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HCP, Inc. (NYSE:HCP)

Q1 FY08 Earnings Call

April 29, 2008, 12:00 PM ET

Executives

Edward J. Henning - EVP, Chief Administrative Officer, General Counsel and Corporate Secretary

James F. Flaherty III - Chairman of the Board and CEO

Mark A. Wallace - CFO, EVP and Treasurer

Paul F. Gallagher - EVP and Chief Investment Officer

Analysts

Richard Anderson - BMO Capital Markets

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Michael Mueller - JPMorgan

Rosemary Pugh - Green Street Advisors

Craig Melcher - Citigroup

Jonathan Habermann - Goldman, Sachs & Co.

Omotayo Okusanya - UBS

Karin Ford - KeyBanc Capital Markets

Adam Feinstein - Lehman Brothers

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2008 HCP Earnings Conference Call. My name is Jasmine and I will be your operator for today. At this time all attendees are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may proceed.

Edward J. Henning - Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary

Thank you. Good morning and good afternoon. Some of the statements made during this conference call contains forward-looking statements. These statements are made as of today's data 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 or new or future developments.

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 web site at www.hcpi.com.

I will now turn the call over to our Chairman and CEO, Jay Flaherty.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Thanks, Ed and good morning from Southern California. We are delighted to have followed up 2007, the most successful year in HCP's 23-year history, with the most successful start to a new year in the company's history. During the first quarter of 2008, HCP produced FFO growth per share of 12%, closed asset dispositions of $336 million, raised equity proceeds of $560 million, accomplished the company's stated delevering goal, achieved superior operating results from the three acquisitions completed last year and was added to the S&P 500 Index.

I will comment further on these issues, but let me first introduce Executive Vice President, Chief Financial Officer, Mark Wallace and Executive Vice President, Chief Investment Officer, Paul Gallagher. Mark?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Thank, Jay and good morning. Since our year-end conference call, our efforts have been focused on meeting our commitment to deleverage our balance sheet. So far this year we've raised $560 million of equity capital and $336 million from asset dispositions. These transactions have generated net proceeds of $896 million all of which were applied to reduce the balance on our revolving credit facility. Our overall leverage at the end of the quarter stood at 58%.

Pro forma for $866 million and proceeds we received in April from the equity raise and asset sales, our overall leverage is down to 52%. We are now leverage neutral relative to our pre-Slough announcement levels, have $1.4 billion available under our $1.5 billion revolver and had $78 million of unrestricted cash at the close of business yesterday.

Our other credit metrics are in great shape as well. On a pro forma basis, our secured debt ratio was 12%, unsecured leverage ratio was 62% and floating rate debt represents 28% of our total debt, off 16% adjusted for the natural hedge provided by our Manor Care investment.

Our bridge loan balance is $1.35 billion, [inaudible] interest at 3.41% and has an extended final maturity of July 31st, 2009. Debt maturities for the remainder of 2008 are limited to $300 million of

floating rate senior and secured notes in September and $89 million of mortgage debt amortization.

For 2009, our debt maturities, other than the bridge, are limited to $277 million of mortgage debt. During the quarter, we issued 174,000 shares under our dividend reinvestment plan for total proceeds of $5 million. We also converted 577,000 non-managing member down REIT units into common equity.

Investment activity for the quarter was principally focused on life science development with five projects scheduled for completion this year comprising 466,000 square feet. We funded $49 million in capital projects this quarter. We acquired one senior housing facility for $11 million with a yield of 8.5%. We sold one senior housing facility and three skilled nursing facilities for $30 million at a weighted average exit yield of 8.7% and recognized over $10 million in gains. In April, we sold 17 properties for $306 million at an average cap rate of 9.3% based on 2008 contractual rents.

For the first quarter of 2008, reported FFO per diluted share was $0.56, a 12% increase over the $0.50 per share we've reported last year. Merger related charges were $1.2 million for the first quarter or less than $0.01 per share or such cost were $10 million or $0.04 per diluted share in the first quarter of 2007.

Our same property portfolio this quarter now includes assets acquired from our purchase of CNL Retirement Properties and assets included in our former GE joint venture. Our same property pool now represents over two-thirds of our total properties. Same property cash NOI growth for the first quarter was 2.3% lead by senior housing at 5.1% and skilled nursing at 3.8% with both sectors benefiting from contractual escalators in rent resets. Senior housing also benefited from rents in the first quarter of $2.5 million from property level expense credits related to our Sunrise properties. Of the $2.5 million, $1.1 million is reflected in direct financing lease income and $1.4 million is reflected in rental revenues.

In the life science sector, we've signed leases on all of the space vacated during 2007 at our Lusk campus in San Diego that impacted same property results. We expect occupancy and rents on that space to commence later this year. Our Slough portfolio, which is not included in our same property pool, was 91% leased at quarter end, up from 82% at deal announcement.

Medical office cash NOI growth was 1.2% reflecting rate increases of 2.3% partially offset by the collection of past due rent in 2007.

Our hospital sector same property cash NOI growth was impacted by one hospital in Texas that was vacated, one hospital in Louisiana where rents are being reserved and lower additional rents recognition on [inaudible] hospitals.

Regarding our guidance for 2008, we now expect reported FFO to range between $2.21 and $2.29 per diluted share. That range is $0.05 per share or lower than our previous guidance due to the 17 million shares we issued in April and acceleration of our asset dispositions. Mid point of that range represents a growth rate of 5.1%. That growth is primarily driven by our Slough portfolio and return on our Manor Care investment partially offset by asset dispositions to further deleverage our balance sheet.

Let me provide a few of the key assumptions that underlie our 2008 guidance. Our guidance contemplates no additional acquisitions of real estate or debt investments except those completed in first quarter and no contributions of assets in the joint ventures. We expect to fund $90 million of development and expansion projects this year, principally in our life science sector. Asset dispositions for the full year are expected to range between $700 million and $800 million with gains for GAAP earnings on these sales between $250 million and $350 million.

Our investment management platform should generate $6 million in fee income. Same property cash NOI growth is expected to range between 2.5% and 3.5%. G&A should be just over $17 million or roughly 6.5% of total revenues. Income tax expense is expected to be about $5 million for the full year. We now reflect a separate line item for our income tax provision in our financial statements, which primarily arises from activities in our taxable REIT subsidiaries. We expect to close on at least $225 million of agency secured debt later this year at an interest rate of 6.5% or better.

Merger-related cost for the year should be about $4.5 million or $0.02 per share primarily at the amortization of the bridge loan fees. And our forecast assumes that we exercise the first six-month extension option on our bridge loan.

I'll now turn the call over to Paul.

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Thank you, Mark. I would like to walk you through HCP's first quarter portfolio performance in greater detail. Before I go through our five segments, I want to highlight what will be a recurring theme in our supplemental and now that we are showing sequential quarterly results. On a going-forward basis, you will likely see sequential decreases from the fourth quarter to the first quarter of each year. Likewise, you will see sequential increases from the third quarter to the fourth quarter as we do not typically recognize additional rents until the fourth quarter of each year. This is especially true with our Tenant and Sunrise assets.

Now, let me walk you through our five segments. Senior Housing, our same property portfolio represents 99% of HCP's owned investments in Senior Housing and now includes our CNL assets acquired in the fourth quarter of 2006. Our sequential same property performance for Senior Housing declined 12%. As I mentioned previously, this is due to the recognition in the fourth quarter of add rents primarily from our Sunrise assets. Year-over-year performance, however, increased by 5.1% driven by normal rent increases and prior period expense credits.

Occupancy for our same property portfolio is 90.2%. While this represents a decline both quarter-over-quarter and year-over-year, it is still within our historical operating range for stabilized senior housing assets.

Our largest operators, which represent about 85% of our same property units have experienced an average occupancy decline of approximately 100 basis points year-over-year and 80 basis points sequentially. Despite the occupancy declines, our operators continue to improve facility performance through increases in rates and other service revenue. As a result, same property cash flow coverage year-over-year has increased 1.06 times to 1.13 times.

Hospitals, first quarter same property NOI was down sequentially 19.7%, again due to the recognition of add rents virtually all of which come from tenant hospitals. The year-over-year decline of 3.1% was the result of repositioning a hospital formerly leased to Community Health Systems to a new operator. Same property cash flow coverage year-over-year is up 1.96 times to 2.31 times.

Skilled Nursing, HCP's same property Skilled Nursing owned portfolio reported a first quarter sequential decline of 2.2% driven by tenant reimbursables generally billed in the fourth quarter. The portfolio produced 3.8% growth year-over-year from contractual rent increases. Same property occupancy for both year-over-year and quarter-over-quarter has remained relatively stable at 86%. Same property cash flow coverage year-over-year is down from 1.64 times to 1.39 times. This decline was a result of fair market rent increases in one of our stabilized portfolios.

Manor Care has provided us guidance on the company's first quarter performance. Occupancy for the first quarter of 2008 was 89%, which was stable compared to fiscal 2007. Quality mix remains strong at 73%. Actual debt service coverage for the first quarter increased to 2.15 times compared to 1.79 times pro forma for the full year 2007. This was driven by Medicare and managed care rate increases, higher equity senses and lower interest rates. This guidance indicates that Manor Care's performance is significantly exceeding our underwriting.

Medical Office, same-store performance for the quarter was up 1.2% on a year-over-year basis. This was driven by higher base rents and improved expense recoveries but was offset by previous collections of bad debt reserves reflected in 2007. The same property portfolio occupancy was 90.7%. Through the end of the first quarter, we experienced strong leasing with 45% of the 2.6 million square feet initially set to expire in 2008 having already been renewed or released.

We executed 177 leases totaling 690,000 square feet of first quarter expirations including the conversion of 141,000 square feet of month-to-month leases to long-term leases. Of the executed leases, approximately 108,000 square feet related to previously vacant space and the remaining 582,000 square feet related to the renewal of previously occupied space at 5% higher rents. The renewed leases brought our retention rate for the quarter to 82%.

Of the remaining 1.8 million square feet of space scheduled to expire in 2008, approximately 432,000 square feet has already been leased. And we have a pipeline of nearly 300,000 square feet of active negotiations.

As for the overall portfolio, MOB occupancy was 90% and now includes our newly developed MOB in Colorado Springs, currently 75% pre-leased to Memorial Hospital. Our pre-development pipeline includes six properties totaling approximately 555,000 square feet with a projected cost of $150 million.

Life Science, since committing to the SEUSA acquisition, HCP has leased or renewed 1.2 million square feet in our Life Science portfolio. Approximately 629,000 square feet of this leasing activity represents renewed or released space where rents have been increased by nearly 55% over expiring rates. As a result of leasing success achieved since mid 2007, we have increased the portfolio's leasing from 82% to 92% at the end of the first quarter. Occupancy in the portfolio was down 1% to 81% since last quarter, driven by the termination of a single tenant in the Bay area.

However, as tenant build out of recently executed leases is completed, occupancy will increase in the second and third quarter.

During the first quarter, HCP completed approximately 35,000 square feet of leasing activity all of which was in the Bay area. Of that 17,000 square feet related to new or renewal leases of previously occupied space and resulted in mark-to-market increases of 11%. The remaining 18,000 square feet of lease related to previously vacant space.

In addition, 42,000 square feet of space was leased in one of our last lines of joint ventures. Leasing prospects for 2008 are strong with 54% of 2008's remaining 302,000 square feet of expirations already renewed or released. Combined with the pipeline of nearly 500,000 square feet of active prospects, we anticipate increased occupancy and income growth as rents rolled to market.

We expect the mark-to-market rental increases on the remaining 2008 expirations to a range from 25% to 35%. On a same-store basis, Life Science portfolio consists of only 13 assets, representing 898,000 square feet or approximately 6% of our Life Science investment. Adjusted NOI from these Life Science assets was down nearly 16% year-over-year as a result of the repositioning of the Lusk campus, which is now complete.

As mentioned a last quarter's call, the entire same-store portfolio is now 100% leased and is in the process of tenant build out. The company's committed development pipeline is unchanged from last quarter and is projected to total 544,000 square feet in six buildings in South San Francisco. Five of these buildings totaling 466,000 square feet will be delivered this year. Genentech will take approximately half the space that will be entirely rent producing by the end of the second quarter. Amgen represents the remaining half of the space that will be delivered and rent producing between the fourth quarter of 2008 and the first quarter of 2009.

Future development and redevelopment pipeline represents an aggregate of 3.3 million square feet of expansion opportunities in South San Francisco, Torrey Pines, Halway [ph] and Carlsbad. Our San Diego markets while improving have not experienced the demand to warrant new development at this time. This will likely limit any new development starts until 2009.

In comparison, given the stronger demand in Northern California, HCP is in active discussions with tenants for new developments on our South San Francisco land inventory. As a result, we are in the final stages of entailing 540,000 square feet of space, which we will be marketed as build-to-suits. Construction could begin as soon as late 2008 upon significant preleasing.

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

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Thanks, Paul. We've made substantial progress in executing the delevering plan we committed to following the acquisitions that we closed in 2007. Before getting into those specifics, let me first welcome our newest Board member Lauralee Martin who was elected as HCP Director at last week's Annual Shareholders Meeting. Lauralee is President and Chief Operating Officer of Jones Lang LaSalle and brings tremendous amount of real estate, capital markets and international expertise to our Board of Directors.

During our February earnings call, I described our plan to dispose a $750 million of assets during 2008 and indicated that we had already received LOIs for 50% of that amount. Two months later, we have closed on or have executed LOIs for $685 million or 91% of the $750 million target. The assets include properties in our Senior Housing, Medical Office, Hospital and Skilled Nursing sectors.

As Mark mentioned our pro forma leverage ratio now stands at 0.52, exactly where it was prior to our Slough Estates acquisition. We are very pleased to have achieved our commitment to the leverage neutral within one year of the Slough closing three months ahead of schedule. If you pro forma the anticipated agency debt placement and remaining asset sales, our $1.5 billion bank line will be completely undrawn and we will have cash balances of approximately $600 million, reducing our bridge loan on a net basis to approximately $900 million. In so doing, we will have effectively toggled our $900 million Manor Care mezzanine investment from our bank line over to our bridge facility. This creates a hedge of the LIBOR based assets paired with LIBOR based funding locking in a positive spread of just under 600 basis points.

Since committing to our $300 billion Slough credit facility, nine months ago we would have raised $3.2 billion comprised of $860 million in equity, $825 million in debt and $1.5 billion of asset dispositions. While we had initially targeted a 50% debt, 50% equity refinancing split, we have ended up with a 43% debt, 57% equity split. Notwithstanding the turmoil in the credit markets, this success has enabled us to rapidly reduce our leverage ratio created by the significant acquisition program achieved last year. And this acquisition strategy has delivered superlative results for HCP shareholders.

Our February 2007 acquisition of Medical City Dallas, [inaudible] is presently 97% occupied with NOI margins of 65%. These margins are 300 basis points above projections and have resulted in superior cash flow from the project that is 4.6% ahead of our underwriting assumptions. Our 2007 acquisition of Slough Estates USA in August is nearing stabilization with an operating portfolio that is 91% leased and 88% rent producing and we own major sites for future development and redevelopment in San Diego and San Francisco.

Our December 2007 Manor Care mezzanine debt investment generated a 2.15 times debt service coverage ratio for the first quarter of 2008, up nicely from a pro forma 1.79 times debt service coverage ratio for all of 2007. Consistent with the strong operating performance that HCR Manor Care has produced of the last several years, the company continue to head new highs in several important operating metrics, leading to cash flows and earnings levels that were significantly better than we projected at the time of our investment. In fact, the company was sitting on $150 million of cash balances at March 31, 2008, well ahead of plan.

I concluded our June 4th, 2007 conference call noting, and I'm quoting directly from the conference call transcript, that our Slough acquisition solidifies HCP as one of the premier REITs in the world and the institutional partner of choice for healthcare real estate. A further affirmation of this status occurred last month with HCP's addition to the S&P 500 Index, described as the leading companies in leading industries, the most widely used investment benchmark for the U.S. Equity Markets.

The reshaping of HCP in the space of a few short years has created a portfolio of long duration, inflation protected, reliable income streams that are diversified across five property types located in high barrier-to-entry markets with tenant concentrations that represent the leading players in their respective sectors.

This effort has involved the passion, the creativity, the ingenuity and the persistence of HCP employees and on behalf of the company's Board of Directors, we salute them all on a job well done.

Operator, we would be pleased to entertain questions at this time.

Question and Answer

Operator

[Operator Instructions]. And your first question comes from Rich Anderson. You may proceed.

Richard Anderson - BMO Capital Markets

Hi, thanks and good morning to everybody over there. I guess the first question, Jay, what was meant by slowdown, you moved too fast in the opening music?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes, I appreciate your suggestion to go as leader of the pack. I just thought that was a little bit of [inaudible].

Richard Anderson - BMO Capital Markets

And the do you happen to know Jim Craimers [ph] track record on mad money?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes. I'll leave it at that.

Richard Anderson - BMO Capital Markets

Just a couple of quick questions, to be serious here. In terms of deals of size in the market, how are you seeing the market today with everything that's going on, I mean is that... are there opportunities out there and what's your confidence levels to pursue sizeable deals even though your acquisition number is zero in terms of your guidance?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Well, as we started to communicate on two quarters conference calls ago, we were seeing... actually, we saw this kind of, in July, start to really fall down the acquisition volumes and we had suggested that you would see sequential down drops in volumes in Q4 of last year versus Q3. On our last call, we said that would absolutely continue in Q1 versus Q4 and we suggested it would continue in Q2 [inaudible] Q1. We have seen absolutely nothing at all to move us from that perspective. In fact, if you look at the transaction that actually have closed in the last six, seven months, I think it's important to note that possibly without any exception, they were all kind of cut pre-August 1 the credit crisis. There are some deals... good-sized transactions that are out there, which we have in dialog with those situations for the better part of six or nine months. I would say that there's probably a convergence of perspectives on the parts of sellers and buyers. But it's not yet at the point where people are prepared to pull the trigger. So there is a lot of chatter, a lot of dialog but near-term nothing actionable.

Richard Anderson - BMO Capital Markets

In terms of leaving the bridge outstanding, I understand you are matching it with the mezz loan and it's relatively cheap money of course, but you still want to sort of keep your dry powder in terms of the line in your cash balance because ultimately you do need to pay that down in the next six months or six months plus July 2008. So I mean, how is that... how do you... is that the strategy to sort of keep your pockets open or keep your pockets empty so that when the day comes you get paid down that you'll be ready to do that or are you going to be pretty aggressive building up the line and hoping for the best?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

I'm not sure I totally understand the question. For starters, the bridge, the final maturing of the bridge is July 2009, not 2008.

Richard Anderson - BMO Capital Markets

Well, I know but you are adding --

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Number one. Number two, we anticipate in addition to having nothing drawn on our line, which on a net basis we are already there today, significant cash balances over the next couple of months as we close the reaming asset dispositions and the agency placement. At that point, I think what we choose to do in terms of completely paying off the bridge or allowing some of it remain outstanding given our Manor Care investment will probably function as two factors, Rich. One would be what's going on with the timing of our acquisition pipeline and as I've just indicated we see nothing actionable at the present time although there is quite a substantial pipeline in the aggregate, and two, just the general conditions of the capital markets. So, those would be the two drivers as to what we do. But as you can tell by the fast pace in which we delevered the balance sheet there was nothing at all in the context of hoping for the best in regard to this. We had, as you can tell by now, given the timing of the closing of the assets sales. Those things were in the works back in Q4 of '07.

Richard Anderson - BMO Capital Markets

You can only be ask the S&P once, is that right? I mean, that did help in this case.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Yes, that's why we are going to end up with $600 million of cash proceeds here in the next month or two. I mean that was all... which means we are that much farther ahead of schedule, which means we had to reflect that in the nickel adjustment to the guidance. But that will help the plan, it always assume that that we'd be leverage neutral by our committed time line of July '08.

Richard Anderson - BMO Capital Markets

Okay, last question is on the development schedule for Life Sciences. You changed the title heading from Estimated Stabilization Date to Rent Commencement Data. Are they the same? Do they mean the same thing?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Not, what we were trying to get across there is that in some cases the rent on the properties actually start well ahead of occupancy and tenant go down. Okay, so that's the reason for the change to try to emphasize where the data which the rents start as opposed to when TIs are completed which also controls the revenue recognition day.

Richard Anderson - BMO Capital Markets

Okay, so two of them, if I compare those commencement dates with the stabilization dates, the last two and the Oyster Bay Point two development B and C, they got pushed back, but they are not apples-to-apples with the fourth quarter disclosure.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

They would not be apples-to-apples, correct.

Richard Anderson - BMO Capital Markets

Okay. I will work with you offline on that. Thank you very much.

Operator

And your next question comes from Jerry Doctrow. You may proceed.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Thanks. I wanted to come back, I guess, maybe this is Mark's, and just clarify a little bit more on some of the swing in rent recognition kind of from fourth quarter to first quarter, stating we were a little high I think on first quarter probably on that. And then also want to get a little more color on G&A because I thing you indicated it would be at $70 million for the year if understood you right. But the run rate from first quarter is lot higher. So, I am trying to understand where it has headed.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Okay, on G&A as said in my prepared remarks, I think, G&A will still be slightly over $17million for the full year. I think the G&A, as you know, most of our G&A consist of compensation and then other professional fees. I think what you will likely to see for the full year is that the first quarter to be higher and then for the quarters they... for the remaining quarters in the year to trend lower. So, I don't expect first quarter to be a run rate for the full.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay. And then just on the swings four the first, again I think you talked about rent recognition on... it there a variable rent recognition in the fourth quarter, could you just give a little bit more color on sort of how much that sort of swung the numbers and basically I want to sort of want to clarify what the first quarter's kind of the right numbers, sort of good base number to go from?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Okay. Well, first of all what I said in terms of the credit themselves to sort of impact the revenue recognition, I'll start in terms of the sequential quarters. As I said, it was the impact of Sunrise property level credits of $2.5 million of FFO in the first quarter. Now, at the same time, in the fourth quarter of last year the effect of property level credits from Sunrise were $7 million... I am sorry, $4.1 million. $4.1 million FFO effect from Sunrise in the fourth quarter of 2007. So you did have a swing from $4.1 million to $2.5 million.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Now just to give you the same breakdown that I gave earlier, the $4.1 million, $3 million was recognized in rental revenues in the fourth quarter and $1 million was recognized in direct financing lease income.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Okay?

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Right. And then I think there is a swing also in sort of the hospitals as well?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

That would just be the kind of the SAB 104, [inaudible], which we have every first quarter, Jerry.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay. And just on the SAB 104, I hate to be as picky as I am but just on the SAB 104, is that $4 million in change I think for first quarter, it sort of listed as a positive but it's really a negative in the first quarter or the first three quarters at sort of that same level and never go positive in the fourth quarter, is that the right... is that the mechanics of what's happening?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

The revenues that we've recognized in the first quarter is less than the cash that we received in the first quarter. That's right.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Right. you've got a charge like $4 million that's sort of being a deduction, there's more... there is --

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Right, so if you're doing a FAD reconciliation then you would add it back.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

You are recognizing less in the cash?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Jerry, you got the same thing with the revenue recognition on the Slough portfolio. You've got $0.06 of rents that are coming in, contractual rents that people are paying us that goes back to, I think, Richard's earlier question because they are not occupied yet. We are not recognizing in FFO even though they are in FAS. So that's up $18 million just for '08.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay, okay. That's helpful. Again, Rich should have asked this, but I just have may be a little bit broader question on the development and sort of these leases that are coming on line. The timing... there is substantial amounts of leasing activity, so the timing that you've got in there is rent received but if tenant improvements efforts still underway, you're not actually recognizing that as income.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

For GAAP accounting, right.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Right, right. So, what should we think about in terms of guidance, in terms of what's in there, the timing that's in there right now is rent receipts, meaning cash rent is coming in, but it won't be recognized in GAAP and will be an add back for FAD, is that kind of a --?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Exactly. That number, just for the Life Science portfolio where we've got the preponderance of the development build out, it is$18 million in '08, which is $0.06 a share.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay. Okay. Great. Thanks.

Operator

And your next question comes from the Steve Guive [ph]. You may proceed.

Unidentified Analyst

Hi, Jay.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Hi.

Unidentified Analyst

My questions on the revenue recognition were answered, but perhaps this for Mark, the held for sale on the balance sheet, is that related solely to the assets that have been sold already or is there anything still in there for assets under contract?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Yes. There are a few other assets in there, but it is by and large the assets that we have disposed in the April or the balance.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Steve, that's a three-part transaction, three separate closings, some offers that need to be cleared, two of the three have closed, there is one remaining which is expected to close in the next two weeks.

Unidentified Analyst

Okay. But, you had referenced that there is $600 million plus of sales that you already had under letter of intent, but those are not in the held for sale, a lot of those are not.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes. But, just to be clear, I said there were $685 million, but not under letter of intent, $685 million either closed or...

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Or under letter of intent.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

So, a good chunk of the $685 million is actually already closed. In other words, 91% of our targeted $750 million, to Mark's guidance point, the range dispositions for the year is $700 million and $800 million, 91% of that is either closed or under LOI and the only portion that you would see in the balance sheet classification that you are referring to are the deals that have been closed and then the last piece of that transaction.

Unidentified Analyst

Okay. I got it. And then, just your comment on the... your new Board member and her international experience, does that imply your interest in expanding?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Well, look I mean, we look at everything, we've got an experiment, if you will, that's modest, but it's doing quite well on south of the border. We've looked north of the border and we looked, I personally been over to Asia twice in the last five months. So, we're... we got our antenna out everywhere. So we're constantly looking to see what the best opportunities are and it really goes back to our model kind of five property types with five products. We've got a very large universe into which we can either deploy capital given appropriate conditions or recycle capital. So, we're very fortunate in terms of the investment universe set that we've got to review.

Unidentified Analyst

Okay. Thanks.

Operator

And your next question comes from Michael Mueller. You may proceed.

Michael Mueller - JPMorgan

Yes, hi. Going back to your question about... not question but comment on acquisitions and it sounds like the probability of something happening at some point this year is a little bit higher than just having nothing baked into guidance. So, if something does arise, is it more likely to end up being for the investment management program based on what you're seeing at this point, or say transactions that were more likely just end up being on your balance sheet?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

It probably depends, Michael, a little bit about the nature of the investment. For example, if it's in... depending on the property type, I think, it would tend to be more an on-balance sheet transaction. If it was in the Skilled or the Hospital property types, I think, it would tend to be more a candidate for one or more of our existing JV partners with some dry powders still committed to us. If it was in, say, Life Science or MOBs and then in Senior Housing, it would be... it kind of depend on what our investment partners' appetite is. In particular right there, I think, they are a little more focused on development within Senior Housing right now as they are acquisitions of stabilized core properties. So kind of hard to give you a specific answer, but given, if you give us pretty good situation, particular property type and particular product type, we can kind of [inaudible] on that for you.

Michael Mueller - JPMorgan

Okay. Two questions coming from that then. Number one, can you comment on your partners' appetite when you think of the investment management... the institutional investor community, the appetite to put money to work today and how that may be different, let's say, this time last year. And also the flow of transactions that are coming across the desk, are they a little more skewed to certain property types than others?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Let me take the last one and then I will ask since Paul has just got back from [inaudible] Boston last month. I'll have him talk about appetite in the part of our present and prospected institutional capital partners. With respect to kind of where the flow is right now, lot are interested in mezz data. I guess our view is that in a market like this, you ought to either be buying quality at a discount or alternatively pursuing maybe some distressed opportunities. With respect to the first category, quality discount, if we were knocked out of the park with Manor Care investment and it's only one quarter's worth of performance to date but they are really rolling. And as you recall we were able to buy that piece of paper at $0.90 on the dollar. With respect to distressed there's some situations we are monitoring but I think it probably goes more towards the good underlying economics of Healthcare. They are not really at the point where I'd call them distressed yet and quite frankly they never get there. I think there... so there is a lot of mezz enquiry. There continues to be Senior Housing inquiry, continues to be Medical Office Building enquiry. The Life Science has, after a lot of activity in '06 and '07, a slowdown of touch, Skilled, a slowdown a touch and Hospital is actually, it's the first time I think in three years, I've been to say that there is some nice starting to show up on some of the fundamentals for the hospital space you've seen. Unfortunately, for those a quick advise you had a very strong flu season, which means, good things for the hospital space, probably means at the margin, not so good things for the senior housing space. And I think, there is a growing recognition on the part of the populous and Washington, D.C. that's something is going to have to happen in the next administration with respect to some sort of floor or a program to take care of the folks that don't have any insurance because they've lost their jobs or they are unemployed which at the margin going forward. At some point probably mean a reduction of bad debt expense coming off that federal issue. So I would say that hospital fundamentals are finally, after several years, starting to look a little better. Do you want to talk, Paul, about what you heard?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Yes, sure. I think the common thing that came out of pre-conference was the concept of the denominator effect. A lot of the pension funds, fixed income investments are down and it skewed their real estate allocations up significantly higher. Most people are talking in terms of doing self-funding transactions where they would need to exit something before they would need to enter into new transactions. The focus is away from core investments looking more towards value-add and opportunistic. There was some emphasize on doing new developments. I think the reception to being in the deal flow and understanding what the opportunities are high but definitely there is less capital out there right now that can be placed.

Michael Mueller - JPMorgan

Great. Thank you.

Operator

And your next question comes from Jim Sullivan. You may proceed.

Rosemary Pugh - Green Street Advisors

Hi, it's Rosemary Pugh here at Green Street Advisors with Jim Sullivan. How are you?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Great. How are you?

Rosemary Pugh - Green Street Advisors

Good. In the first quarter you bought some Senior House... a senior housing property and sold skilled nursing and senior housing at cap rates in the mid-8% to 9% range. What are you seeing in terms of cap rates across the sectors?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

There is no... the bottom line is there is no presence to really point to. There is...

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

We can honestly say that any deal of size, say over $25 million to $50 million that was in the market after August of last year, we have not seen transactions close in senior housing and MOB space and for that matter less lands. We just have not seen transactions close. So, I don't know that we have a good data point to be able to tell you.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

If you do that math, and you guys note that than anybody else, lower loan to values, higher spreads and in terms of borrowing costs that people are maintaining the same IRR as you kind of solve for the difference in cap rates. But, the bottom line is there has just been no, but next to nothing in the way of any transactions to glean any insight from.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

On your two comments about the two transactions, our 8.5% lease rate that we had on the senior housing property, that was actually originated back in the summer of '07 and that was a turnaround property that we put into an existing master lease where there were rental... where there was an occupancy play, we were able to structure a higher than normal going in lease rate. So, that was kind of an after market kind of transaction. And then, the stuff that we sold with reference to the 8.7% cap rate that was on skilled nursing facilities.

Rosemary Pugh - Green Street Advisors

Great. That's very helpful. With respect to the impact of the economy and falling housing prices on Senior Housing and independent living, in particular, what are you hearing from you operators in terms of what's happening in the first quarter of '08, particularly with respect to independent living?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes. Okay, well we've got...

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

We've got some amount of time there given that we've got a big chunk of assets with one of our joint ventures, with a peer play independent living. You're seeing both year-over-year... first of all year-over-year you are seeing very nice same property performance improvement, that's point one. Point two, both year-over-year and sequential quarter you're seeing plus or minus 50 basis point to 100 basis point declines in occupancy.

Now, I'd point out that you coming off of two incredibly strong years, '06 and '07 where operators have been very, very aggressive pushing rates and really haven't had a whole lot of push back relative to occupancy. So, that's there and we're aimed at... one thing to focus on '08, one of the things we are focusing on is not just occupancy but rates. I think, you're going to start may be see some trade-offs there for the first time where they haven't had to do those trade-offs in '06 and '07.

And other factor, I mentioned here the strong flu season, not very good unfortunately for hospital operators, it's not so good for Senior Housing folks. But, we're occupancy wise, we're still well within a range where that we would expect to stabilize the assets. We can find no one geography and we've been... we kind of being focused on this, on your question here Rosemary. No one geography, no one operator, and no one property type that really stands out. We really quite frankly have identified very little sign of any macro economic weakness with the potential exception of may be being on some of the entry fee, the pressure might be on some that we've heard on some entries, operators that are highly dependent on the entry stage, particularly the first generation not so much need for the second and third generation CCRCs. So that's out there. I guess as we drill into, really get into, get very granular of what is going on in our portfolios, we are seeing year-over-year and sequential quarter. We are seeing move-ins are consistently higher, we are just seeing that the move-outs are a little bit higher than the move-in, the gap is narrowing, so that's going on.

And then, my final comment is as you were aware, our first quarter numbers really represent fourth quarter numbers for of operators. So in addition we've kind of been formally been pinging a lot of the operators in the last couple of weeks as they have for the first time kind of closed the books on their first quarter which won't show up until our second quarter. And without exception the occupancy levels are relatively unchanged from where they were at 12/31/07. So that's our take as to what's going on.

Rosemary Pugh - Green Street Advisors

Great. And one more question with respect to Manor Care, you report that debt service coverage has improved and that Manor Care is doing very well, but how do... how did Manor Care do so well given or where is the improvement coming from given that this is a business where it's hard to change things quickly?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Well, remember their model... remember they are kind of a unique model. They are really not... they are really not a skilled nursing company. Their whole model is different. Very short, short-term stay, kind of sub acute, the preponderance of their revenues are from the managed care and private pay, 73%, 74%. It's really a misnomer I think quite frankly to call that company as skilled nursing. There is a lot of people on this call that are probably a little more well versed in that company's history. But so they have done very well, they have benefited from some Medicare, Medicaid rate increases. They obviously benefited from lower interest cost. But if you take a look at that investment, we're very excited about that.

If you take a look at just the jumping-off point of that investment which was December 21 to today... probably the best benchmark that's out there would be in terms of best-in-class operator, large-scale operator and owner as opposed to a lessee of it's real estate, the obvious other benchmark there would be the issue of HCA toggle notes that we also own. I think it's instructive to look at the fact that on the day we closed our Manor Care investment on December 21st those toggle notes were trading... for HCA we are trading 103 in a quarter and this morning they bid at 107, 107.5. So we obviously felt great about the management team and the Manor Care investment. We're also very fortunate with our timing there to have the chance to take that down at the time we did given the overall economics we're able to negotiate.

Rosemary Pugh - Green Street Advisors

Great. Thank you.

Operator

And your next question comes from Craig Melcher. You may proceed.

Craig Melcher - Citigroup

Hi, I'm here with Michael Burman [ph] as well. On the secured debt that you plan and do, I think in the past you were saying you were looking to do a $500 million deal and now it's closer to the $225 million, what's the change in thinking there?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

We never said we were going to do $500 million.

Craig Melcher - Citigroup

Okay.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Though always we've been looking at this one portfolio, it's always from the jumping-off point, it's always been $225 million and it's pretty far along at this point.

Craig Melcher - Citigroup

Okay. And with this... when you are planning on using the bridge rather than the credit facility, what's the thinking there? Let's say what's the own rate on the bridge versus the credit facility after the bridge goes rate goes up with the expansion?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Well, right now they are identical. They are... we borrow at LIBOR plus 55 and then we've got a 15 basis point facility. So all ending on both the credit... the revolver and the bridge were at LIBOR plus 70, where we had to decide... where we need to move forward at July 31st and exercise the first six-month extension, you would add 15 basis points to that.

Craig Melcher - Citigroup

Okay. And what are the cap rates on the dispositions that you currently have under LOI?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

We look forward to telling you about those as soon as they close.

Craig Melcher - Citigroup

Okay. Thank you.

Operator

And your next question comes from Jay Habermann. You may proceed.

Jonathan Habermann - Goldman, Sachs & Co.

Hi, good morning. Just following up on obviously pricing in the market but you know Jay, just the assets you do have remaining for sale you mentioned the LOIs. Can you just give us a sense of sort of where you're seeing pricing versus original expectations? Has there been much of a change?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

No, none what so ever. Again, look the assets we are selling, they are economically very attractive, master lease or guarantees, parent guarantees in most cases, good-quality operators, contractual rents with no role in next couple of years. As I mentioned I think on the previous call, for the folks that are out there, that have access to committed short term borrowing facilities, it's very attractive. It looks... it starts to look a little bit like the same sort of phenomenon we are experiencing on America, not quite that spread, but, so you got the same dynamics. So for the folks that are [inaudible] position of having committed credit facilities that are funded at attractive short-term rates, it's a nice match of their interests and our interests.

Jonathan Habermann - Goldman, Sachs & Co.

Who generally is buying at this point, is it more institutions?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

No. We are in discussions almost exclusively with operators, often times the existing operators, similar to what we did last year with Americas and Oncore [ph] transaction. So there's a strategic, there is a nice kind of strategic fit here as well. They know the assets better than anybody else. It's a reasonably straightforward process of kind of how you are dealing and going into closing. So it just works out real well for everybody.

Jonathan Habermann - Goldman, Sachs & Co.

Okay. And you mentioned obviously, not much in the way of acquisitions for the balance of the year. But if you just had a sort of rank what were you seeing best risk-adjusted returns?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Hang on a second. I didn't say not much in way of acquisitions this year. I said we have nothing in our guidance for acquisitions for the rest of the year. You should not take from that we anticipate making no acquisitions.

Jonathan Habermann - Goldman, Sachs & Co.

Okay. And in terms of just we are seeing the best risk-adjusted returns, where are seeing that today?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Probably, right now today, probably development. We have got... we worked very, very hard in the first quarter with the entailment process, particularly in the Bay area on four specific sites, two developments totaling about 865,000 square feet and two redevelopments totaling about 570,000 square feet, which should be marketed on a bill-to-suit basis. So that's pretty good. The pipeline that Paul described in MOBs where it's about $150 million of cost. Those look very, very attractive. I see they are probably kind of the top of the list right now. I expect there to be some additional convergence here eventually in the next quarter or two between buyers and sellers of some of the more stabilized portfolios that are out there. That is our view as to what is happening.

Jonathan Habermann - Goldman, Sachs & Co.

Now, are you seeing any slowdown in the VC Money, is that impacting any of the... it doesn't sound like based on your comments on Life Sciences but is that impacting any of the demand there?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

You know the VC Money is going to come and go with how good the IPO market is, Jay? And so, I think, it actually has slowed down, given there's a lot of much in the way of IPOs up until a couple of weeks ago. So, I think, that has slowed down. I think, we've seen a slowing in the velocity of the leasing in Life Sciences but again from our standpoint we're out of inventory in San Diego and up in the Bay Area where we are rapidly approaching that point and the pipeline of enquiry that we have is well in excess of what we've got. So, we're... we feel very fortunate that we are where we are; when we are, where we are, if that's not too complicated comment. But I think in the last six months the VC has started to slowdown, but again we would see what happens to market, that's going to be a function largely of the IPO market.

Jonathan Habermann - Goldman, Sachs & Co.

Okay. And just two other questions, the $35 million... the one-time, or I should say, the interest and other income, is that a good run rate? I assume... is there any one-time season there? Or is that simply just addition of Manor Care?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

It's just the addition of Manor Care, it's a pretty... which should be a pretty good run rate for the rest of year.

Jonathan Habermann - Goldman, Sachs & Co.

So that's the first real full quarter of Manor Care impact?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes.

Jonathan Habermann - Goldman, Sachs & Co.

Okay. And then lastly, Jay, you mentioned deleveraging but I mean, do you see change in that sort of 50%, sort of debt-to-cap target overtime if this credit crunch sort of persist longer?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

That's a hell of a good question. That's a hell of a good question. You were picking that around last week at our Board meeting. We will see, I think it's important not to overreact either way. So, I think, we're in a fortunate position, we've got a dial in a capital structure here if you want given our ability... our proven ability to recycle capital, our relationships with the Street were not once, not twice now we've delevered after significant acquisitions. In fact, I'd argue that we kept that same... we held ourselves the same standard being leveraged due to after Slough, now withstanding the fact that subsequent to that we made the Manor Care investment. So, but we're thinking about that and obviously we're most focused on the... debt markets when I make those comments for the better part of last six months, quite frankly. We've opted to be investors in those markets as opposed to issuers. We do have the ability to access the agency market particularly on the Senior Housing side. So, we are kind of taking this all and I think, it's important, I think it shows [inaudible] after a quarter two. I think we've... we are taking all this in and we've been very pleased that we've been able to execute the delevering plan in the middle of all of this, but we'll see where that goes... that is a fertile food for thought over the next year or two, I would suggest.

Jonathan Habermann - Goldman, Sachs & Co.

Okay. Great, thanks.

Operator

And your next question comes from Tayo Okusanya. You may proceed.

Omotayo Okusanya - UBS

Hi. Good morning, Jay.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Hi.

Omotayo Okusanya - UBS

Quick question for you. In regards to going back to focusing on the operators, I know Skilled Nursing is a much smaller part of your portfolio right now. But what are your operators saying about potential changes in regards to Medicare policy? I know more states right now are having the tough time with their budgets, some of that could mean for potential Medicaid policy going forward?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes, I mean, your concern that you've raised is right out of our five-year business plan at three years ago, we were very concerned given that most skilled operators have preponderance of the revenues from state-based Medicaid programs and would be sure they didn't predict a sub prime fallout along the lines that has occurred. But if you go back and look at state governments, the way they have revenues, they basically have two sources of revenue, right? They have got tax receipts on ordinary income and they have got tax receipts on capital gains transactions and in order to grow tax receipts on ordinary income last time I checked, you got to have growing employment. We certainly don't have that in the country today and we feel that probably more acute out here in California where I think unemployment just ticked over 6%.

And then with respect to capital gains transactions given what's happened in the stock market and real estate markets, I don't think there is a lot of that happening. So you're swinging... you are seeing enormous swings from surpluses to deficits on the books of the state budgets. In California alone, in less than 12 months, have gone from $9 billion surplus to projected $14 billion deficit. And that was really the main driver as to why we decided to significantly reduce our Medicaid exposure. We feel good that we did it when we did it, we've got very little left. And with respect to the debt investment in Manor Care that is really different model as I said earlier. Their Medicaid exposure is very, very low and again that investment is a debt investment as opposed to an equity investment.

So I think there is some concern out there. I think they have had an pretty good run in the last three or four years. The operators that we talk to say they are concerned but oftentimes it's an election year and chances are if anything happens, it won't be as pronounced as some of the initial proposals. That's the general buzz that we get from the operators but watch we have done, that's what all we say.

Omotayo Okusanya - UBS

Thanks, Jay.

Operator

And you have a follow up question from Jerry Doctrow. You may proceed.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Sorry, it's another minor point. There is an item I think in the Q that just talks about this four on five I think Senior Housing properties, I think it was maybe in the fourth quarter as well. I was just trying to get a little color mostly in the context what's going on with the operators.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

I think those are foreclosure properties?

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Yes. We had... those have been around for two or three years. So that's some of the few remaining vestiges of some of our fourth quartile. I guess probably the only thing that's left out of our fourth quartile portfolio review that took place when Paul first came in four years ago, they have been around for... it had been identified in that bucket for three or four years, you should not all...

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Anything from a standpoint of that being indicators to what's going on.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

And Jay, again I probably should know this but could you just give me a little more color as to how much of your Senior Housing stuff, you think you have the big chunks of Brookdale and Sunrise stuff, is that just... it's a straight lease and then you get some ups sort of at year-end or do you have any operating exposure on those or operating... participate in the operating of those?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

For the most part it is... Paul is going to whack me if I say this straight up lese settlement. We have one lease, it is the same as another. I guess in the original, when we did the mezz deal into American Retirement Corp, we have a participation, don't we?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

We have a participation in incremental revenue on some of the assets.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

But isn't over some threshold?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Yes, it is over a threshold.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes. I think for the most part Jerry, I think we are modified versions of leases, which is why we feel so good. Again, we spent a lot of time on this... the comment that you are really getting at with respect to the operators in our portfolio and I think we detect some softness but it's after two phenomenal years and from an HCP shareholder standpoint, I get real comfortable when I start to take a look at some of those coverage ratios, what the last two years of good times have created in terms of the coverage ratios across the whole company, but particularly in Senior Housing. So, I think that will be my take on that.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay. And then, what's driving again, you answered this earlier, but what's driving that swing then in the fourth quarter where you get the pump in the earnings?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

I'm sorry, what?

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

In the Senior Housing side, you said you have sort of... earnings were higher, fourth quarter revenues higher, fourth quarter and then it's coming down in first quarter.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Well, we're not going to... well we recognized it is add rents. I mean for example, we are not... we reserved their add rents even if we are getting them, or sometimes there is clawback features in some of the leases. So, until we have it for sure, we're just not going to reflect it in our fourth quarter. So, we tend to be very conservative on that. So, I think for us, this is kind of the first time most of you folks have seen, the CNL portfolio, it's the first time it really drilled into the sequential quarterly disclosure that we put in as opposed to the year-over-year. That's all great, and we're glad to answer all your questions. I think it's probably more representative to take a look at our year-over-year metrics as opposed to sequential quarters. They are for you, glad to answer any questions, in particular it's probably not at all represented to look at that differential between Q4 and Q1 because that does have an extra bit of noise in it.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

I know, but it will be sort of a normal seasonal variation that you'll see discussed with those...

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

Yes, you know Jerry, part of it is based on the call, and Senior Housing tends to have a kind of soft first quarter. So, you've got all sorts of things going on here. I think, looking at things on a year-over-year basis probably a little better, obviously from an asset management standpoint where we're actually looking out over the next couple of quarters. And again we see kind of more of... more of just reported quite frankly, nothing that's got strong growing.

Jerry Doctrow - Stifel, Nicolaus & Company, Inc.

Okay, thanks a lot.

Operator

And your next question comes from Karin Ford. You may proceed.

Karin Ford - KeyBanc Capital Markets

Hi, just a couple of quick questions. On the MOB portfolio, where do you think the occupancy will be after all those successful leasing you've done this quarter? And did you say you were getting 5% rent increases on the MOB portfolio?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

We've got 5% rent increases on the renewal rents that we had.

Karin Ford - KeyBanc Capital Markets

And are new leases being signed at roughly the same rate as well?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

New leases for vacant space?

Karin Ford - KeyBanc Capital Markets

Yes.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

We are either achieving or exceeding what we've budgeted for those particular spaces. So, we don't see, I mean we're getting the rents that we're targeting in the various types of markets.

Karin Ford - KeyBanc Capital Markets

Where do you think the occupancy will be in the MOB portfolio later in the year?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Below 90's. A lot of it is retention. We're doing 82% right now. So, you might see a couple of basis points pick up with leasing that we've achieved.

Karin Ford - KeyBanc Capital Markets

Great. And last question on the Life Science portfolio, you mentioned that a single tenant had terminated their lease in the Bay Area, and I noticed that Amgen had moved down your top tenant list, was Amgen that tenant that's terminated?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

No, actually this was... that the tenant had the right to terminate the lease and we actually were able to negotiate an excellent fleet [ph] without going away. But, the thing we liked about that deal is the rents for dollars a square foot and we think we can easily release that space at about $2 and $2.25. So, we actually see some upside in that particular transaction.

Mark A. Wallace - Chief Financial Officer, Executive Vice President and Treasurer

For those of you, and there are several on the call, that is towards that our properties, that was at the Sea Port Campus. So that was... that may have something similar there that what happened at and Lusk Campuses.

Karin Ford - KeyBanc Capital Markets

Great, thanks.

Operator

And your next question comes from Adam Feinstein. You may proceed.

Adam Feinstein - Lehman Brothers

Great, thank you. It's late in the call so I'll just... I'll be brief. First of all thank you for all the details on Manor Care. I was listening to a nursing home conference call there, so I appreciate that?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

It's always like that?

Adam Feinstein - Lehman Brothers

Yes, helpful for me. But just real quick, clearly the same property change in NOI will bounce around between course, you made that point, but as we think about the five segments could you just help us ballpark the growth for those five segments for the full year. So not looking at the changes between the quarters but just looking at an annualized full-year number. Just curious in terms of how you think about growth between the five segments?

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

The growth prospects of the five sectors, Adam?

Adam Feinstein - Lehman Brothers

Yes, I guess, yes the growth prospects.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

I would say Life Science has got a lot of new stuff coming on. Paul mentioned the Amgen and Genentech campuses that are quick into rent producing mode for the first time here. Not withstanding the fact that we are not going to be able to see it in FFO. So that's obviously, that plus the rents rolling there, the leases that we have growing the market. I think Paul put them between 25% and 30%. So that's a big pop there on top of the rent producing leases at Genentech and Amgen coming on line on top of the Lusk campus which will start to become fully rent producing on July 1. So in Life Science as you got kind of outsize sort of growth opportunities there, which is probably as much a function of kind of the things you've strategically done to the portfolio either down to Lusk campus or the Slough portfolio.

MOBs is probably little more of kind of steady as she goes ex the development pipeline that Paul mentioned the one in Colorado that we are really excited about. We're seeing very, very good retention rates kind of low to mid 80s and nice increases there. Hospitals, I think that's going to be kind of flat may be tending up towards the second half of the year. So that's again and there are coverages there, I think they are at the all-time high since I've been here and that excludes the Medical City Dallas campus just because that' s on our same property and if you recall when we bought that that was north of a six times coverage ratio. So you will see our coverage ratios in hospitals start to kick up. Again that's going to be... that will be a function of... I am not sure that representative of the entire Hospital portfolio as it is the Medical City Dallas campus coming on line, and I guess it'll be in the next quarter, I guess. Hospital... Skilled, I think that's probably flat to may be down a touch just with some of the rent increases. You'll see the coverage may be, you saw some of that moderate already. Again that's a very small piece beyond real estate portfolios, that's a very small piece. Almost all of our investment in that space now is represented by the Manor Care investment.

And in Senior Housing, I'd say that's going to moderate here, I think two fantastic years for the industry. I think it's a great business. We love it. We love our operators. We love our real estate. But I think just... you can't keep going up to that low to mid double digits forever because that will moderate a little bit as well.

Adam Feinstein - Lehman Brothers

Okay. Thank you very much.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Yes.

Operator

[Operator Instructions].

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Okay, Operator.

Operator

Yes.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

I think is that it.

Operator

Yes, you have no questions at this time.

James F. Flaherty III - Chairman of the Board and Chief Executive Officer

Okay, everybody, appreciate your time and your interest in HCP and we'll talk to you in a couple of months. Thanks again.

Operator

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. Good day.

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Source: HCP, Inc. Q1 2008 Earnings Call Transcript
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