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HCP Inc. (NYSE:HCP)

Q1 2009 Earnings Call

April 28, 2009 12:00 pm ET

Executives

Ed Henning – Executive Vice President and General Counsel

Jay Flaherty – Chairman and Chief Executive Officer

Paul Gallagher – Chief Investment Officer

Analysts

Jay Habermann – Goldman Sachs

Richard Anderson – BMO Capital Markets

Rob Mains – Morgan, Keegan & Company

Jerry Doctrow – Stifel Nicolaus & Company

Stephen Swett – Keefe, Bruyette & Woods

Omotayo Okusanya – UBS

Jim Sullivan – Green Street Advisors

Mark Biffert – Oppenheimer

David Toti – Citigroup

Bryan Santino – Barclays Capital

Stephen Mead – Anchor Capital Advisors

[Jacob Schamswasser] – Raymond Capital

Sarah King – JP Morgan

Operator

Welcome to the first quarter 2009 HCP earnings conference call. My name is [Chanel] and I will be your coordinator for today. (Operator Instructions). Now I would like to turn the presentation over to your host for today's conference call Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may go ahead, sir.

Ed Henning

Thank you. 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 companies good faith believe 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, Jay Flaherty.

Jay Flaherty

Thanks, Ed. Joining me on our call is Executive Vice President and Chief Investment Officer Paul Gallagher. To begin though, I want to say that at last Thursday's HCP Board of Director's meeting we elected Thomas M. Herzog, Executive Vice President, Chief Financial Officer. We are extremely fortunate to have someone with Tom's skill set, experience and leadership qualities join the executive ranks at HCP. We welcome Tom and look forward to having you visit with him at NAREIT in June.

Overall our first quarter was relatively uneventful. HCP's portfolio had a solid performance in the first quarter producing a positive 3.0% same property performance result which we will review in more detail. For the first quarter of 2009 we delivered FFO of $0.50 per diluted share. During the quarter we funded $25 million of development and tenant and capital improvements primarily in our life science and medical office segments.

Also during the quarter we purchased a minority interest in a senior housing joint venture for cash consideration of $9 million. The estimated year one cap rate will be 10% on the investment. We also sold seven assets during the quarter, primarily from our medical office segment for net proceeds of $6 million and recorded a net gain on sale of $1.4 million.

We closed out the first quarter with our credit metrics in good shape. Our overall leverage ratio stands at 48%, our secured debt ratio at 15%, and our unsecured leverage ratio at 52%. We are comfortably within all financial covenants of our credit agreements.

For the remainder of 2009 our scheduled debt maturities are $438 million, including the remaining $320 million outstanding on our bridge term loan. For 2010, our debt maturities and amortization total $505 million and are comprised of $206 million of senior unsecured notes and $299 million related to mortgage debt.

Floating rate debt represents 15% of our total debt and is essentially matched on our balance sheet with our floating rate HCR ManorCare investment. At the close of business yesterday we had $120 million drawn on our $1.5 billion revolver net of unrestricted cash. Our revolver matures on August 1, 2011.

Turning to guidance we continue to expect FFO pre-impairments of between $2.15 and $2.21 per diluted share, consistent with our previous guidance. The key assumptions used in developing our guidance are also consistent with those communicated in our year-end call, including, expected full year same property adjusted NOI growth of between 2.5% and 3%, and the second quarter 2009 sale of our Los Gatos Hospital.

This $45 million sale closed on April 10th, two weeks ago, and we expect to book a gain of $31 million in the second quarter. Our 2009 guidance contemplates no additional acquisitions of real estate or debt investments and no contributions of assets into joint ventures, and excludes future impairments or similar charges if any.

Let me now turn the call over to Paul to review our portfolio.

Paul Gallagher

Thank you, Jay. Before going into the details of each sector I note that first quarter same property cash NOI which now includes 98% of our operating lease portfolio, increased by 3%. This is at the upper end of our 2009 guidance of 2.5% to 3%. Now let me turn to the individual sectors. Senior housing, occupancy for our same store senior housing portfolio is 88.3% representing a 70 basis point decline quarter-over-quarter and a 200 basis point decline year-over-year.

Despite the continued pressure on occupancies, our operators continued to grow revenues through ancillary service programs as well as achieve positive results from cost reduction efforts. As a result, cash flow coverage continues to be stable year-over-year at 1.1 three times. Our senior housing year over year same store cash NOI declined by 5.8%.

Breaking it down, senior housing excluding Sunrise increased 2.3% by contractual rent escalators offset by initial rents associated with the Aureus transaction. Sunrise experienced a 21.6 decline due primarily to non-recurring insurance credits received in 2008 and a reduction in LIBOR-based rents. Property performance has been holding steady as Sunrise has implemented expense controls resulting in a significant reduction in expense growth. We have no near term lease exploration exposure.

Hospitals, year-over-year same property cash flow coverage excluding our well performing HCA Hospital at Medical City Dallas was 2.64 times. Year-over-year same property cash NOI declined 10.9% primarily driven by short-term rent relief at our Irvine hospital as well repositioning two rehab hospitals where the new tenants are in place with rents commencing in the second quarter.

The new lease for our Irvine hospital with Hoag is for a term of 15 years with escalators of 2% to 4%. The first year rent is 2% higher than previous – than tenant's previous rent. The transaction was structured with rent abatement equal to no rent for the first six months and 50% rent for the next nine months while Hoag invests up to $40 million to reposition the facility.

Subsequent to quarter end we sold our Los Gatos Hospital formerly operated by Tenet to El Camino Hospital for $45 million, realizing a gain of approximately $31 million in the second quarter of 2009. Our hospital portfolio has no near-term lease exposure.

Skilled nursing, our skilled nursing portfolio continues to perform well. Year-over-year cash NOI in our same store portfolio increased 3% driven by contractual rent increases with cash flow coverage remaining stable at 1.51 times. In addition, all 2009 lease expirations in our skilled nursing portfolio have been extended with the next lease expiration in 2013.

With regard to our HCR ManorCare investment the company reported strong fourth quarter results lifting trailing 12 month debt service coverage to 2.12 times. In addition, the company has indicated that first quarter operating cash flow is up 10% over the same period prior year, driven by higher acuity and positive rate growth.

Medical office buildings, for the first quarter, same property adjusted NOI was up 5.7% over the first quarter 2008. This growth was driven by increased cost recoveries and contractual rent increases and a one-time revenue adjustment of $1.9 million of certain properties covered by credit support agreements. In addition, our expense control initiatives resulted in a reduction of costs when compared to the prior-year quarter, which excludes utilities.

As we previously reported, a 33% utility rate reduction at a portfolio of our Texas MOBs became effective late in the first quarter, and the full effect of this will not be realized until the second quarter. MOB occupancy for the first quarter was 90.5%, up from 90.3 at the end of the fourth quarter. The increase was primarily driven by 20,000 square feet of move-ins at our recently completed Colorado Springs property.

During the first quarter, 161 executed leases totaling 531,000 square feet took occupancy of which 369,000 square feet related to previously occupied space and resulted in a retention rate of 79%. This is up from 74% for 2008. These renewals occurred at 1.2% higher base rents and included a sizable renewal on a lease that was above market rent. Absent this renewal, our mark-to-market increase in rents was 3.3%. The remaining 162,000 square feet related to the lease-up of previously vacant space.

As of the end of the quarter, we had 1.7 million square feet of scheduled expirations remaining for the balance of 2009, including 275,000 square feet of month-to-month leases. Our pipeline has increased from the fourth quarter with 325,000 square feet of executed leases that have yet to commence and 575,000 square feet in active negotiations.

During the quarter, we completed the sale of a 40,000 square foot medical office building for a net sales price of $4.3 million and recognized a gain on sale of $1.3 million. We also completed the sale of four shell buildings for approximately 400,000 square feet. The buildings are located in Louisiana and had been destroyed by Hurricane Katrina during the third quarter of 2005. HCP had already realized $19.5 million in insurance proceeds from these buildings.

Life science, the life science first quarter same store cash NOI was up 22.5%, principally driven by increased occupancy and mark-to-market rent increases along with favorable one-time items. Occupancy for the entire life science portfolio was 91.4 at the end of the first quarter, up slightly from 91.1 at year-end.

We were able to address 100% of the first quarter space rollover of 193,000 square feet without any downtime by retaining 80% of the tenants and converting the remaining 66,000 square feet for a new life science user, which increased in-place rents by 65%. During the first quarter, we completed over 125,000 square feet of leasing, of which 104,000 square feet related to previously occupied space which exhibited an average rent decline of 6.8%.

However, if you exclude a short-term, 90-day extension on 20,000 square feet of space for a tenant who significantly downsized and will vacate at the end of its term, renewal rents increased 6% over expiring rents. The remaining leasing activity for the quarter totaled 21,000 square feet and related to previously vacant space in our Torrey Pines submarket.

Our life science portfolio has limited lease expirations over the next two years. Lease expirations for the remainder of 2009 total 316,000 square feet and represent only 0.8 of HCPs annual revenue. We have already addressed 151,000 square feet or approximately 48% of the 2009 remaining expirations at mark-to-market decrease in rents of 12%.

Looking further into 2010, we have 567,000 square feet of expirations, which represent only 1.4% of HCPs annualized revenue. We have already addressed 136,000 square feet or 24% of 2010 expirations at mark-to-market increase in rents of 7%. While tenant demand has slowed with the broader economy, HCP continues to pursue a pipeline of leasing prospects of approximately 500,000 square feet for existing space.

We continue to see deals where terms are shorter and have experienced protracted negotiations as decision makers remain reluctant to enter into new longer term commitments. Switching to our redevelopment and development activity, our current development efforts aggregate approximately 515,000 square feet in the Bay Area in three projects that are 49% pre-leased.

These projects represent new construction at our Oyster Point Campus where Amgen has pre-leased two buildings and the redevelopment of two smaller projects where we are converting office buildings into life science use.

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 approximately 87% of our rents coming from public companies or well-established private entities. From a liquidity standpoint, life science tenants with less than 12 months of cash represent only 2% of HCPs total base rent.

Despite the current credit crisis, we continue to see positive credit events within the portfolio. These deals have ranged from the $47 billion acquisition by Roche of Genentech, to smaller transactions where early-stage companies in HCP's portfolio have raised over $125 million in capital from current capital partners or through recently announced alliances with larger pharmaceutical companies.

With that review of HCP's portfolio, I'd like to turn it back to Jay.

Jay Flaherty

Thanks, Paul. As I review the current state of our investment portfolio, we continue to benefit from our unique five sector diversification strategy as well as the strong credit profiles of our operator-tenant partners. Paul just highlighted examples in our life science sector. In our hospital sector, we've experienced recent good news in a reduction of bad debt expense. Our top hospital relationship, industry leader, HCA, reported that first quarter EBITDA was 23% higher than a year ago. HCA also successfully raised $1.8 billion in debt financing so far this year.

Tenet Healthcare recently pre-announced better-than-expected results. As I mentioned, we closed on the sale of our last remaining California Tenet Hospital, Los Gatos Hospital, which was sold for $45 million earlier this month. For you HCP nostalgia buffs, Los Gatos Hospital was one of the original two hospitals in our IPO of 24 years ago. The other hospital, North Shore, outside of New Orleans, has a lease which expires in May 2010. Tenet has a 12-month advanced notification of their intention due to us next month.

Our skilled portfolio continues to perform extremely well. In particular, HCR ManorCare's key operating figures of occupancy and quality mix are at or near historic highs. Benefiting from these trends and low LIBOR levels has produced an estimated debt service coverage ratio for the first quarter of 2009 of 2.4 times.

It is good to be in healthcare, especially with limited near-term lease expirations. Our overall portfolio same-property performance result for the first quarter was a positive 3%, representing the top end of our forecasted 2.5 to 3% range for the year. I find it especially gratifying seven quarters into the worst economic period since the Great Depression, to have our portfolio performing at this level.

Thank you for your time today, and thank you for your interest in HCP. We would be delighted to take your questions at this time. [Chanel]?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Habermann – Goldman Sachs.

Jay Habermann – Goldman Sachs

Question for you, Jay, on terms of capital, you mentioned obviously the balance sheet in very good position. You've been in that position now for a couple of quarters, or several quarters, but just curious, any thoughts on the unsecured market or just plans to raise capital in the future?

Jay Flaherty

Well again, we always like to have multiple avenues of execution. So the unsecured market has not been terribly attractive for I think over 12 months at this point. We have seen a fairly dramatic improvement in that market for all REITs, including HCP although it's not at the point today that we would be an issuer of unsecured debt.

We're spending a fair amount of time with the possibility of doing some additional secured financings. They appear, from a debt standpoint, probably to be the most attractive bucket of execution, if you will, from a debt financing standpoint, and I think were benefitted with the fact that we did all the delevering activity that we did.

We were early to that game over the last 18 months with the two separate equity issuances in 2008 and the significant amount of asset sales so that the last remaining piece of our asset sale program which we announced in the fourth quarter of '07, just close of Los Gatos, so we're in pretty good shape.

The credit metrics continue to tick up, slow and steady. The coverage ratio now is trailing 12 months coverage ratio; I think it's up to 2.4 times. That's all fine. We're more kind of focused on seeing if we can't create some attractive opportunities to deploy some shareholders' capital at this point.

Jay Habermann – Goldman Sachs

And you mentioned obviously a 10% cap rate on a transaction, it was a smaller one but can you give us some insights in terms of what you're seeing? Whether it's some portfolio sales or other transactions where perhaps funds might be looking to sell and which segment specifically?

Jay Flaherty

Yes you continue to have a real dearth of transactions as an overall comment. There's really – there's not a whole lot to point to, Jay. We've got our oar in the water on a number of fronts. And while the bid ask spread has certainly narrowed, you're not seeing – I think it's kind of good news and bad news with healthcare. You take a look at our portfolio. First quarter of this year we're up 3% and that had some one-time stuff in it that dragged it down to that point.

That's the good news. The bad news is that generally healthcare is continuing to perform well notwithstanding the length of this recession. And as a result you see potential sellers of a mind generally to kind of sit tight and see if they can wait it out. So that's a little bit of a conundrum that we're in.

Jay Habermann – Goldman Sachs

You mentioned obviously the stable performance with the exception maybe of senior housing. Can you give us some insights there in terms of did you expect that cash flow coverage to dip below the 1.1 times because it is sort of precariously close?

Jay Flaherty

Well let me answer that a couple of different ways. First off you saw the same property performance for all of senior housing, as Paul detailed. You got kind of tale of two cities there. You've got the Sunrise piece, then you've got the non-Sunrise piece. The non-Sunrise piece for the quarter was up 2.6%.

Paul Gallagher

I think it was 2.3.

Jay Flaherty

Two point three, sorry. OK so that's, and in the coverage of HCOs, our operators have done a very nice job in terms of making tough business decisions in light of the environment we're in. So we're pleased with that and I'd point out at sector-wide occupancies in the 86, 87 zone on average, with no supply coming in, we continue to like the – forget about the long term. We continue to like the intermediate value play there so if we could put some additional dough out in that space, we would jump at the opportunity.

Now on Sunrise, you've got a couple one-time things there that you really need to isolate out. Paul indicated that the Sunrise St. Patrick performance was down 21%. That's obviously quite a headline, but we need – dive into it, you've got the impact of – recall that some of those portfolios the rents are based off LIBOR, for one thing. And then we had a significant amount of all the insurance credits that we had negotiated from Sunrise dropped in Q1 of '08.

So when you adjust just those two facts right there, which I think probably ought to try to get you at a little bit better underlying read on the portfolio, the same property performance of Sunrise was negative 10%. And I'd further add that we are seeing very specific, very real and very broad-based expense controls now starting to function from the new team at Sunrise. In particular, our February results from that standpoint were the best we've ever had since we've owned the portfolio. So I think there's a good story there.

Paul Gallagher

I think the other thing that I would add, both with Sunrise and the rest of the portfolio, our operators are starting to see the benefit of lower labor costs as well.

Jay Habermann – Goldman Sachs

That's good color. And just last question, on the debt maturity this year is the plan just to use the line at this point?

Jay Flaherty

Well as you heard, we've got not a whole lot drawing on the line. In fact the net draw during the quarter was $120 million. I think we started off the quarter with nothing drawn and now we have $120 million. Recall that we had prepaid the piece of debt. Actually we did that right at the end of last year. We prepaid a piece of debt that was on one of our Sunrise portfolios at a discount. So actually the net draw on the line for the quarter for the line was zero, because I think we jumped into the first part of the year having just closed that the last week of two of December.

So we're very mindful of the debt maturities, but we're in very good shape. You certainly have the fallback of using the line. I don't think that's our first prize. I think we've got the opportunity with some attractive financing terms that would look like some secure debt to maybe kind of chip away at a good chunk of that. And when they drop and all that other kind of stuff, that's the nice thing about having the bank climate that we've got with the maturity that's out still a couple years plus and the attractive pricing we have on it.

Operator

Your next question comes from Rich Anderson – BMO Capital Markets.

Richard Anderson – BMO Capital Markets

Quick one on the life sciences, the mark-to-market on the lease, the 2009 leasing was down 12% and that sort of stands in contrast obviously to the good numbers of growth that you typically get from that portfolio. Could you just reconcile that for me and what – was that an anomaly or what was the basis to that decline in this quarter?

Jay Flaherty

We actually had a fairly large credit tenant that had been on holdover at quite high market rents based on the holdover. What we did was we were able to negotiate a long-term five-year extension with that tenant at what we consider to be market rents at this point in time. It just so happens that the amount of holdover rent that we had was even higher. So there was just a roll down to what we believe market is today.

Paul Gallagher

Rich I think – and I think you've been a very good observer of the mark-to-market that we've been having. I came across some of your questions at conferences and conference calls in the last, well since we bought the [SLA] portfolio. I don't think you should expect as we head into the second half of the year, I think the days of plus 25, plus 30, plus 35, plus 40% marks are – we're probably looking in the rearview mirror on those sorts of things. You're going to see them start to normalize a little bit in the second half of this year.

Richard Anderson – BMO Capital Markets

I'd expect it but not to negative 12%. I just wanted to make sure I understood that. Just another sort of modeling question, do we have the full quarter's worth of the lower rental revenue that you're getting with the transition of the pool of properties to Ameritas and Sunrise? Is that fully reflected in the numbers at this point?

Jay Flaherty

Yes that deal closed December 1st. So you've got a full quarter. But remember that steps up quickly in the year one to year two transition.

Richard Anderson – BMO Capital Markets

How long does it get backed up to sort of breakeven? A couple of years?

Jay Flaherty

Oh no, you're above breakeven year two. I mean it ramps very quickly.

Richard Anderson – BMO Capital Markets

With the addition of Tom Hertzog, should we be expecting any sort of changes to your balance sheet management plan or is there anything that he might bring to the table that you think might alter how you go about managing things?

Jay Flaherty

Well, Tom brings a tremendous amount to the table across a whole bunch of disciplines so, but I think if you go back and think about our investment triangle, the three cornerstones of that have always been opportunistic investing, diversified strategy, diversified portfolio and a conservative balance sheet to allow the opportunistic investing to be able to execute on that.

So I don't think – that's been around since the big guy created the company 24 years ago and we're certainly not going to change that. We've always looked at things on a 50/50 basis and to the extent we've gotten above that or below that by more of the standard deviation, we've always had a plan in place to bring that back.

And I think our relationships with our banking partners and our relationship to rating agencies certainly speak to that. I think it's a very question in light of what's going on in the world –

Richard Anderson – BMO Capital Markets

And also what's going on with [Enco]. You have a very different structure there, so.

Jay Flaherty

Yes, I'm not really familiar with that so I can't speak to that, but I think it's a fair question to something we've kind of kicked around at the board level just a little bit whether or not going forward is the target balance sheet ratio, 50/50, is that the right one, or? We're obviously below that now or we're probably going to go a little bit lower below that if we just continue to see what – the performance of the portfolio.

But we're looking at a lot of things right now and I would expect, and knowing Tom, I would expect him that he would take a leadership role in that regard and develop a view and that's going to account for a hell of a lot.

Richard Anderson – BMO Capital Markets

Switching to more property-specific stuff, any discussion yet, you may or may not be able to say much, but with Roche and Genentech, you have some space in south San Francisco, seems like an opportunity. What's going on there, if you can comment at all?

Jay Flaherty

There's really not much new to report. I mean, the one thing that did happen since we talked about this last is that the deal closed. I think on the last call there was to and fro'ing with the Roche and Genentech shareholders so the deal closed. They're into integration mode and with respect to the specific question you've asked, we have nothing new to report as of this morning.

Richard Anderson – BMO Capital Markets

Are you going to rename DNA Drive or is that going to stay that way?

Jay Flaherty

I don't think that would go over too well.

Richard Anderson – BMO Capital Markets

Just real quick, dividend, how do you feel about it? I have a 97% payout. How do you feel about the dividend going forward, sort of is it going to be an annual look at it or how is that going to work?

Jay Flaherty

Absolutely. We're not going to change that. For the overlying performance the portfolio is good and might be a little bit better than 3% if you isolate out one or two of these one-time things like the Hoag free rent, things like that. The balance sheet metrics are in good shape, so we're a strong company. We can afford to pay a cash dividend. We can afford to grow that cash dividend, albeit modestly, and we intend to do just that.

Richard Anderson – BMO Capital Markets

Lastly, the wave of equity offerings, just curious where you stand on that, I mean, you did mention looking at deploying some capital. Would it be something where you would time it with an opportunity to invest? You obviously don't have balance sheet issues to speak of where you would need to raise equity, but is it something that's at least on the table and in conversation with the board?

Jay Flaherty

Yes, I think that's a very good question and I think you've answered – you've given a very good answer to a very good question. I think at this point with the delevering activities that we executed right at the end of '07 on some of the sales that we did and then '08 with the equity, the two equity deals and a big chunk of sales, I kind of think, we are very mindful of dilution and I think our shareholders would like to see more of a trigger event where we could potentially combine something with what they felt was a very attractive use of shareholder's capital. So I think that would be our preference at this stage.

Operator

Your next question comes from Rob Mains – Morgan, Keegan & Co.

Rob Mains – Morgan, Keegan & Co.

Jay, I just want to make sure I've got the number right. The amounts run on your revolver, did you say $120 million as of yesterday?

Jay Flaherty

$120 million net of the restricted – we have unrestricted cash so we net those two numbers together. But our net draw today is $120 million which is kind of right where it was at the beginning of the quarter.

Rob Mains – Morgan, Keegan & Co.

And then Paul, you gave the breakdown that was helpful on the senior housing portfolio, same stores between what's Sunrise and non-Sunrise year-over-year, do you have the same thing for quarter-over-quarter?

Paul Gallagher

It's in the supplemental. I can get that to you after the fact , but we do that quarter-over-quarter.

Rob Mains – Morgan, Keegan & Co.

But do you have the breakdown of Sunrise versus non-Sunrise for that? The numbers are in the supplemental but I think –

Jay Flaherty

We can get that to you, Rob.

Rob Mains – Morgan, Keegan & Co.

Just want to make sure that when you're talking about the senior housing portfolio, I noticed a couple of your big operators had exactly what you described, a kind of noticeable decline in occupancy but they were able to keep their coverages up. And I'm assuming that there's nothing going on with their rent. Is that a reflection more of pricing or expenses, or is it a combination?

Jay Flaherty

I think it's more a combination of good expense control. I would quickly add that at some point, I don't think you can kind of continue to do that. If we get into an 80% occupancy mode, I mean I think there's going to be like anything else, you kind of go for the low-hanging fruit initially so I think so far they've been able to manage this softness quite well.

But the business model isn't linear. If you lose another five points, you can't take whatever the associated revenues are out of your cost structure. At some point, you're going to see pressure on those coverage ratios. Again, that's why we like what we've got. We've got triple net leases that are master leased and we've got very, very high-quality operators there.

Rob Mains – Morgan, Keegan & Co.

And so you haven't done anything with your rent there, right? You still getting your annual escalators, those that get more CPIs that are available?

Paul Gallagher

Absolutely [not].

Rob Mains – Morgan, Keegan & Co.

I think I'm forgetting something. Senior housing rental income was down sequentially from the fourth quarter. Was there something in the fourth quarter that contributed to that?

Paul Gallagher

Yes, if you remember a year ago, I laid out both year-over-year and quarter-over-quarter and said that we weren't going to be specifically addressing the quarter-over-quarter just based on timing of various different things. We have a lot of true-ups and additional rent that gets booked in the fourth quarter that doesn't happen in the first quarter. And it just creates a lot of noise.

Rob Mains – Morgan, Keegan & Co.

So it's kind of the one, two, three, one quarters would probably be a better pattern of what we should look for.

Paul Gallagher

Probably.

Jay Flaherty

Is it fair, Paul, to say that the first quarter's going to understate the year and then the fourth quarter's going to understate it?

Paul Gallagher

You're always going to have significantly more noise at fourth quarter to first quarter.

Operator

Your next question comes from Jerry Doctrow –Stifel Nicolaus & Co.

Jerry Doctrow – Stifel Nicolaus & Co.

Just to follow-up on that point. So, what was the specific hit to the fourth quarter I guess from Ameritas? It should have been relatively small because you started December 1 and so the rest of the hit is primarily just on senior housing. The rest of the hit is just basically the one-time items? Is that sort of the right way to think about it?

Jay Flaherty

Well, we can get to, I don't know the one month, I don't even disclose just a one month, but we can, that's easy for us to get our hands on that, Jerry.

Jerry Doctrow – Stifel Nicolaus & Co.

Let me just come back to a couple other things. There's the [PIC] interest on the HCA. Just wanted to clarify how that's being accounted for in FFO and obviously some non-cash items. Just, can we get that clarified?

Jay Flaherty

Sure. Well, the [PIC] amount is in both FFO and FAD. When they made the decision, they had a one-time decision for a discrete window to pick that and it increased by 75 basis points over the cash coupon. So our position is that that amount creeps up on our balance sheet, increases the amount of the investment.

It's convertible to cash at any time and it's a very liquid security. And in fact, with the good performance of HCA, the price of those bonds have moved up materially since year-end. At year-end, at 12/31/08, the price of those bonds were at 78. They traded at 89 yesterday and reflect the very good operating result that HCA has had and the significant amount of liquidity. They've raised a $1.8 billion so far this year in two separate high yield offerings that were both very well received, oversubscribed, and executed quite well. So that's a real good story for us.

Jerry Doctrow –Stifel Nicolaus & Company

Okay. And when you say they're convertible to cash, could you just clarify?

Jay Flaherty

We could sell them. They're a liquid listed security and we mark that security, by the way, through the equity account in our balance sheet. So you see a mark on those.

Jerry Doctrow –Stifel Nicolaus & Company

So that one is mark-to-market on the balance sheet.

Jay Flaherty

Yes, absolutely. It's through the equity account. It doesn't run through FFO because we got it –

Jerry Doctrow –Stifel Nicolaus & Company

Right. Okay. There's also, and a lot of this has been covered, so I won't go through it. There's a little item that we thought was new in the Q, which just had some reference that there's certain mortgages that have crossed default so that if somebody files bankruptcy.

I was just curious whether those were related to Sunrise or whether it's something significant that we should be concerned about? And then also maybe on Sunrise you had talked about the possibility of doing some kind of transaction with them, and I was just wondering if there's any update on that status or are you still in discussions or where we stand?

Jay Flaherty

Well, we don't as it relates to your first question, I mean, that wasn't Sunrise related to bankruptcy. I think that was if I recall correctly, that was in our 10-K I believe. I think the risk factor section of our 10-K for the first time ever, exceeded 20 pages.

I think you've got commentary in there about the challenging economic environment that the country's going through right now. You've got every potential risk factor known to mankind in there. So that's really more just good –

Jerry Doctrow –Stifel Nicolaus & Company

It's not something new; it's not something –

Jay Flaherty

There's nothing at all specific to Sunrise. With respect to your second question, which was specific to Sunrise, there's all sorts of rumors out there, and we don't comment on rumors. So I really can't shed any light on that.

Jerry Doctrow –Stifel Nicolaus & Company

Okay. I mean the deadline is two days away, so we're waiting for news. Okay, and then just to maybe come back on the life science issue. You had talked about mark-to-markets not being 25, not being minus 12. In terms of your assumptions, obviously you're ramping up. You're in a $2.00 run rate right now. You're giving guidance to $2.15 to $2.20. We've got Hoag. We've got some normal sort of just increases, as we roll through the year.

Is there anything else sort of material or like what are you assuming in terms of life science rent rollups or the original data?

Jay Flaherty

The overall – the forecast for the year was 2.5% to 3%. Now, I think we've given you in the previous call by sector, and for life science we were kind of plus 12, 12.5% metric. So we continue to feel quite good about the whole 2.5% to 3% range, witness the 3% in the first quarter. And we continue to feel good about the 12.5% metric for life science.

I will also tell you if you do, and again, it is what it is, and it's 3%, we're glad we got it in terms of how far we are linked to this recession. But if you were to adjust out that six month pre-rental period that we're in right now for Hoag taking over Irvine Hospital, and you were to adjust out the impact of the LIBOR, just the LIBOR component on those Sunrise portfolios that have LIBOR.

And finally, three adjustments here, if you were to adjust out when we got – when we negotiated the insurance cuts from Sunrise, most of those dropped in Q1 of '08. If you adjust that out, which I think probably gets you to a more representative same property performance result for the first quarter. That 3%, Jerry, goes to 5.3%.

Okay, now look there's some stuff going the other way too, so I think you got to be careful when you do that. But I mean those three are driving a lot of the drag on same property performance notwithstanding the fact overall, which is now a very representative perspective on HCT's portfolio because we've got, I think, what 96% or 97% of all the properties that we own –

Paul Gallagher

Ninety-eight.

Jay Flaherty

Ninety-eight percent or around that, so I think that's another thing that we look at more of doing our drill downs on a monthly basis with our operating colleagues who feel even better than maybe the advertised 3% number.

Jerry Doctrow –Stifel Nicolaus & Company

And on the LIBOR in your guidance, are you making assumption so that it moves higher so that you pick up some of that?

Jay Flaherty

Well, we did, but again it kind of cancels it out because we've got the ManorCare investment, right? So it is, I forget – I don't remember off hand what our LIBOR forecast was for the year, but it is certainly higher than the level we're at right now.

But if I were to show you the inside numbers in terms of the impact, the downdraft on the ManorCare, and the LIBOR, and of the LIBOR based ManorCare, and Sunrise, but then show you the equal downdraft on the expense, it's within a pretty small number of being match-funded.

Jerry Doctrow –Stifel Nicolaus & Company

And how much is the swing on Hoag? You're zero now. When you switch in the second half of the year, what's that run rate quarter to quarter? How much will you pick up?

Jay Flaherty

I think it goes six months free rent, and then the next nine are 50%. But I think you made a comment about comparing to the old Tenet rent, what was?

Paul Gallagher

Yes, if you took the previous year's Tenet rent, and compared it to first year rent with Hoag it's a 2% increase over where Tenet was.

Jay Flaherty

And those escalators will be higher in the quality mix that you're going to see. I think you've seen the campus, Jerry. The quality mix you'll have in there is going to be materially different than what Tenet had in there.

Paul Gallagher

And one thing to bear in mind, when you looked at the previous operations at that hospital, Tenet was not covering operating expenses let alone rent, so being able to get in and get a rent at 2% higher than where Tenet was, we think that's a very good transaction.

Jay Flaherty

And remember, the much different quality mix, like margin [procedure], and stuff like that that goes hat-in-hand with the $40 million of investment that Hoag is putting into our property. So it all kind of comes together.

Operator

Your next question comes from Steve Swett – KBW.

Stephen Swett –Keefe, Bruyette & Woods

Thanks very much. Most questions have been answered, but a couple of things. Paul, I think you mentioned on the expense reimbursements there were some one-time items in the MOB portfolio, and the expense reimbursements were certainly up in the quarter. Is that something that kind of normalizes back down going forward?

Paul Gallagher

Yes, it probably does and it was just a function of the collections in that particular quarter is what I think was happening there.

Stephen Swett –Keefe, Bruyette & Woods

Okay, and then, Jay, just one more to press your thoughts on the refinancings for this year and your other capital options. In the past, you've talked about the HCR ManorCare investment, and being a LIBOR based, and then you had it match-funded with some LIBOR-based debt, and as you pay down the bridge that's I guess that's less a fact today.

Does that affect how you think about recapitalizing going forward? Is that a connection you want to maintain or do you look more at the low-cost secured debt more as an option?

Jay Flaherty

I think we would gravitate more to the latter. I mean, the pricing, just so we're clear, the pricing on that bridge is one in the same to the pricing on our bank line. So it would be seamless, right, because they're both at LIBOR plus 70.

So we've always got that. I don't think shareholders pay us to speculate. But at some point here, if and when some of these stimulus dollars start to stimulate, you're going to have to see a reversal of some of these interest rates. So at some point here it's starting to fix out some of that.

I guess that's a pretty smart idea. When we do that, how we do that'll be a function of how good the opportunities on some of the secured debt financing alternatives, and maybe one or two other things that we're working on pencil out.

But I think now it's easy because it's kind of effectively essentially match-funded, and it's a no-brainer. But at some point we're going to want to make sure that we lock in some long-term attractive capital.

Stephen Swett –Keefe, Bruyette & Woods

And is terming out, I know you haven't included any incremental acquisitions or investments in your guidance, but is terming out that debt something you guys have considered in your outlook?

Jay Flaherty

No. We have not. We do have a secured financing rolled into our guidance. But beyond that I mean we're pretty careful about how we think about our long-term capital structure.

Operator

Your next question comes from Omotayo Okusanya – UBS.

Omotayo Okusanya – UBS

Very good, thank you. Just a couple of quick questions, in regards to the change in rents in the life science portfolio, when you take out the one large tenant that had the roll-down, what would that percentage change in rent have been?

Paul Gallagher

I don't know if I have that calculation off the top of my head.

Unidentified Corporate Participant

You're asking for what it went to?

Omotayo Okusanya – UBS

Okay, the change in rent was negative 7.2, but a big portion of that was the one large credit tenant that had the roll-down. I was just wondering if you excluded that one tenant, what that number was.

Paul Gallagher

Yes, I don't have that calculation right now, but I can –

Jay Flaherty

We can get that. Give us a shout or send us an email afterwards. We'll get it.

Omotayo Okusanya – UBS

Okay.

Paul Gallagher

That's pretty easy for us to just back that out. That's pretty straightforward.

Omotayo Okusanya – UBS

I'll do that. And then second thing, could you just give us a brief overview of operations at ManorCare at this point, kind of what you're seeing in regards to the overall patient mix, and how they're managing operating expenses, etc.?

Jay Flaherty

I think at the current pace, we're going to have our debt investment repaid out of cash flow from operations. I mean they are killing it, knocking the cover off the ball, regardless of which metric you look at, occupancy, quality mix, expense control.

Omotayo Okusanya – UBS

Can you give us some of those metrics, like what occupancy is right now, and patient mix?

Jay Flaherty

No, I know them, but all I can tell you is that all of their key operating metrics are at or near all-time highs. And I think by the way. I think – and you know this better than I do – but, I think you're seeing a similar story, maybe not to the magnitude you'll see at HCR ManorCare. I'm pretty sure you're seeing a similar story in the metrics for the publicly traded skilled companies. So, I think that it's been a benign reimbursement environment. Good heavens what's going to happen next year, if and when healthcare reform comes? But for the past several years now, you had a very benign reimbursement environment.

Omotayo Okusanya – UBS

And, correct me if I'm wrong, but I believe you had mentioned earlier, there was one life science tenant who was going to be going away. Have they –

Jay Flaherty

Genentech went away. Now Roche.

Omotayo Okusanya – UBS

Oh, okay.

Jay Flaherty

We've exchanged the AA credit for a AA credit.

Omotayo Okusanya – UBS

Great, okay. And, the general, I mean -

Jay Flaherty

Hey, I'm teasing. Hang on and Paul will –

Paul Gallagher

That had to do with the first quarter leasing. We had a tenant that we knew was going to vacate, and we significantly downsized. And what that did, even though it was a renewal, but it was only a 90-day renewal, it impacted the mark-to-market on all those renewals.

I look at it as we were able to collect a little bit of rent for 90 days, and it had an impact on how it was reported. If you take that guy out, you actually flip from minus 6.8 to positive 6%. So we think it's a good story. We collected some cash for 90 days, as opposed to losing it for that 90-day period.

Omotayo Okusanya – UBS

Can you give us some general characteristics of that tenant? Was it like a small company that was [DC bad]? Did they run out of the money, or the product didn't get FDA approval?

Paul Gallagher

I don't know the specifics offhand. We just knew that they were going to be downsizing and moving out.

Operator

Your next question comes from Rosemary Pugh – Green Street Advisors.

Jim Sullivan – Green Street Advisors

Hey, good morning, guys. It's Jim Sullivan here with Rosemary.

Jay Flaherty

Your voice changed, Rosemary.

Jim Sullivan – Green Street Advisors

A bit deeper. Jay, you talked about the balance sheet management. You talked about operating at sort of a 50/50 debt equity level. It strikes me that, in the old world, 50% leverage was probably considered conservative for a REIT. And, it also strikes me that, in the new world, 50% is probably going to be considered at the aggressive end of a reasonable range. And, I think that's probably going to be the case. It's Green Street's view that that's going to be the case for a period measured in years, not just the next couple of quarters. So curious if you agree with that, and –

Jay Flaherty

Yes, like I think I do. I mean I think that's what I was saying. Historically, we've been at 50/50. We're below that today at 48. We're likely to kind of continue to tick down a little bit lower here with the cash flow of coverage continuing to tick up, but I agree with you.

I think we want to – what we talked with the board about is we don't want to be making five and 10-year decisions based on six or nine months of activity. But this one is different than – this downdraft is a little different. But I think conceptually I completely agree with you, 100%.

I also think, conceptually, and this might be a comment made relative more towards healthcare REITs than just general REITs, I think going forward the model is going to be different. I mean the days of just creating value, because you could just buy right or sell right, I think that's – you've kind of got to reinvent yourself here a little bit.

And towards that end, if you look at really what we've done for the last 18 months, whether it's terminating the Aureus portfolio and swinging that over to Ameritas, or restructuring Tenet and selling Los Gatos and Tarzana and moving Hoag in to Irvine or the Lusk campus down in San Diego.

Some of the stuff that we did with Horizon Bay, and then the, most recently, the big ramp, lease-up ramp we had at [SLA], I think creating value going forward is going to be more about making what you've got – assuming you've got good stuff, right? We've got great stuff – more valuable, as opposed to just being dependent on the treadmill of acquisition.

So, we spend a lot of time focused on that. So that would probably be a little bit of a push back to the right debt structure, Jim. It probably allows you to be a little bit higher, but conceptually, I'm with you. I think we need to be – we're lower than our long-term target and I think at the margin we'll probably go a little lower still.

Jim Sullivan – Green Street Advisors

I hear you with respect to actively managing the existing portfolio, but it also seems, at the same time, that the acquisition opportunities may become quite interesting. So –

Jay Flaherty

Yes, that's a good discussion to have. I think – and you know a lot more about these other sectors than I do, but I think I get it in hotels, where you've got, you know, that's setting up to be a real buying opportunity.

In healthcare, as I mentioned earlier, that our conundrum is that while our portfolio is performing at the top end of our forecasted range, you're not seeing – it's not like there's 10 opportunities that are sitting out there that are just screamers of opportunities. We're looking at a couple of interesting things, but you can count them on one hand as opposed to needing two or three hands, like I think is the case in some of these other sectors.

Jim Sullivan – Green Street Advisors

But wouldn't you agree that even within healthcare debt maturities are going to ultimately be the catalyst to some of these properties changing hands?

Jay Flaherty

They should. They should. Yes, we've been there. As you know we've been very measured with our cuts, any dollars going out the door now for – since the fourth quarter of '07. So we've been patient, but we've been frustrated that more opportunities haven't presented themselves.

Jim Sullivan – Green Street Advisors

Going back to my original question and your agreement with, I think, the position that leverage ratios in the industry are going to be a lot lower than what they've been, historically, where does common equity and an issuance of common equity sit on your menu of alternatives?

Jay Flaherty

Well, it's certainly on the menu. Again, I think when we look at dilution a lot and we obviously want to do the right thing on a long-term basis. But we did not one, but two $0.5 billion equity deals in '08, which, when combined with the big asset sales, delivered the company from the Slough and ManorCare acquisitions we made in the second half of '07.

So, I think at this point with no net draws at all in the first quarter, to date I think, yes, we'd probably want to match that up with a triggering event in terms of a specific use as opposed to – the other play is let's go off and raise a boat load of money, and no new use of proceeds and we'll just be opportunistic.

I guess what I'm saying is as we sit here right now, there is not a wealth of opportunistic sorts of opportunities that if we add another however many hundred millions of dollars, we would be comfortable putting it to work today. We're working on a couple of things, but it's, again, you can measure them on one hand the number of opportunities as opposed to needing two or three hands.

Jim Sullivan – Green Street Advisors

Okay, it's very helpful. And, a totally unrelated question, can you comment on your relationship with [Seris]? They had a loan, a fairly sizable loan come due at the end of the year that you guys extended. It looks like their rent in first quarter on the two hospitals is down, materially?

Jay Flaherty

No, no. Yes, that's a good question. It's not down. Let me tell you about this. So this is a secured loan that came to us as part of the C&L transaction. It pays cash of 9.5%, it accrues at 14%. It's secured, kind of double secured. It's secured by an underlying portfolio of medical office buildings and specialty hospitals. We just had an independent, third party appraiser come back to us earlier this year and it got the appraisal and the balance of that loan, with the current appraisal is a 75% loan-to-value. That's point one.

Point two is that, in addition, we have $35 million of personal guarantees from some high net worth investors on top of that, and that represents just under 50% of the amount of the loan. So from a security standpoint, we feel very, very good. They are current and have been current and have always been current. The loan matured on 12/31/08 and had an extension feature, but one of the tests they needed to make to allow the extension feature to kick in was not met, so that put us in a situation where we began a discussion with them about extending that earlier this month, so Q2, not Q1, Jim.

We reached an agreement to extend the loan to 12/31/2010 and they have wired us additional extension fees. The difference you're seeing in the Q1 versus Q4 is that some of those fees and stuff like that, they get amortized over the new remaining period of time. So now that we've got two years left, it's the denominator, the period of time that the income's being amortized over that's caused the change. The cash rents have remained absolutely the same and the amount that we're accruing has remained the same as well.

Operator

Your next question comes from Mark Biffert – Oppenheimer.

Mark Biffert – Oppenheimer

Jay, in the past, you've talked about acquisitions and the senior housing space being an attractive place, I'm wondering if that's changed. You had also mentioned that some of the partners you were talking to were looking in the range of 20% to 30% type IRRs. I mean, how has that changed in their views, in terms of what they would expect to get given that you're focused on higher quality assets and given that you've had so few to choose from currently?

Jay Flaherty

In general, I would say it hasn't changed. We've had one or two partners in recent weeks suggest that maybe it ought to change, i.e. maybe the return thresholds are a tad bit high, a tad bit, not a lot. But our fundamental view on this space remains, and we're passionate about it, it's great space.

It's – forget about the long term, intermediate term there's going to be some opportunities here because of a couple of things, potentially some triggers, as Jim Sullivan was mentioning related to debt maturities and the fact that you've got no new supply underlying this demographic that's locked in, the aging baby boomer in the United States of America.

So the fundamental pillars to our investment piece this year, that this is attractive, that '09 could very well be a transition year where we swing back into putting some capital into the space, unlike the last several years, remains absolutely intact as we sit here 1/3 of the way into 2009.

Mark Biffert – Oppenheimer

And then I was wondering, you mentioned that you could potentially do some secured financing; I was wondering, first, which property types would you look to go out and encumber with secured financing and what types of conversations are you having with lenders in terms of the underwriting of those assets?

Jay Flaherty

Well, the three of our five sectors, I think three present opportunities for secured financing. One is senior housing, although that's reasonably limited to the GSCs and I think you've know we've gone to that well quite a bit in the last two years. The other two sectors that's probably more a life company, a life insurance company-driven dynamic for secured financing, would be both life science and medical office.

Mark Biffert – Oppenheimer

And what type of rates are they quoting, if you've gotten any quotes on anything?

Jay Flaherty

You're kind of somewhere between seven and eight, probably, would be the kind of [cuff it] for both those sectors.

Mark Biffert – Oppenheimer

That's seven, 10-year type financing?

Jay Flaherty

Oh, yes, yes, amortizing, 10-year term, somewhere between seven and eight. I didn't mention Skill. You clearly have a bid in the market there from a HUD program. Those tend to be a little tougher execution because they tend not to like the pool of folks.

I was with one of the GSCs just two weeks ago and they made an interesting comment to me. They said that they actually preferred getting the secured packages to bid on from the REITs as opposed to the operators, and I inquired as to why that was the case.

They said you guys, not just HCP, but ourselves and our peers, you're going to have your separate underwriting discipline that you go through, so we like that, the third party discipline and, typically when you present them to us, they're all master leased, and so they draw great comfort in those sorts of portfolios. I thought that was interesting. Again, that's specific to GSCs and senior housing, but –

Mark Biffert – Oppenheimer

Lastly, you mentioned, or maybe it was Paul that mentioned that you had about – a bunch of your Life Science tenants had raised about $120 million in cash in the first quarter. I'm just wondering, as you look at your tenant roster now in the Life Science portfolio, what percentage of that causes you concern that could potentially could come back and what the potential downside risk to revenue is, just to state what it is.

Jay Flaherty

I think the best way to answer that question is that, Paul, maybe you could just –

Paul Gallagher

Yes, one of the things that we highlighted is that we looked at liquidity, for tenants that have less than 12 months of cash and that represents just 2% of HCP's total base rent.

Operator

Your next question comes from David Toti – Citigroup

David Toti – Citigroup

… facilities a bit earlier, Jay. Can you just talk more specifically about what your views are relative to post the [Q] bundling and if that changes your outlook on the outside longer term?

Jay Flaherty

Your first couple of words there got cut out. I could guess, I think I know where you're going, but could you just repeat the first part of your –

David Toti – Citigroup

Sure. You mentioned skilled nursing facilities earlier and I thought if you could go into just a little bit more detail relative to your outlook for the asset, given proposals to the bundling system changes.

Jay Flaherty

You mean for our modest skill portfolio, David?

David Toti – Citigroup

I think it was limited.

Jay Flaherty

We'll talk. Here's the deal. Healthcare reform is a wildcard. Who knows what's going to happen? I would say, generally, the skilled space like almost all these other spaces, is going to give at the altar here a little bit. So what's going to happen? There's going to be winners and losers, and the winners are going to have three criteria. They're going to have quality outcomes, they're going to be efficient operators, and they're going to have critical mass.

Now, you shouldn't read critical mass to be huge. You should read critical mass to be concentration, could be very much a regional dynamic, by the way, and the best metric to look at, for critical mass is market share.

And then on efficiency you should read that to mean margin. And then quality is actually what the government will be measuring and they will be using quality metrics to determine where the reimbursement dollars are flowing.

So the folks that have critical mass are efficient and have quality outcomes are going to do great. And in general in the skilled space, you've got the added benefit that that is generally the low cost provider for that demand type. The government is going to pay a hell of a lot less money if mom or dad, who just had a knee replaced or a hip replaced at a hospital, gets out of the hospital quickly into a long-term care or rehab setting where the cost model is a lot lower.

So on this bundling, hospitals aren't obviously going to get into skilled space, because the better hospitals are going to link up with the better, the higher quality, the more efficient and those skilled operators that have critical mass.

If you look at, with one or two exceptions, if you look at every operator or tenant we've brought into the company's portfolio in the last couple of years, and perhaps more important every operator or tenant that we've invited to leave the company's portfolio in the last couple of years, you will see quality outcomes, efficient operators and critical mass as being representative of the folks that came in and not being present, the folks that went out.

So in that setting if the big hospital systems whether they're non-profit or for-profit, they're going to deal with this bundled thing. They're going to want to do kind of what we do when we buy stuff. We like big concentrations where we can have master lease portfolios and we can have relationships that they're important to us and we're important to them.

Well same thing's is going to happen here so obviously that sets up wonderfully for a company like HCR ManorCare. And if we go to a particular part of the country like the parts of the Midwest that sets up wonderfully for a private company called Trilogy that we have in our portfolio. If we go to the East Coast that sets up wonderfully for a private company skilled portfolio called [Tandem]. So we really like what we've got and we are really excited about what's going to happen here going forward.

David Toti – Citigroup

Do you think there's any tertiary benefit to medical offices in that environment?

Jay Flaherty

Yes, but the other piece there is the technology overlay, okay? So you can do procedures now that you used to have to check in and stay overnight. You can do those in an outpatient setting in the medical office building.

Now you take that one step further and you have this phenomenon of a lot this physician-owned real estate that's been diluted some of the occupancy off the campuses of the on-campus medical buildings. There's reasonable expectation that you're going to see some limitations put into effect as part of this healthcare reform.

That, at the margin, will do two things. One, it will stop any additional physician-owned properties from being constructed. And may, in fact, drive back to the on-campus MOB portfolio for which HCP's 14.5 million square foot MOB portfolio is 81% on-campus number one, number two market share hospitals. That could be another driver for demand back to the MOB.

So again we don't have any inside scoop as to what the metrics are going to be coming out of the healthcare reform, but we feel pretty confident that our portfolio is going to perform quite well in whatever they come up with.

David Toti – Citigroup

Just shifting over to senior housing, and forgive me if I missed this, could you talk about your appetite for shifting additional master leases to other operators? I know you've hinted at potentially some changes a few months ago and I might have missed an update on that.

Jay Flaherty

I'm sorry, David, you said shifting the master leases to other –

David Toti – Citigroup

Shifting some of the operator leases.

Jay Flaherty

I think the only shifting that in senior housing – is it senior housing that you're talking about?

David Toti – Citigroup

Yes.

Jay Flaherty

The only shifting that we'd be doing at this point would be a la kind of what we did with the Aureus portfolio when we transitioned that over to Ameritas in December. It would be limited to that. Otherwise we really like the portfolio of senior housing operators we have in our company.

David Toti – Citigroup

And then, Paul, maybe you can provide a little bit more detail, the weakness in senior housing this past quarter, would you say there's a component of seasonality to that? And if so what sort of percentage range?

Paul Gallagher

There typically is seasonality. We haven't seen it really impact the portfolio this particular year. In previous years we've seen much more of an impact, but the flu season was pretty light this year, David. Last year it was pretty bad. They got the cocktail right this year.

Operator

(Operator Instructions) Your next question comes from Bryan Santino – Barclays Capital.

Bryan Santino – Barclays Capital

Just a couple of follow-up questions here, as it relates to the secured debt that you mentioned before, can you give us an indication of how much availability you have there?

Jay Flaherty

Well I think the best way to look at that would be our secured debt ratio. It's 15% so that means the reverse of that is the vast majority of our real estate portfolio is unencumbered. So now, from a practical standpoint, our pals at Moody's and Fitch and S&P they understand the attractive nature of the secured debt, but they don't want to see us taking the entire remaining real estate portfolio that's unencumbered and then securing that.

So with that, that really becomes the more, the guiding metric we look at there. And they generally I think in the current environment they're probably – their sweet spot is somewhere between 20% and 25%. So that 15% could go to somewhere between 20% and 25% depending on the situation and all that kind of stuff. So if you run the math on that, that's a big number, but I don't think we're looking to go that high.

Bryan Santino – Barclays Capital

And then just with regards to your comments really with the 2% increase year-over-year for the Irvine facility at Hoag, is that bi-annualizing the back half of '09 rent and comparing it to the rents you received from Tenet last year?

Paul Gallagher

Yes, that was a comparison taking what tenant was paying versus what Hoag will be paying. Now the Hoag lease will actually increase between 2% and 4%, whereas the Irvine, where the Tenet lease was actually capped at 1%, so we've got significantly more growth out of the new lease going forward.

Jay Flaherty

So just to repeat, you're starting out higher and then the ups are higher?

Paul Gallagher

Correct.

Jay Flaherty

And you put down on top of the fact that this high quality operator is writing a check for $40 million to change the quality mix in the portfolio. You bring all that together the likelihood is that we're going to be getting the upper end of that range.

Bryan Santino – Barclays Capital

Okay, but in terms of the facility itself you mentioned it wasn't covering its expenses under the previous Tenet. Are there any metrics that have improved just initially that you can talk about at that facility?

Jay Flaherty

Yes, you're a real estate guy, not a health care guy. Here's the deal, California – kind of had three California hospitals – and they unfortunately were saddled with not the greatest managed care contracts. And this was one of those hospitals. There other two were Tarzana and Los Gatos so they kind of were playing with at least one hand tied behind their back.

You don't have that, by the way, those managed care contracts in the other four hospitals that Tenet operates for us on the East Coast. So they, what you've got here is it's apples and oranges. You're going to have the premier non-profit Orange County-based operator that's got the mother ship down there in Newport Beach.

They're going to move over some of their highest, most in demand procedures, orthopedics in particular, once they finish the $40 million investment into this hospital. And then this hospital strategically will become a beachfront to southern Orange County to use as a feeder for the main hospital in Newport Beach.

The combination of that and what they're going to do in terms of the physical plant and what you're going to see in terms of patient mix and revenue source, it's just an entirely different ballgame. So you really can't compare the two.

Operator

(Operator Instructions) Your next question comes from Stephen Mead – Anchor Capital Advisors.

Stephen Mead – Anchor Capital Advisors

I can't resist asking this question on the short position in the stock and the rise in it. And where is that coming about and what is effective on that?

Paul Gallagher

I have no idea. If you find out, give me a call and let me know, okay?

Stephen Mead – Anchor Capital Advisors

But what about the fundamentals, I mean what is the rub on HCP in terms of the shorts out there?

Jay Flaherty

Again we're focused on putting points on the board. I think the performance of the portfolio in the first quarter which is at the upper end of the range that we had forecasted we're pleased with. We're looking at some other things that may or may not pan out. If they pan out they're going to be equally rewarding. That's really what we're focused on.

Stephen Mead – Anchor Capital Advisors

Yes, and then as you exit 2009, what do you think the FAD coverage of the dividend should look like in terms of range of coverage?

Jay Flaherty

Oh I think for 2009 you'll probably be in kind of like the mid90s. Again we've got some one time things here, I think you'll see that ramped down pretty quickly in 2010 because a lot of what we've been doing here is like the Hoag transition into Irvine Hospital like the Aureus transition, to Ameritas and things like that, for a short period of time they've been – they're going to increase that. That's going to ramp back down in 2010.

Stephen Mead – Anchor Capital Advisors

Well, what ratio are you talking about? I'm looking at FAD.

Paul Gallagher

You're asking about the FAD ratio, I thought.

Stephen Mead – Anchor Capital Advisors

As a coverage of dividend?

Paul Gallagher

Right.

Stephen Mead – Anchor Capital Advisors

But then going forward in terms of looking at 2010, where are the areas that are sort of incremental on a same store basis, in terms of progress? Where would you sort of highlight where you would see the best sort of the progress in 2010?

Paul Gallagher

I'm sorry you just cut out the last bit there?

Stephen Mead – Anchor Capital Advisors

Well, no, just assuming a tough environment as you look at different categories of your investments, I can see the trends this year, but as you look into 2010, where would you sort of look for incremental gains by property type?

Jay Flaherty

Hospitals and medical office buildings, certainly; senior housing I think that's going to be a function of when the economy bottoms out, so I wouldn't look to have – unless we change something in that portfolio I wouldn't look for a lot of incremental upside in 2010 versus 2009 in senior housing. And the skilled portfolio, I think that is going to continue to do pretty well, particularly the skill portfolio we have, so we're feeling pretty relaxed about that.

Stephen Mead – Anchor Capital Advisors

Just one other question, going back to the secured lending and your guidance, was there a number that you had in terms of how much was going to be rolled into secured lending in your guidance on a specific basis?

Jay Flaherty

Yes, $200 million and that was executed in the fourth quarter of '09.

Stephen Mead – Anchor Capital Advisors

Okay, and so going from the LIBOR plus to the seven to eight kind of range of interest expense on that stuff that gets rolled into secured?

Jay Flaherty

Yes, based on where today's market is, I think that's right.

Operator

Your next question comes from the line of [Jacob Schamswasser] – Raymond Capital.

[Jacob Schamswasser] – Raymond Capital

For the Los Gatos California-based hospital.

Jay Flaherty

Yes.

[Jacob Schamswasser] – Raymond Capital

What cap rate did you sell that for?

Jay Flaherty

Well there again that hospital not unlike the Irvine hospital was actually not covering the rents which was a function of these managed care contracts it was saddled with so, kind of a meaningless number. It was about an ]eight] acre campus in Los Gatos, it was about a 30 year campus single story.

[Jacob Schamswasser] – Raymond Capital

Your phone just cut out. I don't know if you're on a headset but I think the battery might be low.

Jay Flaherty

I'm not on a headset. The cap rate there isn't really relevant. There was a very high quality non-profit acquired it from us and resulted in a very significant gain for the company.

[Jacob Schamswasser] – Raymond Capital

Got it, and at the beginning of the call you mentioned one of the assets being sold at a 10% cap rate?

Jay Flaherty

No, that was a joint venture interest in the senior housing space that we acquired.

[Jacob Schamswasser] – Raymond Capital

I understand, so you acquired it at 10% cap rate.

Jay Flaherty

Right.

[Jacob Schamswasser] – Raymond Capital

Got it, and this question has been asked I guess in a lot of different ways on the call so far, but just kind of very straightforward, how do you guys think about 2011's liquidity needs?

Jay Flaherty

I think we've got ample sources of liquidity. We've got a number of markets. We've always based our balance sheet management on never having all our eggs in one basket so we've got joint venture transfers. We've got unsecured debt in the last several years in very meaningful amounts.

We've got secured debt offerings in very meaningful amounts. We've got equity issuance of very meaningful amounts, so now those markets are not all necessarily always open and they're not all necessarily open at what we would deem to be attractive levels.

For example today the unsecured debt market – that's not just today by the way it's been about 12 months – we would not deem to be terribly attractive but, so we take all that into account and we take a look at what we've got in terms of maturities over the next, in your case two years and in the course of a year, we're in a very good situation with respect to joint venture opportunities, secured debt financing opportunities and a bunch of other things that we are working on as well.

[Jacob Schamswasser] – Raymond Capital

Understood, so just to be clear, net liquidity for '09 and '10 is no issue whatsoever but you have maturities of.

Jay Flaherty

Well, we've got our bank line. Our bank line matures in August of 2011. It has a one-year extension and that's at our option but you need a 50% consent from the bank group so the reality is we're going to have to renegotiate a new bank agreement. So that's out there, but we're not going to wait until August 2011 to get that done, but that would probably be the big piece of the 2011 focus.

[Jacob Schamswasser] – Raymond Capital

Okay, and are you, is there a cap rate in which you see prevailing for your sectors as of late? You've talked about how there's some transactions going on – there's some, not transactions, but then overall cap rate in which we can apply to the business to come to some sort of valuation?

Jay Flaherty

No, I mean it's really going to be situation specific. I'd check in with Mr. Sullivan if you want an expert view but other than that we probably wouldn't have an awful lot more to add to that, the answer to that question.

Operator

Your final question comes from the line of Sarah King – JP Morgan.

Sarah King – JP Morgan

Hi, it's Sarah King here for Mike Mueller, I just have a quick question for you guys about interest and other income, the sequential decrease was it primarily just due to LIBOR or were there any other anomalies in that figure?

Paul Gallagher

It's almost all LIBOR.

Sarah King – JP Morgan

So it's pretty much all LIBOR. Okay, that's all. Thank you.

Jay Flaherty

Okay everybody sorry to drag on but we appreciate your questions and for those of you that will be at NAREIT in New York City in June we look forward to seeing you then. Take care.

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. Q1 2009 Earnings Call Transcript
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