve raised $1.5 billion, via Fannie those would relate to senior housing assets. The preponderance of our Sunrise portfolio is now largely encumbered. In fact, the early prepayment in December of the $120 million was secured debt on a Sunrise portfolio.

So, that allows the possibility for a tremendous amount of additional secured debt there, were we to go that route. If you just take a look at, where the capital markets in terms of unsecured debt new issuance in the very young 2009 at this point, one month in. You’ll see it completely dominated Jerry with issuance by Big Pharma and Big Biotech. Novartis did $5 billion at the end of last week Amgen’s come to the mark with $1 billion, obviously everything is dwarfed by the Pfizer/Wyeth deal.

So, there is tremendous demand on the part of fixed income investors for Big Pharma and Big Cap Biotech. Fortunately, with Life Science now representing 25% of the overall company with a majority of that with names like Genentech, Amgen, Pfizer to cater pharmaceutical and all of that real estate totally unencumbered that becomes very interesting opportunity for us as well.

So, near-term I think secured debt is interesting, the joint venture transfers or something. I personally spent inordinant amount of my time in the last couple of months on, probably used that more to play offense, there is a fair amount of availability out there with obviously much higher return expectations than the profile of the existing joint venture partners we have that’s okay though, because we’ve got much higher return expectations in the current market as well.

So, there will be more in a short-term, if you think out intermediate term kind of 2012-2013 will be the beneficiaries of our two mezzanine loan investments maturing, which will also free up a significant in excess of $1 billion of capital to match fund maturing and secured debt maturities out in 2013-2014. So again, the composition of the bucket is different, but we are in the very fortunate position of having multiple buckets to pursue.

Jerry Doctrow - Stifel Nicolaus

I guess I was in so much worry that you weren’t going to get it done in one way or another, but just in terms of your guidance, do you assume any change sort of in debt costs compared what you got right now?

Mark Wallace

I think the base line on the ‘09 guidance would be that we’ve been very conservative just assume that we take anything that is occurring this year net of the asset disposition we talked about down our line of credit.

Jerry Doctrow - Stifel Nicolaus

Okay and than just one last thing I have is, I was wondering if I can get some sort of CapEx T.I guidance going out maybe ‘09 and even into 2010. If you got it, it jumped to $15 million this quarter, it was running sort of 12, I think in the third quarter, this may be a Mark question and just trying to get a sense because it’s an issue for us in terms of that, where you think that CapEx T.I. spending might be?

Mark Wallace

Our forecast for 2009, that number is $38 million.

Jerry Doctrow - Stifel Nicolaus

Okay and just varies I guess somewhat with the delivery of new space in that stuff?

Mark Wallace

Yes that’s correct, I think in ‘09 I think you’ll see just in terms of the quarterly regulars get started in the first quarter is about $10 million, it would probably go up slightly in the second quarter and then comeback down to about $5 million in fourth quarter.

Jerry Doctrow - Stifel Nicolaus

That is 38, is that all Life Science or some of that above?

Mark Wallace

It’s a little bit above.

Jerry Doctrow - Stifel Nicolaus

Okay and than just in terms of , I mean in the absence of maybe else dramatic, that’s sort of a run rate going forward in terms of delivers in 2010 whatever might move it one way or the other?

Mark Wallace

I would assume the debt number in 2010 will ramp down further in the absence of anything else.

Operator

Your next question comes from line of Mark Biffert - Oppenheimer.

Mark Biffert – Oppenheimer

Related to your Life Science portfolio Jay, can you talk a little bit about what you’re seeing? I mean you’ve given guidance of roughly 12% to 12.5% NOI growth, is that based on just what you currently have leased? Or how much incremental leasing do you have to do to achieve that?

James Flaherty

Zero.

Mark Biffert – Oppenheimer

Okay and what are you seeing in terms of additional appetite for more space in South San Francisco and San Diego?

Mark Wallace

Well, I think Paul kind of made some comments about the fact that decision-making process is being elongated and there is interest in kind of shorter-term maturities. So, I think that’s perfectly understandable as we visit with our colleagues on the office side of REIT land we’re seeing, similar sorts of things. It’ll be interesting to see what plays out on Roche-Genentech. Roche has substantial research activities on the East Coast in Nutley, New Jersey and they’ve talked about affecting a fair amount of synergies where that deal to go through and one of the things being [inaudible] will be a consolidation of their research activities across the states up in South San Francisco.

So, we’re watching that, so we like our position very much and we think it’s a great space particularly the way we’ve elected to play it with the bigger cap companies and the companies that have commercially viable drugs that are actually making money and we’re watching the situation very carefully.

Mark Biffert – Oppenheimer

Okay and then jumping over the senior housing portfolio. Paul, you mentioned that you had a negative impact from some LIBOR based rents with I think the Sunrise. If this should happened that Sunrise assets gets transferred to another tenant, I mean do you have any other tenants that use those type of leases or is that simply with Sunrise?

Paul Gallagher

That’s simply with Sunrise.

James Flaherty

You should assume that we’re those among the communities transferred. You would no longer see LIBOR based rents with HCP going forward. Those are ones that we inherited from the C&L transaction.

Mark Biffert – Oppenheimer

Okay and then lastly, the impact of the concessions you gave on the whole hospital. I’m just trying to quantify that in terms of FFO for a good run rate as we look out beyond ‘09, can you quantify them, Mark?

Mark Wallace

Say your question one more time.

Mark Biffert – Oppenheimer

The concessions that you gave to Hogue for the first year, were you expecting a 10% to 11% decline in NOI in the hospital area. Can you quantify that in terms of the impact on FFO for ‘09?

Mark Wallace

Great question very appropriate question, let us close the lease which closes in a week and I suspect we’ll be able to have the same data that we provided when we did the lease on the portfolio that was transferred to Ameritas you’ll have that at the next quarter call.

Operator

Your next question comes from the line of Michael Mueller – J.P. Morgan.

Michael Mueller – J.P. Morgan

Most questions have been answered, but a couple of housekeeping items here, Mark you talked about CapEx assumptions, can you clarify FAS 141 straight-line rent run rates just how that should shape up in ‘09?

Mark Wallace

Our forecast includes straight-line rent; let me just run down a few of the items. We’ve got straight-line rent forecasted to be $50 million, $51 million. We have stock based compensation to be $15 million, debt issuance cost amortization of $9 million. We’ve got interest accretion of $27 million and then you’ve got revenues that were deferring because tenant improvements, cash that we received, but revenues being deferring because the tenant improvements aren’t yet done, there is $16 million of that forecast and then the [FAB 104] I think for the full year really won’t have any impact, it varies a little bit from $2 million negative in the first quarter $2 million positive in the second, but not much impact for the full year.

Michael Mueller – J.P. Morgan

Okay then, I just want to clarify there are no one-time items known either on revenue side or the expense side of guidance, correct that’s more of a run rate?

Mark Wallace

Not in the guidance, yes.

Michael Mueller – J.P. Morgan

Okay and then with respect [slough] the same-store increase, does that include or exclude the development properties that are come online?

Mark Wallace

Yes, it excludes.

Operator

Your next question comes from the line of [Bryan Santino] - Barclays Capital.

Bryan Santino - Barclays Capital

I think Paul, you gave some coverage ratios for the different operators, managers, and senior a little earlier and I just want to trend down on the Sunrise, you said it was a one-time coverage, was that?

Paul Gallagher

That would be snapshot for fourth quarter and for the trailing 12 months.

Bryan Santino - Barclays Capital

Is that for like the various operators or is that on that on a facility-by-facility basis?

Paul Gallagher

That would be for each of those three operators that I talked about.

Bryan Santino - Barclays Capital

I guess is there like potential for some of them to be not covering the rent expense there, just an average?

James Flaherty

Sure, there is potential for anything.

Bryan Santino - Barclays Capital

Okay and then you mentioned earlier that the occupancy for them was around 89.6 for the Sunrise?

Mark Wallace

89.6 I guess.

Bryan Santino - Barclays Capital

Can you give a little bit of indication across the spectrum, like Sunrise Mansions, Brighton Gardens, Eden Gardens, Eden Care, Maple Ridge what the occupancies are?

Mark Wallace

We don’t break that out.

Bryan Santino - Barclays Capital

Okay, but do you have any idea? Is it generally like a little bit better in the higher Sunrise Mansions?

Mark Wallace

Actually, it’s going to be more depended on locations than product type.

Operator

Your next question comes from line of Richard Anderson - BMO Capital.

Richard Anderson - BMO Capital

Regarding the same-store growth for Life Science, to my understanding a lot of that is driven by converting conventional office to Life Science use and you take a nice run from that. When does that start to burnout? Is that a 2010 type of event?

Mark Wallace

Yes, I don’t think any of that is a function of that Rich.

Richard Anderson - BMO Capital

While the 32% mark-to-market of rents that you did on the leasing so far. I think that was a number. That’s all converting conventional offers, isn’t it?

Mark Wallace

None of that’s converting, Rich.

Richard Anderson - BMO Capital

Is there any risk that Roche-Genentech combination could do the reverse that is they consolidate in Nutley, New Jersey?

Mark Wallace

Sure.

Richard Anderson - BMO Capital

And, but your sense is that it would not; you sound like you have a lot conferences that it is going to go to the other direction?

Mark Wallace

My sense is, they have majority control of Genentech. Now they are for a whole bunch of reasons some owing to their own product pipeline, some owing to the Genentech product pipeline, some owing to the currency issue, some looking to affect very meanful synergies, which they cannot do as a 54% owner, but they could do as 100% owner. They will move forward and close the transaction at some point here in the first half of 2009.

Once that happens, there will be part of work on expecting the synergies. The company that they have majority of control over today with them. An extraordinary return on their investment is headquartered in South San Francisco and more importantly, the leading scientists that are responsible for that unique product pipeline reside in South San Francisco.

Richard Anderson - BMO Capital

Okay, and regarding skilled nursing, I guess the stable nature of that product type is winning some hearts these days and particularly when you consider the relatively positive view of our reimbursement rates on a go-forward basis, is there any interest in your part to sort of revisit that as maybe a more substantial piece of your portfolio on a go-forward basis?

Mark Wallace

I think its 9% or 10% of our company performing great. The strategic repositioning we did in the last couple of years where we migrated out of the oldest 35 plus year old portfolios and migrated out of the real estate that was operated by just one or two operators where we had 40 or 50 different operators that were operating just one or two facilities and that’s gone very well, we have talked in the past about the analogy from going from a supermarket in terms of SKU offerings to a COSCO offering. So we are sitting here with Manor Care, Trilogy, Kindred and covenant care.

All great people, great operators doing a great job with real estate we own and if there presents an opportunity to add someone of that ilk and high quality and integrity and it came with it, quality real estate we would be all over that, but that situation hasn’t presented itself yet.

Richard Anderson - BMO Capital

And lastly are you getting into the fast food restaurant business as a fixed division?

Mark Wallace

No, I just don’t see it I cant buy anything else that’s 3.5% or projecting to be up 3.5% more than 3.5% to 4% for ’09 except McDonalds which is tracking along there at 5% and 5.5% so.

Richard Anderson - BMO Capital

It would be a good feeder maybe to their medical office, people get sick and they go to doctor.

Mark Wallace

I am not going to go there Rich.

Operator

Your next question comes from the line of Rob Mains - Morgan, Keegan.

Rob Mains - Morgan, Keegan

You can all see, because I guess on bankruptcy attorney offices too. The question on the hospitals, you have said that EX the Irvine repositioning is still going to be flat cash NOI, why is it flat as opposed to growth?

James Flaherty

We have one hospital in Louisiana where we have taken action against the operator and are in the process of transitioning that property for sale that’s had an impact on the overall portfolio and our tenant add rents still remain relatively flat on the remainder of the assets that we have in tenant.

Rob Mains - Morgan, Keegan

Okay and then can you remind me the remaining Sunrise that you’ve got is represented by how many master leases?

James Flaherty

Well, its pools, we got 111, excuse me, we had 101, 11 went to Ameritas. So, now we are down to 90. Property-wise of the 90, 22 are mansions, remaining whatever that is 68, a mix of Brighten Gardens, Eden Cares and Maple Ridges and largely for financing purposes at the time, they are all constructed in a variety of different pools and the remaining 90 pools find themselves into a total of I think 11 separate pools, 12 separate pools, right.

Rob Mains - Morgan, Keegan

Okay and those pools are represented by how many operators? Not Sunrise, I mean the actual, the guy who writes you the check?

James Flaherty

You mean tenants, three.

Rob Mains - Morgan, Keegan

Question on kind of the big picture, when you’re talking about the NOI growth, that you’re describing for 2009 and you have the guidance for the FFO is down. Is it fair to say, you’re going to get same-store growth on a smaller number of stores and also more shares out of that, basically, the explanation?

James Flaherty

Well again I think it’s 30,000 feet, which is probably where these guys want me to stay which is totally understandable, there is two big drivers, one you had as I said about $0.19 of one-time stuff in ‘08. The big numbers there were the $0.11 on the tenant settlement and the $0.07 on the lease termination with $0.01 on the early debt retirement, so that’s $0.19, one-time stuff in ‘08.

If you go to ’09, you look at the dilution with the disposition of the properties and the two equity issuances offset against the interest savings and that’s a $0.14 dilutive impact in ‘09 versus ‘08. So that’s really, if its, we can get as granular as you want, but that’s really what it is in our view what it bought us was a balance sheet that’s very strong right now, which we think is the right thing to do so.

Rob Mains - Morgan, Keegan

Okay, now that’s what I was looking for. Thanks and appreciate detailed answers to some of the previous questions.

Operator

Your next question comes from the line of Omotayo Okusanya - UBS.

Omotayo Okusanya - UBS

Hi, guys, good morning, Rob actually just asked the exact question that was on my mind so thank you very much.

Operator

Your next question comes from, Chris Haley of Wachovia.

Chris Haley - Wachovia

To the capital expenditures, $38 million in 2009 CapEx, is that comparable to the $16 million on the cash flow statement for calendar ‘08?

Mark Wallace

Directionally, it’s coming way down Chris because we have the Amgen and we delivered the Amgen and Genentech campuses up in the Bay Area and that they we’re all finished off in ‘09, so it’s dropping off very quickly we can give you the actual delta though I think in terms of ‘09 Chris.

James Flaherty

The answer to the question was yes, it would be comparable to that line item?

Chris Haley - Wachovia

In terms of recurring or releasing expenditures on the second generation costs, was $38 million that you are providing in 2009, does or does not include first generation or newly led space expenditures.

James Flaherty

It’s not.

Chris Haley - Wachovia

Okay maybe I minute or two on the Hogue transaction I recognized your earlier comment to the lease is not yet finalized, but I wanted to get a perspective on the dollar amount on what you are carrying the asset. The incremental dollars going in, the short term impact as you outlined in your call and then what the return, the aggregate return on investment looks like on our asset, a year or two out within a range, kind of give us the senses to, we recognize the short term impact to 2009, but what is the potential impact in ‘10 and ‘11?.

James Flaherty

We’re going to get this the plan to have this executed in a short period of time and then we will be able to take you through the math just like we took you through the math on the transfer of Aureus portfolio to Ameritas. Sufficed to say, we want to have as our operator tenant partnerships, the premier players, where ever possible and for those of you who haven’t spent much that time in Orange County, in a whole would be versus the Manhattan crowd will be a kin to kind of a Sloan Kettering sort of names, so this is a huge get for us and the fact that they are going to invest $40 million in our property is I think very significant and will help them reposition the quality mix and the services provided at this, it will be very good opportunity for those you to come out to visit us and take you down there and I think you will walk the campus and you see what’s it going to do and you see strategically what this means for this hospital system it will connect the dots for you. But we can get very granular for you Chris on the next call.

Chris Haley - Wachovia

Thank you and I appreciate that in terms of the timing however, this is one in addition to the shares that we are shooting in the later parts of 2008. This is obviously a driver to a year-over-year decline in FFO per share of approximately 5% to 6%. So, if you were to adjust for this transaction alone, what do you think your numbers would look like, your FFO expectations would look like in 2009.

Mark Wallace

I don’t think this is much of a driver I wouldn’t say the rent concession on Hogue is a driver at all for’09. Again I think the two big drivers are we had $0.19 worth of kind of one-time events that occurred in ‘08 and detailed those for you and if you look at the dilutive aspect of the steps that we took to de-lever the balance sheet from the very active ‘07 activity we had which included property dispositions in ‘08 and two equity issuances, that was about $0.14 so that you take those two adjustments and then you tick in the same property cash NOI growth that are we talking about and you are right there..

Operator

Your next question comes from the line of Rosemary Pugh - Green Street Advisors

Rosemary Pugh – Green Street Advisors

Can you give us any insight into what you see as outcome for Sunrise in the coming quarter?

James Flaherty

I don’t know, sends over your crystal ball and we will dial it in together.

Rosemary Pugh – Green Street Advisors

Are you seeing any at the property level, are you seeing employee turnover under spending CapEx or other issues of concern?

Mark Wallace

No, I mean certainly not under spending CapEx, because those are decisions that we control and monitor quite frankly. Look I would say the following, you got a new team in there that’s trying to dig themselves out of a whole and Mark and Rick are really great guys and they are dealing a whole host of problems, they are taking, slowly but steadily they are taking a lot of those problems off the table and we have a lot of times for those guys these days and it’s possible for us to be a part of the solution that in a situation that works for them and works for us so, that would be great, that’s not news, I have communicated that on prior calls. I think we are they and us are all anticipating the day that they can get themselves out of what I call “fire drilled dual mode” and into a real good “operating rhythm mode”. I think they’re much closer to being in that situation than they have at any time in the 2.5 plus years that we’ve actually owned the portfolio, but they are not quite there yet, so that will be good.

Rosemary Pugh – Green Street Advisors

Great and then on the MOB portfolio, it looks the TI and leasing cost per square foot have increased materially over the quarters of the year and I was wondering, if this a trend you expect to continue or is that cost to maintain occupancy in this economic environment?

Mark Wallace

No, it’s really functioned as to whether it is vacant or shelf space that is being built out or whether it is renewing second-generation TI’s that’s really the driver.

Operator

Your next question comes from line of Karen Ford - Keybanc Capital Markets.

Karen Ford – Keybanc Capital Markets

HI, just a couple of quick questions. You mentioned Fannie Mae for one of the options in your secured financing plan this year. Have you seen any change in agency appetite for senior housing lending?

Mark Wallace

Yes, I didn’t mean to focus on TI as far as in Fannie and Freddie for both, but that would be just senior housing to be cleared to the rest of the folks on the group. What we have seen Karen, is some modification of the underwriting criteria, which is totally understandable, so in other words, if the going in coverage ratio, they got a number of criteria to look at, but they have definitely raised the coverage ratio, in light of what’s going on.

I was on a panel at Osher two weeks ago down in Orange County with one of the most senior people from Fannie Mae on the panel; and he was asked that very question and he didn’t skip a beat and said that, he obviously wasn’t speaking for Freddie, but Freddie was in the audience and they affirmed the comment that both the Freddie and Fannie remained absolutely committed to senior housing space. In terms of spaces, as rent by where there have been losses or defaults or what have you, this is the poster trial in terms of best performance to senior housing space.

So that gives them all great, great comfort they get the business, they are in the business, they understand the aging Baby-Boomer. I think not unlike skilled nursing, I think they and their constituents in Washington DC are very mindful of the political clout that seniors in general and AARP in particular have.

So I think, our sense is that’s a viable financing business for this sector going forward. I think like anything else the costs are going up whether it’s in terms of proceeds you could actually realize, because of the change in the underwriting criteria or may be widening out the spreads both of which we’ve seen in the last couple of months, but that’s definitely, I think in our view going to remain a viable financing platform for senior housing.

Karen Ford – Keybanc Capital Markets

Thank you that’s helpful. One more quick one just on your recent dividend increase was that decision made as a result of you guys bumping up against your tax limit income level or if not, just talk about what the board’s decision making process wasn’t electing to do that?

Paul Gallagher

Sure I can assure you that bumping up against our taxable the ceiling had absolutely zero to do with the decision. I think the board looked at a handful of things. They included the fact the leverage metrics of HCP whether it’s standard one’s leverage ratio, secured ratio what have you, but increasingly important to us as well as the rating agencies are rapidly increasing fixed charge coverage ratio, we’re the best in several years in terms of where we closed out 08 in the projection for ‘09.

I think they also looked at the limited near-term debt maturities they looked at a very large portfolio $1 billion plus or minus of NOI with a projected same property cash NOI projection of between 3.5% to 4% adjusted for the one item and they looked at the quality and the stability of the operators and the tenants Life Science, they have got we’ve kind gone through the Pfizer’s, the Amgen’s, the Genentech’s and Tacada’s you’ve got HCA in hospital land, Manor Care and some of the other names I just talked about and skilled and they looked at, our FFO and FAD payout ratios.

So, those would be the five or six items that the board zeroed in on in terms of determining to our A, pay in all cash dividend and B increase the cash dividend from the prior year’s quarter.

Operator

Your next question comes from the line of Dustin Pizzo - Banc of America.

Dustin Pizzo – Banc of America

Jay just given how kind of broken the unsecured debt markets or as you put it, can you talk a bit about your potential appetite for buying back any of your unsecured debt that’s coming to over the next few years?

James Flaherty

Good question, right now we are certainly a handful of situations and kind of greater than one less than five. As we look at those situations, among the different things we kind of contrast and compare the return opportunities on would in fact be the potential purchases some of our unsecured debt. At the present time, the couple of things that we are trying to advance would have a superior result than repurchasing some of that unsecured debt notwithstanding the yields implied by some of those trading levels, but depending on how successful we are in moving forward, one or two of these other things that is definitely in the mix. So that’s I think how I would respond to that question, Dustin.

Dustin Pizzo – Banc of America

Okay, and then I guess on the opportunities that you are looking at and as you’re thinking about things today, are that the yield and return hurdles that you guys are that they are working through there, I mean are they still kind of in that low-to-mid teen range or have those moved at all?

James Flaherty

Yes, they have moved up from there.

Dustin Pizzo – Banc of America

They have moved up, so we are talking 20’s or are we talking mid teens here?

James Flaherty

Situations we are looking at right now start with a two.

Dustin Pizzo – Banc of America

Okay, and then just lastly I know on those two development assets that Amgen is on the hook for the leases on have they had any luck in trying to sublease that space here?

James Flaherty

Yes, we got some news there Mr. Gallagher.

Paul Gallagher

Back in the third quarter, we talked about three of the Amgen assets, out-looking for sublease and at this point in time, they’ve taken one of those out of the sublease pool.

Dustin Pizzo – Banc of America

Right, so the other two are still in there?

Paul Gallagher

Yes,

Operator

The final question comes from the line Michael Mueller - JP Morgan

Michael Mueller – JP Morgan

Hi, Mark, I know a lot of the Manor Care loan is hedged, what’s your assumption for LIBOR and I guess how it translates into the interest in other income line for ‘09.

Mark Wallace

It’s about the LIBOR assumption we used for the plan are the forecast here, it was about 2%.

Operator

That concludes the Q&A session. I would now like to turn the call over to Mr. Jay Flaherty, Chairman and CEO.

James Flaherty

Chenille thanks for your good work. Nice to talk to you everybody, we’ll see you soon. Thanks.

Operator

Ladies and gentlemen that concludes the presentation. Thank you for your participation you may now disconnect. Have a great day.

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Source: HCP Inc. Q4 2008 Earnings Call Transcript
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