Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page1of28
HCPIncorporated(HCP)EarningsReport:Q12016ConferenceCallTranscriptThefollowingHCPIncorporatedconferencecalltookplaceonMay9,2016,12:00PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JohnLu;HCP;EVPLauraleeMartin;HCP;President&CEOMikeMcKee;HCP;ExecutiveChairmanTimSchoen;HCP;CFOJustinHutchens;HCP;CIO
OtherPart icipants
VikramMalhotra;MorganStanley;AnalystNickYulico;UBS;AnalystJuanSanabria;BoAMerrillLynch;AnalystRossNussbaum;Nussbaum;AnalystChadVanacore;Stifel;AnalystSmedesRose;Citi;AnalystMichaelCarroll;RBC;AnalystKevinTyler;GreenStreetAdvisors;AnalystTayoOkusanya;Jefferies;AnalystToddStender;WellsFargo;AnalystJeffGaston;KeyBanc;AnalystJohnKim;BMOCapitalMarkets;AnalystMichaelMueller;JPMorgan;AnalystRichAnderson;MizuhoSecurities;AnalystAndrewRosivach;GoldmanSachs;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheHCPConferenceCall.
(OperatorInstructions)
Pleasenotethiseventisbeingrecorded.
NowI'dliketoturnthepresentationovertoyourhostfortoday'sconferencecall,JohnLu,ExecutiveVicePresident.Youmaygoahead,sir.
JohnLu (EVP):
Thankyou,Operator.
Today'sconferencecallwillcontaincertainforward-lookingstatements,includingthoseaboutourguidanceandthefinancialpositionandoperationsofourtenants.Thesestatementsaremadeasof
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page2of28
today'sdate,andreflectourgoodfaith,beliefsandbestjudgmentbasedoncurrentinformation.
Thesestatementsaresubjecttotherisks,uncertaintiesandassumptionsthataredescribedinourpressreleasesandSECfilings,includingourannualreportonForm10-Kfortheyearended2015.
Forward-lookingstatementsarenotguaranteesoffutureperformance.Actualresultsandfinancialconditionmaydiffermateriallyfromthoseindicatedintheseforward-lookingstatements.
Futureeventscouldrendertheforward-lookingstatementsuntrue,andthecompanyexpresslydisclaimsanyobligationtoupdateearlierstatementsasaresultofnewinformation.
Additionally,certainnon-GAAPfinancialmeasureswillbediscussedonthiscall.WehaveprovidedreconciliationsofthesemeasurestothemostcomparableGAAPmeasuresinoursupplementalinformationpackageandearningsrelease,bothofwhichhavebeenfurnishedtotheSECtoday,andareavailableonourwebsiteatwww.hcpi.com.
Also,duringthecall,wewilldiscusscertainoperatingmetricsincludingoccupancy,cashflowcoverage,andsame-propertyperformance.Thesemetricsandotherrelatedtermsaredefinedinoursupplementalinformationpackage.
IwillnowturnthecallovertoourCEO,LauraleeMartin.
LauraleeMart in (President&CEO):
Thankyou,John.WelcometoHCP's2016FirstQuarterEarningsConferenceCall.Joiningmethismorningare,MikeMcKeewho,weannouncedthismorning,hasbeenelectedExecutiveChairman;TimSchoen,ChiefFinancialOfficer;JustinHutchens,ChiefInvestmentOfficer;andJohnLu,EVPofCorporateFinanceandInvestments.
Wehavealottocovertoday.
First,letmehighlightsomeadditionsandchangestoourleadershipteam.First,asImentioned,MikeMcKeehasbeenelectedExecutiveChairmanofthecompany.MikehasbeenoneofourlongesttenuredBoardmembersandhaveservedasNon-ExecutiveChairmanoftheBoardsince2013.He'stheformerViceChairmanandCEOofTheIrvineCompany,andrecentlyhasbeenCEOofBentallKennedy,aleadingrealestateinvestmentmanager.MikeandIhaveworkedcloselytogethersinceIbecameCEOandIlookforwardtoworkingevenmorecloselywithhiminhisnewroleatthisimportantpointinthecompany'shistory.
IamalsopleasedtoannouncethepromotionJustinHutchenstoChiefInvestmentOfficer.Justincontinuestobeanincreasinglyvaluablecontributortoourstrategyandexecution.Inaddition,weannouncedKaiHsiao,formerCEOofHolidayRetirement,hasjoinedHCPasEVP,SeniorHousingAssetManagement.
Asmostofyouknow,afteradecadeofoutstandingservicetoHCP,TimSchoenhasacceptedanewpositionasPresidentofBioMedRealty.ThiswillbehislastearningscallwithusasourCFO.Wesincerelythankhimallthebestinhisnewopportunity.I'malsopleasedtoreporttherecruitmentprocessforTimreplacementiswellunderwayandwehopetohavedefinitivenewssoon.
Today,weareannouncingamajorstepinaddressingissuesrelatedtoourHCRManorCareportfolioinvestment,andwantdescribeinsomedetailwhatimpactthatstepwillhaveonHCPgoingforward.Andofcourse,wewilladdressourquarterlyresults,andupdateyouonotherimportantinitiatives.
Beforewebegin,pleasegototheInvestorRelationssectionofourwebsitewherewe'veposteda
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page3of28
presentation,whichwe'llrefertoduringourremarks.LetmeturnthecallovertoMiketobeginourdiscussionofthespin-offtransaction.
MikeMcKee (ExecutiveChairman):
Thankyou,Lauralee.
IwanttostartbyexpressingmygratitudetoLauralee,ourBoard,ourexecutiveteamandastellargroupoffinancialandlegaladvisorswho'vebeenworkingexceptionallyhardinpreparationfortodayandthedaystocome.Sinceitsinception,IhavebeenabigbelieverinHCPandmorethananytimeinourhistory,Ibelievethebestdaysforthiscompanyareahead.
Foranumberofmonthsnow,ourteamhasconductedacomprehensivereviewofallofouravailableoptionsregardingourHCRManorCareportfolioconcentration.Aspartofthatprocess,wealsohaveengagedCarlyleandHCRManorCareleadershipinourdiscussions.Aswereviewedouroptions,welandedontwokeygoalsasweendeavoredtomaximizevaluetoourshareholders.
First,webelieveasfiduciarieswearestewardsoftheinherentvalueexistinginourHCRManorCareHoldings,andweneedtopreserveandrealizeasmuchofthatvalueaspossible.Andsecond,weneedtoeliminatetheoverhangthatexistsfromthecurrentchallengesfacingHCRManorCaresothattherestofourbusinesscanflourish.
Aswefocusedonthosegoals,andreviewedouroptions,formanyreasonsitbecamecleartotheBoardthatthebestpathwayforwardwastopursueaspin-offtransaction.Wedonotseethespinasanendinitself,butasameanstoanend.Soletmerunthroughthelogicbriefly,whichwe'veoutlinedonslidesoneandtwoofthepresentation.
Withalong-termperspective,webelievethereissignificantvalueembeddedinourHCRportfoliothatispresentlynotbeingrecognizedbythemarket.Wearelong-termbelieversinthepost-acuteandskilledspace.
Justseveralweeksago,thefederalgovernmentannouncedaproposedincreaseinratesforcareinthisspace,andhighlightedtheessentialservicesthatareprovidedinthecontinuumofcarebypost-acuteandSNFfacilities.AsweexploredouroptionsforaddressingHCRManorCare'schallenges,itwasapparenttousthatHCPisnottheoptimalinvestmentvehicletomaximizethevalueinourHCRManorCarerealestate.
Incomparison,SpinCoasastandalonebusinessfocusedonitspost-acuteandseniorhousingassetswithadedicatedmanagementteam,willbeabletoemployawiderrangeofstrategieswithoptionalitytomanage,sellortransitionassetsasdesiredprovidinganattractiveinvestmentalternativeforinvestors.Sothespintransactionresultsinthecreationoftwoseparatebusinessplatforms,eachwithamorestrategicfocus,strongmanagementteams,adistinctivebusinessstrategyandinvestmentprofile,andanappropriatecapitalstructuretosupporteachcompany'sindependentobjectives.
BeforeIturnitovertoLauraleetogiveyoumoredetailsonthespinandtheimpactitwillhaveonHCPpost-spin,letmehighlighttwoimportantpoints.First,weareverypleasedtoannouncethatMarkOrdanisjoiningourteamtoplayacriticalroleinexecutingthespin.MarkhasjoinedusasaSeniorAdvisorasweprepareforthespinandwillbecomeCEOofSpinCouponexecution.
ManyofyouknowMarkfromhisdaysasCEOofSunriseSeniorLivingandmorerecentlyasChairmanofWPGlimcher,amongothersignificantroles.InidentifyingandrealizingtheembeddedvaluelockedinHCRManorCare,webelievewehavethebest,themostexperiencedleaderavailabletotakeonthisassignment.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page4of28
Andlastly,Iwouldnotethatlikeanyspin,weexpectSpinCotobesuccessful,butmoreover,welookforwardtoreturningHCPtoahealthycompetitiveandgrowingcapitalproviderintheevolvingworldofhealthcare.
Sonow,letmeturnitbacktoLauraleetogiveyousomemorebackground.
LauraleeMart in (President&CEO):
Thankyou,Mike.
Letmedrawyourattentiontoslide3ofthepresentation.SpinCo'sportfoliowillbeprimarilyconcentratedinHCRManorCare'spost-acuteandassisted-livingfacilitiesandwillalsoincludethe$250milliondeferredrentobligationthatwasnegotiatedinconnectionwiththeMarch2015leaseamendmentaswellasthe9%investmentinHCR'soperatingcompany.
Withasingularfocusonaportfolioofprimarilypost-acuteandseniorhousingassets,aflexiblecapitalstructure,andafocusedmanagementteamledbyMark,webelieveSpinCowillbewellpositionedtotakeadvantageofdynamicsthatareuniquetotheskillednursingspaceandprovideinvestorswithanattractiveinvestmentreturnfortheriskprofile.
SpinCoisintendedtobeconservativelycapitalizedtowithstandpotentialuncertaintyfromitstenantconcentration.ProceedsfromtheSpinCodebtfinancingwillbedistributedtoHCPandimportantly,SpinCowouldhaveexpandedflexibilitytomanage,sell,ortransitionassetsasrequiredinataxefficientmanner.HCPshareholdersareexpectedtoreceivesharesofSpinCoviaapro-ratadistribution.Followingthedistribution,HCPshareholderswillownsharesinbothHCPandSpinCo,andthenumberofHCPsharesownedbyeachshareholderwillnotchange.SpinCoexpectstofileitsinitialForm10registrationstatementwiththeSECinthenext30daysandthespinoffisexpectedtobecompletedinthesecondhalfofthisyear.
TurningtothehighlightsforHCPonpagefour,webelievethespingivesHCPtheabilitytoreconfirmourselvesasabluechip,innovative,relationship-orientedhealthcareREIT.Wewillhaveastrongfinancialprofile,ahallmarkatHCPformostofour31-yearhistorywithapremierportfolioweightedtowardsprivatepay.We'llbefocusedonourcoregrowthbusinesses,seniorhousing,medicaloffice,andlifescience.
Thequalityofourportfolioincomepostspinincreasestremendouslywithayounger,welllocatedassets,improvedtenantconcentration,andamorestableincomestreamthatis95%privatepay.Importantly,withaninvestmentgradebalancesheetandanimprovementinourcostofcapitalovertime,wewillbewellpositionedtoaccelerateouraccretiveexternalgrowthopportunities.
Slide5,putsaframeworkaroundHCP'sfinancialprofileproformaforthespintransaction.ThecashproceedsgeneratedfromborrowingsofSpinCoandourplannedassetsaleswillbeusedtorepayhighercoupondebtallowingHCPtomaintainacreditprofilethatsupportsitsgrowthgoingforwardwithsubstantialliquidityandnodebtmaturitiesthroughtheendof2018,animprovedweightedaveragecostofdebt,andanextendedtermonremainingdebtmaturities.Ourfinancingplantargetsanetdebt-to-EBITDAratiointhemid-sixtimesrangewithamanageableamountofassetsales.Andweareintheprocessofevaluatingopportunitiesforanadditionalcapitalrecyclingactivitiestofurtherreduceleveragetoourtargetratioofsixtimes.
Nowturningtoslide6,IwillwalkyouthroughasnapshotofeachofourassetclassesinproformaHCPpost-spin.Thisisanimportantdiscussionbecauseforquitesometime,adisproportionateamountofourconversationswithyouhavebeendominatedbyquestionsaroundourHCRManorCareinvestment.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page5of28
Wecannowfocusonthestrengthofourremainingportfolio.Letmestartwithourlifesciencebusiness,whichisledbyJohnBergschneider,whohasbeenwiththisportfoliofor16years.Lifesciencehadanexceptionalquarterwith9.6%same-storegrowth,occupancyof98%,andwe'vealreadyaddressedorinnegotiationsfortwo-thirdsofour2016leasematurities.
Our$3.7billionportfolioof7millionsquarefeetisconcentratedinpremierbiotechclusters.WearethelargestowneroflabspaceontheWestCoastwithleadingpositionsinSanDiegoandtheSanFranciscoBayareaincludingthemostactivesouthSanFranciscosubmarketwith30%plusmarketshare.
Ourincomeisdiversifiedamongmorethan130tenantswith86%ofourincomefrompublicorwellestablishedprivatecompanies.Thecurrenthealthofthelifescienceindustryisoneofthestrongestwe'veseeninrecenthistorydrivenbythreeindustryfundamentals,accesstocapital,consolidationandcollaborationamongresearchcompanies,andastreamlinedFDAprocesswhichhasresultedinanincreaseinthenumberofdrugapprovals.
Lookingahead,ourrecentleasingsuccessandstrongtenantdemandwillcontinuetoresultinacceleratedorganicgrowth.Inadditiontotheco-developmentprojectunderway,wehaveampledevelopmentcapacityincoastal,landconstrainedmarketsinSanFranciscoandSanDiego.Wecanexpandandbuildanadditional2.6millionsquarefeetofproduct.
Next,medicaloffice,our$3.6billionmedicalofficeportfolioalsodeliveredasolidquarterwith3.3%same-storegrowth.Demandformedicalofficespacehasincreasedsignificantlyoverthepastseveralyearsandourstrongretentionrateshavehelpedkeepourmedicalofficeportfoliooccupancyconsistentlyabout90%for10consecutivequarters.
Ourleasingmomentumcontinuedinthefirstquarterwithmorethanhalfofthisyear'sleaseexpirationsalreadyaddressedorinnegotiations.Wehaveoneofthelargestmedicalofficeplatformsinthecountrywithover17millionsquarefeetledbyTomKlaritchwhohasrunthisportfoliofor17years.Medicalofficeisarelationship-centeredbusiness.Wehaverelationshipswithover200hospitalsandhealthsystems.95%ofourbuildingsareaffiliatedwithahealthsystemand83%arelocatedoncampuswithahospital.
OurgoalistobeaffiliatedwiththeTop1or2hospitalsystemsineachmarket.Inaddition,wecurrentlyhavefouroncampuspropertiesunderconstructionandwe'veseeninterestfromvarioushealthsystemstoaddadditionaloncampusspace.Thesedevelopmentprojectswereoff-markettransactions,theresultofourrelationshipwiththeaffiliatedhospitalsystem.Lookingatsectorfundamentals,medicalofficeisastableassetclasswithapositiveoutlookfordemand.
Finally,ourseniorhousingportfolioisledbyKendallYoungwhohasbeenwithHCPforsixyears.Wehavea$9.6billionportfolioofprimarilyprivatepayseniorhousingcommunities,geographicallydiversifiedacrosstheUnitedStatesandtheUK.WearepartneredwithleadingoperatorssuchasBrookdaleandSunriseintheUSandMariaMallabandintheUK.Andwecontinuetoexpandourportfoliowithbothexistingandnewrelationships.
Giventhesector'sfundamentals,cateringtoanagingdemographic,seniorhousingwillcontinuetobeacorefocusforHCPasevidencedbythe$1.7billionofinvestmentswehavemadeinthisspacesincethebeginningof2015.Now,I'llturnthecallovertoJustintodiscussourseniorhousingtransactionsandperformance.
Just inHutchens (CIO):
Thankyou,Lauralee.I'llstartbyofferingaverywarmwelcometoKaiHsiao.I'veknownKaifornumberofyears.AsLauraleementionedearlier,hehasjoinedusastheEVPofSeniorHousingAssetManagement.Kaibringsawealthofoperatingexperiencetoourteam.Hehasspentthepastsevenyearswithholiday
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page6of28
retirementcorporation,thenation'slargestoperatorofindependentlivingcommunitiesincludingthreeyearsasthecompany'sCEO.
Hemadesignificantcontributionsleadingthecompany'sreturntomarketleadershipbyboostingoccupancyandmargin.Kaiwilloverseetheperformancemanagementofourportfoliowithanemphasisonvaluecreationthroughbusinessanalytics,marketanalysis,financialoversight,andassetrepositioning.
He'sliterallybeentheshoesofourcustomersandwillbeaperfectcomplementtotheHCPbrandpromiseofbuildinghealthypartnerships.IamconfidentthatKai'soperatingexpertisecombinedwiththeinvestment-savvyKendallYoung,ourEVPofSeniorHousingInvestmentswillaccelerateourseniorhousingplatformforsuccess.
NowI'lldiscusstransactionsdemonstratingdiversificationofouroperators.Duringthequarter,weacquiredaportfoliooffiveprivatepaycommunitiesandoneskillednursingfacilityfor$95million.Allthecommunitiesweredevelopedwithinthepasttwoyearsandaretriple-netleased.Weenteredintodefinitiveagreementstoacquireaportfolioofsevenprivatepayassistedlivingcommunitiesfor$190million,withanexpectationtocloseinthesecondhalfoftheyear.TheportfoliowillbemanagedbySeniorLifestyleCorporationinaRIDEAjointventure.Withthesetwotransactions,weareaddingfivenewrelationshipswithtwonationaloperatorsandthreeregionaloperators.
Wehavealsoagreedtothesaleofhalfofour80%ownershipinterestinourBrookdaleRIDEAIIjointventureportfoliotoafundoperatedbyColumbiaPacificAdvisors.Weexpectthistransactiontocloseduringtheyear.ThistransactionresultsinreducedBrookdaleconcentrationaswellastheadditionofawell-capitalizedjointventurepartnerwithsignificantindustryknowledgeandfutureco-investmentopportunities.
Movingontoourportfolioperformance,ourentiretriplenetportfoliohasanEBITDARMcoverageof1.27andEBITDARcoverageof1.07.RelativetoBrookdale,weareinadvanceddiscussionswiththemregardingupto25non-strategiccommunitieswhichweintendtosellortransfertootheroperators.Weexpecttheleasecoveragein2016toimproveuponremovingthesecommunities.It'simportanttoemphasizethatallofourleasesarebackedforBrookdale'scorporateguarantee.
OuroperatingportfoliocontinuestoperformwellwithsolidsequentialgainsinoccupancyandNOI.Oursame-storeoperatingportfolioreportedaverystrongfirstquarterwithyear-over-yeargrowthof9.2%,drivenbyimprovedoccupancyrateandexpensemanagement.OccupancyhasimprovedthelastthreeconsecutivequartersandtheQ1annualrateincreasewasthestrongestwe'veseeninseveralyears.
Weremainactivelyengagedwithallofouroperatorsthroughouractiveassetmanagementplatform,continuouslyreviewinglocalmarketdynamics,operatingtrendsandthephysicalconditionofourportfolio.Ourstrategiccapitalexpendituressetusapartasacapitalpartneranddistinguishesourcommunitiestotheresidentsasahigh-qualityproductinanattractivepricepoint.
Ouroperatingportfolioisconcentratedinmarketswithstrongdemographicsandpopulationgrowthhigherthanboththeindustryandourpeergroupaveragesforthe75pluscohortintotalpopulation.Only6%ofourportfolioislocatedwithinthetop10MSAsfornewconstruction,andatalocallevel,wecontinuetoperformwell.Wehavepositionedourportfoliowithappropriateaffordabilitytoresidentsinourlocalmarkets,whichhasresultedinstronggrowthandprospectsforfuturegrowthdespiteincreasedsupplyforthebroaderMSAs.
Withthat,I'llhandthecallovertoTimtotalkaboutourfinancialresultsandupdatedguidance.
T imSchoen (CFO):
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page7of28
Thankyou,Justin.Letmestartwithourfirstquarterresults.Forthequarter,wereportedNAREITFFOof$0.68pershare,whichincludes$0.01pershareoftransaction-relatedcostsinconnectionwithourinvestmentactivities.Excludingtransaction-relatedcosts,wereportedFFOasadjustedof$0.69pershareandFADof$0.66pershare.
BothmetricsarelowerthanprioryearprimarilyimpactedbyitemsthatwehavepreviouslyannouncedrelatingtoHCRManorCare.Specifically,theleaseamendmentthattookeffectonApril1lastyearandthe33assetsalesthatwehaveclosedto-datereducedbothFFOandFADby$0.03pershare.FFOwasfurtherreducedby$0.08persharefromplacingtheHCRleaseoncashbasisbeginningonJanuary1thisyear.
Firstquartersame-storecashNOIperformancedeclined50basispointscomparedtotheprioryear,reflectingtheHCRManorCareleaseamendmentinApril2015.ExcludingtheHCRManorCareportfolio,weachievedsolidsame-storecashNOIgrowthof3.2%fromourhighergrowthprivatepaysegmentofSeniorHousing,LifescienceandMedicalOffice,representing75%ofourportfolio,ledbya9.6%increaseinLifeScienceand9.2%increaseinRIDEA.
Movingontocapitalrecyclingandbalancesheet,wehaveannounced$1.3billionofcapitalrecyclingandrefinancingactivitiesfor2016,whichwillbeusedtopermanentlyfundouryear-to-dateacquisitionsandreducefuturedebtmaturities,including$740millionofexpectedproceedsfromtheanticipatedRIDEA2jointventuretransactionthatJustinjustdiscussed,fromsellinga40%stakeintheventureandfinancingwiththird-partydebt.
Inaddition,wereceived$90millionfromthesaleofanon-coreLifeScienceasset,amedicalofficebuildinginApril,andwe'vepreviouslyannounced,weexpect$310millionfromthefirsttrancheofGenentech'spurchaseoptiononourLifeScienceCampusinSouthSanFrancisco,whichisexpectedtocloseinNovember,anda$130millionfromthesaleofHCRManorCare'snon-strategicassetsduringtheyearinclusiveof$62millionfromassetsoldduringthefirstquarter.Intotal,westillanticipateproceedsof$350millionaftersellingtheremainingassets.
Ourfinancialleverageincreased50basispointsto45.5%andnetdebt-to-adjustedEBITDAincreasedto6.2timesatquarter-endaswetemporarilyfinancedourfirstquarteracquisitionsonourrevolver.Afterpayingdowndebtusingtheproceedsfromourcommittedsalestransactionsjustdiscussed,weexpectthesemetricstoimprove.Further,weendedthequarterwith$1.3billionofliquidity.
Finally,ourincreased2016guidance.The2016guidanceupdatedtodayrepresentsourperformanceexpectationsforourentireHCPportfolioanddoesnotreflectthespintransactionannouncedthismorning.OurguidancedoesreflecttheimpactoftheRIDEA2transactionandourannouncedinvestmentincapitalrecyclingactivities.
Withthatsaid,theportfoliocontinuestoperformwellandcombinedwithourrecentacquisitionactivity,weareraisingguidanceandexpectHCP'sfullyear2016NAREITFFOtorangefrom$2.76to$2.82pershare.Excludingtransactionrelateditems,weexpectFFOasadjustedtorangefrom$2.77to$2.83pershareandweareraisingourFADguidancetorangebetween$2.65and$2.71pershare.Wearereaffirmingoursame-storecashNOIgrowthforecastof1.5%to2.5%andweareprojectingthemajority75%ofourportfoliofromtheprivatepayseniorhousing,lifescience,andmedicalofficesegmentstoincreasebetween2.3%and3.3%whenyouexcludeHCRManorCare.
LetmeclosebyexpressingmygratitudetotheHCPteam.Ihaveworkedalongsidemanyofyouinavarietyofrolesandfeelfortunatetohavebeenpartofatalented,industry-leadinggroupofprofessionalsthatgrewandexpandedtheHCPportfoliooverthepastdecade.SoletmeendbysimplysayingthankyouandturnthecallbackovertoLauraleeforherconcludingremarks.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page8of28
LauraleeMart in (President&CEO):
Thankyou,Tim.Solookingatslide8,thebottomlineis,webelievethespin-offistherightmoveattherighttimeforbothHCPandHCR.Weareproudofourhigh-qualitydiversifiedhealthcareportfolio.
Wedifferentiateourselvesinthemarketwithourbuildinghealthypartnershipsapproach,executedbyseasonedsectorleadersandinvestmentteamswithoperatingexperienceandknowledge.WefurtherconfirmthisdifferentiationwithourannouncementofKaiHsiaojoiningourteam.
ProformaHCPhasaninvestment-gradebalancesheetwithsignificantliquiditysupportedbyahigherqualityportfolioincomefromastableprivatepayincomestream.Weareeliminatingexposuretoanindustrywithreimbursementmodelsintransition,whileourshareholdershavetheopportunitytorealizesubstantialupsidepotentialinSpinCoasaninvestmentvehicletooptimizethelong-termsolutionforHCRManorCareassets.
BycapitalizingonthedifferenceincostofcapitalbetweenHCP'sandSpinCo'srespectivehealthcaresectors,HCPwillbebetterpositionedtodeliverconsistentreturnswhileacceleratingourinternalandexternalgrowthprofile.
Insummary,HCP'sapproachofbuildinghealthypartnershipscombinedwithanimprovedcostofcapitalwillleadtoaccretiveinvestmentgrowth.
Withthat,I'llnowasktheoperatortoopenthelinesforquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
VikramMalhotra,MorganStanley.
VikramMalhotra(Analyst-MorganStanley):
Congratsguysongettingallthetransactionsdone.I'msureit'sbeenveryhecticandTim,congratsonagreatstinthere.We'llmissyou.
T imSchoen (CFO):
Thankyou.
VikramMalhotra(Analyst-MorganStanley):
SoquicklyjustfirstontheSpinCo,Iwasjustlookingthroughitsortof,IthinkyouhighlightedtheSpinCowillbestructuredasaREITinitially.Doesthatmeanyoumaylookatsomealternativestructuresortheremaybeotherstructuresdowntheroad?
LauraleeMart in (President&CEO):
Well,wetriedtodoandIthinkwe'vedoneitverywellisgivespinallthetoolstorealizethevaluethat'sembeddedintheHCRportfolio.SocontrarytoHCP,whichisacommittedblue-chipREIT,theyhavechoices,andtheycanusethosechoices.SotheyareaREIT,butitdoesn'tprohibitthemfrommakingotherchoicesastheythinkaboutwhattheywanttodotomaximizethatvalue.
VikramMalhotra(Analyst-MorganStanley):
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page9of28
Okay.Andthen,asa--justareminder,theassetsthatare--those50assets,thatsalewillbecompletedpriortothespin?
LauraleeMart in (President&CEO):
Itis.It'sgoingtohappeninthesecondhalfofthisyear,andIwouldexpectthatitshouldmostlygetdoneifnotveryshortlythereafter.
VikramMalhotra(Analyst-MorganStanley):
Okay.Andthen,justontheBrookdaletransaction,canyougiveussomesenseofwhatthecap--whatthatrepresentsintermsofthecaprate?
Just inHutchens (CIO):
Sure.Onatrailingbasis,it'sabout6.5cap.
VikramMalhotra(Analyst-MorganStanley):
Okay,6.5.Andthenjustlastone,onjustonseniorhousing,IbelievethereisasmallamountofNOI,Ithinkits0.5%coming,whichIdon'tthinkit'sBrookdale,butit's--theleaseisupforrenewalthisyearandIthinkit'saround1timescovered.Canyoujustgiveusanythoughtsonwhatyoudowiththatlease?
Just inHutchens (CIO):
Sure.Thatisaportfoliothat'sleasedtoAtriaandwe'restillindiscussionsintermsofnextstepsforthoseproperties.
Operator :
NickYulico,UBS.
NickYulico (Analyst-UBS):
Thanks.Iwashopingtogetsomemorefinancialdetailsonthespin,particularly,withthedebtthatSpinCoisgoingtoraise,whatlevel,whatamount,whattypeofrate,G&AforSpinCoandthenalso,whatwecanthinkaboutasadividend?
LauraleeMart in (President&CEO):
Okay,thereisanumberofquestionsinthere.Soletmetakethefirstone.Aswehaveinthedeckthatwepresentedtoyou,wewillberaisingplusorminusabout[$2.75billion]ofproceedsofwhich$740millionisrightthereto,aswethinkaboutHCPafter,butifIgotothat$2billionandthinkaboutspin,whatwe'vebeentoldbyadvisersisthatthereis,getoutthereinthemarketplacethatdefinitelycanbeachievedataboutafivetimesleverageatmarketlevelrent.Andso,whatwe'veassumediswecangetproceedsonthatbasisandtheadditionalamountthatgetstothe$2billionwillbeassetsalesthatHCPwilldo.Thatwillthenfocususonabouta6.5timesleverage.
Relativetodividend,I'mgoingtoanswerthatbothHCPandspin,untilthespinhappens,ourcurrentdividendpolicywillcontinue.Post-spin,obviously,thedividendpolicyforspinwillbesetbytheBoardofthatcompany,butifIthinkaboutHCPpost-spin,goingbacktoourinvestmentthesis,therewillbeaveryhighqualityprivatepayportfolio,definitelyfocusedonhavingaverystronginvestment-gradebalancesheetandIexpectthatwewillhaveadividendpolicythatisfocusedontotalshareholderreturn,whichmeansgrowthinthecompanyandgrowthinourdividend.AndIthinkyouhadonemorequestionthatImighthavelost.Therewasthreeinthere.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page10of28
NickYulico (Analyst-UBS):
No,Iguessforallofthisviadetails,Imeandoyouexpecttobeputtingtheseoutinalittlebitmoreprecisewayoverthenextcouplemonthssowecanfigureouthowto?
LauraleeMart in (President&CEO):
Verygoodquestion.TherewillbeaForm10thatwillcomeoutinaboutamonth,whichwilldefineallofthis,theinvestmentthesisofspinandallthoselevelofdetails.So,we'veannouncedthattransaction,thatForm10isinprocessandthenyou'llhavealotmoreinformation.
NickYulico (Analyst-UBS):
Okayandthenturningtothespin,youtalkedaboutthatyouengagedCarlisleandHCRindiscussions,butdidyougetapprovalfromHCRManorCaretodothisspin?Doyouneedtogetapprovalandmaybeyoucouldtalkaboutwhatotherapprovalsyoumightneed,regulatoryapprovalsatthestatelevelorotherwiseforthespintohappen?
MikeMcKee (ExecutiveChairman):
Yes,thisMikeMcKee.WhatwementionedconversationswithHCRManorCareandCarlisle,that'sanongoingprocess.Wedothatroutinelyandhaveforalongtime.Theyareawareoftheplanswehaveannouncedtoday,butwedonotneedtheirpermission.Wedon'tneedstateregulatoryapproval.TherearesomeSECfilings,butfrankly,themechanicsareprettyroutineandwedon'texpectanybarrierstoexecutingthespininatimeframeofaboutthreetofourmonths.Soitisaverycleantransactionfromthatperspectiveandwe'llbeworkingonitwithMarkOrdanintheweekstocome.
JohnLu (EVP):
IthinkRosshasafollow-upquestion.
RossNussbaum(Analyst-Nussbaum):
Yes,goodmorningeveryone.Mike,Iguessthisquestionisforyou.WhenIreadthepressreleaseandIseeyourthreemainareasofresponsibilitybeingstrategicgrowth,leadershipdevelopment,andcompletingthespin-off.Normally,thoseareresponsibilitiesthatIwouldthinkofasbeingalignedwiththeChiefExecutiveOfficerofthecompany.Somaybemyquestionhereis,what'sthemessagethattheinvestmentcommunityshouldbereceivingherethattheseprimaryresponsibilitiesaregoingtoanexecutivechairmanroleandnottoLauralee?
MikeMcKee (ExecutiveChairman):
Well,Ithink,thewayI'dansweryourquestionis,ifyoustepbackalittle,you'llseethatourmanagementteamhasgonethroughasignificanttransitioncertainlyoverthelastcoupleofyearsandreallyimportantlyeveninthelastsomemonths.WehaveanewCEOforthelastseveralyears,moreclosely,wehaveanewCIO,wehaveanewGeneralCounsel.WearewellonourwayinoursearchforanewCFO.We'veannouncedMikeadditionasanExecutiveChair.WeannouncedtodayKaiHsiaocomingin,inhiscapacity.
Whenyoulookatthatteamthathasbeenassembled,onethingIwouldnoteisthatfouroftheseleadershavebeenCEOsofverynotableorganizationsbeforetheycametogetherhereasateamandevenonourP&Lleadershipfront,Ithinkyou'veheardinthepastwe'reveryproudthat,TomKlaritchandJohnBergschneiderandKendallYoungareverywellknownintheirrespectivesectors.Thisteamthat'sbeenassembledandtransitionedhasprettyimpeccablerealestate,healthcare,operatingcompany
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page11of28
financeandinvestmentcredentialsandtheBoardisveryconfidentintheabilityofthisteamtoworkcloselytogetherandverywelltogether,whichisveryimportanttous.
Myroleis--Iseeitascomplementary.LauraleeandI'veworkedverycloselytogetheroverthecoupleofyearsthatshehasbeenhere.Asyouknow,shesteppedintoquiteasetofissuesandhashadherhandsfull.Ithinkthatwhenwelookedatthisrole,wenotedthatthereisalotgoingonmanyfrontsandwehaveanewteamcoalescing.We'vegotanumberofstrategicinitiatives,oneofwhichweannouncedtoday.We'vegot75%ofourbusinessthatwethinkcanstanduptoandmaybe,inourpersonalviewisasgoodasanyhealthcareportfoliointheworldandwewanttogrowthat.So,thereisalottodoaroundhere,there'salotthat'sbeenhappeningandIjustseemyroleascomplementarytoworkingwiththisteam.
Intermsofleadershipdevelopment,letmejustspendasecondonthat.It'sourdesireto,asabestpractice,developtheleadershipthatwehaveandthat'sjustnotatthetoplevelbutlayersdown.TheBoardwouldverymuchliketohaveasuccessorortwoforeverykeypositionwehaveinthecompany.We'renotabigheadcount-typeCompany,sotobeabletodothatwilltaketimeandemphasisandwethinkthattherearesometoolsthatwecanapply,whichwilltakesometoptalentandbringthemuptonewlevelsofleadership.SoI'llbespendingsometimeonthataswell.
So,weseeallthisascomplementary.Ithinkifyoulookatthedynamicnatureofallthethingsthataregoingoninourbusiness,wewanttohavetheresourcestoaddressthingsreal-timeonmultiplefrontsandwethinksomeofthesechangesaregoingtoallowthat.
Operator :
JuanSanabria,BoAMerrillLynch.
JuanSanabria(Analyst-BoAMerrillLynch):
Ijustwantedtofollow-uponNick'squestionontheleverageatSpinCo.Didyousayyouwerelookingtoraiseabout$2billionofdebtatSpinCoorI'mnotsureiftherewasamaterialamountofpotentialothernon-coredispositionsthatwouldgetyoutothatsomethatyouhighlightedinyourpresentationasfarascapitalcomingbacktoHCP.
LauraleeMart in (President&CEO):
No,Ididnotsay[therewouldbe]$2billionatSpinCo.That'stheamountofcapitalinadditiontotheRIDEA,wetargettohaveHCPbeattherightlevel.TheamountofdebtatSpinCo,weexpecttobeaboutfivetimesleverageratioonmarketlevelrentsatSpinCoandthat'sanumberthatwe'vevalidatedthroughouradvisorsthattheyfeelisachievableinthemarketplacejustgivenyieldandrisk-reward.
JuanSanabria(Analyst-BoAMerrillLynch):
Sothatwouldbebasedonpotentiallya[red-cut]figure,andisthatfivetimesthenetdebt-to-EBITDAnumber?
LauraleeMart in (President&CEO):
Yes,that'showweweretoldtheywouldunderwriteit.Itdoesn'tmeanthere'sanychangeintheEBITDA,butthat'showtheywouldunderwriteit.
JuanSanabria(Analyst-BoAMerrillLynch):
AndthenonG&A,sohowmuchincrementalG&Aarethetwoentitiespost-spin.HowmuchactualG&Aarewetalking,howmany[testsynergies]?
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page12of28
LauraleeMart in (President&CEO):
IwouldsayitsimmaterialandthosedetailswillcomeoutwhenwedotheForm10.
JuanSanabria(Analyst-BoAMerrillLynch):
AndhowaboutforproformaHCP,isG&Agoingtogodown?Iknowyou'veaddedKaiorareyounetlosingG&Aandyou'represumablygoingtohavesomeheadcountgowithSpinCo,howshouldwethinkaboutproformaHCPwherethedetailswon'tbeinaForm10.
LauraleeMart in (President&CEO):
TherewillbeservicesthatwewillcontractSpinCooutofHCP,butIthinkit'sprematuretohavemuchmorethanthatatthistime.Again,wethinkit'snotmaterialandweexpectsortofthesimilarrunrateratio.
JuanSanabria(Analyst-BoAMerrillLynch):
Andjustabigstrategicquestion.WasthereacontemplationtodoastrategicreviewofHCPasawhole,notjustManorCare?
MikeMcKee (ExecutiveChairman):
ThisisMikeMcKeeagain.Overthelastthreeorfourmonths,wetoldyouonthelastearningscallthatweweregoingtolookatallofouroptionsandwehaverunaprocessthathasdonethat.We'vehadanumberofmeetingsattheBoardlevel,manymoreatthemanagementteamlevel.We'vebeenadvisedbysomeveryexperiencedfinancialandlegaladvisorsandwewentthroughacomprehensiveprocessandlookedatallofouralternatives.AnumberofthosealternativesremainopenwithSpinCoandaswe'vetriedtoemphasizetoday,wethinkthatvehicleisamuchmoreflexiblevehicletoopenupafullmenuofoptionsthataren'taseasilyaccommodatedatHCP.
SowelookforwardtoexecutingthespinandthenhavingMarkOrdanandhisteamcontinuetokeepopenavenuesthatgoafterthatvalue.SoIcanassureyouthatthere'vebeenhundredsofhoursofanalysis,discussion,prosandcons.Obviously,someofthatstaysintheBoardroom,butIcancertainlyassureyouit'sbeenquitecomprehensive.
JuanSanabria(Analyst-BoAMerrillLynch):
Great.Andjustalastquickquestionforme.What'stheproformaexposuretoBrookdaleofHCPandcouldyoujustremindus,IthinkyoutalkedaboutasecondlegofBrookdaledispositions,whatthequantumthereisandviewsonvaluationforthoseassets?
Just inHutchens (CIO):
Sure,thisisJustin.Post-spin,theconcentrationwillbeaboutathird.Ishouldmentionthatwefindittobeadouble-edgedswordtosomedegreebecausewethinkBrookdale'sonsolidfooting,newmanagement,freshapproach,certainlyouroperatingportfolioisseeingreallygoodresults,butwe'remindfulofconcentrationsandcapitalrecycling.SotheRIDEAIItransactionImentionedpresentedopportunityforus.
Meanwhile,we'reinregulardiscussionswithBrookdaleintermsofhowtounlockvaluewithinourtriple-netportfolio.Imentioned25assets,thevaluationrelativetothoseassetshasn'treallybeendetermined.Icantellyou,ourintentionistoeithersellassetsorintheeventthatthosenon-coreassetsforBrookdaleareinfactacoreassetforaregionaloperator,wemayplacethosewithanewoperator.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page13of28
Theintentistobecashflowneutral.Therewillbealittlebitofpickupduetosomeoftheperformanceoftheassetsandsowe'reactuallyexpectingaslightimprovementinourcashflowcoverage[above1and1.5times]asaresultofthetransaction,butalotofthedetailsarestillbeingdiscussedandwe'llhavemoredowntheroadasthatmaterializes.
Operator :
SmedesRose,Citi.
SmedesRose (Analyst-Citi):
Ijustwantedtoknow,arethereanychangestoyourEBITDAoutlookforManorCareversuswhatyouprovidedinthefourthquarter?
LauraleeMart in (President&CEO):
No,actuallyManorCaresequentiallyhadanimprovementinthefirstquarterandthatperformancestillstaysintheguidancethatwegaveyoulastquarter.
SmedesRose (Analyst-Citi):
AndwhenyousaidthatmarketlevelrentsatthenewSpinCo,whatsortofcoverageratiosdoyouthinkaremarketlevelnowfor[sniff]portfolio?
Just inHutchens (CIO):
ThisisJustin.Thereisrangeswe'veactuallyspokentointhepastandyoucangetustightasabout,maybeblendedat(inaudible)anddependingonthespecificasset,youmaygoalittlehighercoverage,higheryieldincertainmarketsandcertainhigherqualityassets,youmightbeonthelower*endofthatnumber.
LauraleeMart in (President&CEO):
RememberthatSpinCowillhaveboththepost-acuteskilledassets,whichManorCareisinthemarketplaceknownashavingveryhighqualityrealestateaswellastheArdenCourtsmemorycare,whichistheprivatepayseniorhousingassets.
Operator :
KevinTyler,GreenStreetAdvisors.
KevinT yler (Analyst-GreenStreetAdvisors):
Mike,justaquickfollow-uponRoss'squestion.Post-spin,doyouplantomovetoalessactiveroleorareyouplanningtobeinvolvedintheday-to-dayactivitiesforthelonger-termatthispoint?
JohnLu (EVP):
Well,I'msignedupformylonger-term.Itmightnotbeyourlonger-term,butit'snotashort-termassignment,letmeputitthatway.Ithinkthatwe'vegot--we'reveryexcitedafteracoupleofyearsofalmostanobsessionwithHCRManorCaretogetbacktothegrowthprofilewe'reusedtooverour30plusyears.So,wedon'treallyhaveatimehorizon.
I'mnotgoingtobedaytodaymanagingthecompany.That'sLauraleeandtheteam'sjob,butIamgoingtobeactiveinmyrolefocusedonintheneartermcertainlyhelpingMarkOrdanandtheteamexecuteSpinCo,butwe'vegotalotofotherthingstodo,andsoI'msurethat'llkeepmerelativelybusy.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page14of28
KevinT yler (Analyst-GreenStreetAdvisors):
Okay,thanks.Andthen,inthedeck,youmentionedawiderangeofstrategiesavailabletobepursuedbySpinCo.Canyoujustelaboratealittlebitfurtheronthoseandthenmaybehowquicklyweshouldexpectthemtoplayout?
Istherearangeofexpectations,wementionedarentcut,isarangeofexpectationsthat'sbeendiscussed?Howshouldwethinkaboutquantifyingthat?Andthenlastly,ontheManorCarepiece,isthereanyupdateasitrelatestotheDOJ?
LauraleeMart in (President&CEO):
Letmetakethelastonebecauseitsrealquick.Nochange,reallynothingtoupdateyouon.Ithinkit'searlytodiscusswhat'sgoingtohappenatSpinCo.WhatwehavedoneisgiveSpinCoallthetoolstooptimizewhattheycando.Idon'tthinkweneedtoremindyouthataREITislimitedtoownershipoflessthan10%.
We'vedonecertainthingsintermsofthestructurethatSpinCocandointermsofpositioningtheassetsundervaluation.Sothisstructurespinreallydoesnotforecloseonanyoptions.It'sjustwaytooearlytohavethatplaythrough.
MikeMcKee (ExecutiveChairman):
Ialsothinkthereisarecognitionthatabsentsomedivineintervention,thisisaprocessthat'slikelytotakesometimeandit'snotjustrelatedtoHCRManorCare,butthewholespacepost-acuteandSNFs,asyouallknow,isinachallengedperiodoftime.
Aswesaidinourpreparedremarks,wethinkthatoverthelongterm,thisisanecessaryarea,onethatthegovernmentwillsupport,andonethatwillbeevenmoreimportantlong-terminthecontinuumofcareasthere'sanemphasisofmovingpatientswhocan'tgohomeoutofhospitalsandintothiskindofcare.
Butrightnow,theissuesfacingtheindustryarecomplexandmanyandwecan'tpredictatthistimehowlongitwilltakefortheindustrytostabilizeandwehavebeenratherpatientatHCPinmyopinionabouttryingtoseeifthereissomerecoveryonthehorizon.Butrightnow,wecan'tpredictwhenthatis.
So,oneofthemotivationsinmovingtothespinwastherecognitionthatifyoucan'tpredictthatandyouhaveanoverhangonthe75%ofthebusiness,whichwethinkisprettyterrific,spinjustmakesalotofsensetoustonotonlytogivemoreflexibilityaroundoptions,butalsotorecognizethisislikelytotakesometime.
KevinT yler (Analyst-GreenStreetAdvisors):
Okay,thanksfortheaddedcolor.Andthen,justonelastoneandkindofanitpickeronthedeck,butyoumentionedthatHCPcouldprovide[seller]financingatmarkettermsforalimitedperiodoftimetoSpinCo.Iguess,Iwasjustwondering,isthereanorderofmagnitudethat,thatcouldgoupto?Isitfreereignorhowareyouthinkingaboutthatpartofthepotentialarrangement?
LauraleeMart in (President&CEO):
Well,overall,we'regoingtokeeptheleverageandthebalancesheetatSpinCoconservative.So,don'tassumethere'sgoingtobeasignificantamountofdebtplacedonusinsellerfinancing.Also,ifwedoprovidesellerfinancing,it'sbecausewethinkitistherightthingforHCPPrimetodosoandthatitwouldbeagoodinteriminvestmentforusatthisplacethrough.So,again,that'sstilltobedetermined,
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page15of28
flexibilityaroundit,butallofthefinancingstructuresatbothHCPandSpinCoaretohavebalancesheetsthatsupporttheinvestmentthesisofbothcompanies.
Operator :
ChadVanacore,Stifel.
ChadVanacore (Analyst-Stifel):
So,justthinkingaboutthespinManorCare,arethereanyexpectedchangestoManorCareleasetermspostspinthatcouldbeonmaturities,brands,escalatorsoranyothermaterialitems?
LauraleeMart in (President&CEO):
Wearenot--thatwillreallybeadeterminationofspin.We'renotanticipatinganythingatthistime.
ChadVanacore (Analyst-Stifel):
Okay.Andthen,doyouexpectanychangestorentorrentcoverageonthatportfolio,proforma,forthespinanddispositions?Iknow,rightnow,yousaidyou'reexpectingrentcoveragetobe1.06to1.16?
MikeMcKee (ExecutiveChairman):
Spinisgoingtohaveitsownmanagementteam,itsownboard.Theyaregoingtobelaser-focusedonattheoutsetbeingthelandlordhere.Ithinkthatwithduerespect,SpinCowon'tprobablybeinexistenceforafewmonthsnow,andthey'llhavetorespondtofactsontheground.Wedon'tknowandit'shardtopredictwhat'shappeningandit'sverydynamic.
SoIthinkitwouldn'tbehelpfulfranklytotrytolookoutalittlebitandwonderwhathappen.Weknowwhat'shappenedinthelastquarterortwo.Weknowthatthey've--basically,asLauraleesaidalittlebitago,they'removingforward,andweassumethatwillcontinuebutwe'renotinapositionaslandlordtoreallyhavevisibilityofthat.SoIthinkit'shardtopredict.
ChadVanacore (Analyst-Stifel):
Alright.Impliedbythestatementthatyou'dleveredupcommensuratewithwhatthemarketwouldbear,whatwouldyouestimatethedifferencebetweencurrentrentsandmarketlevelrentsarerightnow?
LauraleeMart in (President&CEO):
IthinkJustinaddresseditwhenhetalkedaboutcoverage.SoIthinkthatwouldreallybethemathandyoucandoityourownway,butmarketgenerallylooksatcoveragelevels,andIthinkthat'ssolelytheunderwriter.So,lookatitwhentheyputtheirdebtonit.
ChadVanacore (Analyst-Stifel):
Alright.ButLauralee,rightnow,we'relookingatjustalittleoveronetimesrentcoverage,andyousayfivetimeswhatamarketlevelrentwouldbeandthatimpliesthatmarketlevelrentsarebelowwheretheyarenow.Wouldthatbeappropriatetothinkabout?
LauraleeMart in (President&CEO):
Thatishowthedebtunderwriterswillunderwriteit.That'scorrect.
ChadVanacore (Analyst-Stifel):
Andthen,whatdoesthecontemplatedcapitalstructurelooklikeforSpinCo?Isitsecureddebt,isit
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page16of28
unsecured,isittobedetermined?
LauraleeMart in (President&CEO):
Itistobedeterminedbutagain,wewouldlookforthebestfinancingtomakeSpinCoandtheirinvestmentthesissuccessful.
ChadVanacore (Analyst-Stifel):
Alright.Andthen,youmentionedinthepressreleaseabouttaximplications.Iknowthisquarteritlookslike$49millionofincometaxassociatedwiththegainondisposals.WhatkindoftaxwillthenshouldweexpectpostSpinCo?
Just inHutchens (CIO):
Chad,that's--the$53millionthatwetalkedabout,that'sapotentialtaxliability.Theactualamountwillbedependentonhowthetransactiontakesplace.Butfromafederalperspective,we'veclearedthroughaholdingperiodandthetaxliabilitythat'sassociatedwiththeHCRManorCareassetsisreallyatastatelevel.Buttheultimateexposurewillbedependentonthetransactionthatgetsexecuted,butitwouldn'tbeanylargerthan$49million.
ChadVanacore (Analyst-Stifel):
Alright.Andthen,arethereanyupdatesontheManorCarepotentialDOJsettlement?
Just inHutchens (CIO):
No.
ChadVanacore (Analyst-Stifel):
Alright.Onelastquestionfromme.WhatdoyouthinkthemarketisnotgettingrightaboutthisManorCareportfolioasapartofHCPthatitwillbe--thatyouthinkwillberecognizedasstand-aloneentity?
MikeMcKee (ExecutiveChairman):
That'sreally,Ithinkaninterestingquestion.WethinkSpinCoisgoingtobeaveryinterestingcompanyactually.Oftenspinsaremotivatedbyadesiretoseparateoffassetsthatareadragontheoverallbusinessandcertainlythat'sthecasehere.Buthavingsaidthat,asmentionedearlier,manystillconsiderHCRManorCareasaleaderinthisspacebasedontheirqualityofcareandclinicalcapabilitiesandthequalityoftherealestate.Sothere'salotfromMarkOrdantoworkwithhereandwebelieve,inadedicatedvehicle,he'llbeabletobettertranslatetothemarketthepotentialintheplatform.
There'sbeenalotoffocusonit,notjustthroughusbutmoregenerallyinthespace,butwethinkthededicatedvehiclewillallowmoretransparencytotheextentwehaveit.Again,asalandlord,you'resomewhatlimited,you'renottheoperator,butnevertheless,wethinkthatwithhisbackgroundinhealthcare,inrealestate,asCEOofseveralspinsorturnaroundsandasuccessfultrackrecord,thatheisuniquelypositionedtobothtranslatetothemarket,butalsofindthepathofdifferentalternativesthatunlocksthemostvalue.
LauraleeMart in (President&CEO):
ImightaddonethingtothatintermsofvalueatHCP.Ithinkoneofthethingsthat'sverydifficultforthemarketplacetolookatisreallythevalueofthe75%ofourbusiness,becausewhilethatisanoverhang,it
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page17of28
meansthatwedon'thavethegrowthdynamicsthatwewouldhaveifwithacleanercostofcapitalandaclearvisionbythemarketplaceofwhatwecandowiththatportfolio.SothereisawaytooptimizetheSpinCo,butitgivesaveryclearpathofwhatHCPisandthepotentialoftheportfolio,thegrowthdynamicsandwhatthemanagementteamscandowiththat.
Operator :
MichaelCarroll,RBC.
MichaelCarroll(Analyst-RBC):
CanyouguystalkalittlebitaboutthesequentialimprovementsthatHCRManorCarewouldbeabletoachieve?Whatdrovetheoccupancyimprovementandisthatsustainable?
LauraleeMart in (President&CEO):
Therewasaseasonallyhighercensusimprovement.TheywerecomingoffofaparticularlybadQ4.Sotheyactuallyhadabout20%increase,upabout$21millioninQ1.Fluseasonwassoft,butitwasalsoalittlelatethisyear.Soperformanceisrelativelystable.
MichaelCarroll(Analyst-RBC):
Andthen,canyoukindofdescribewhyfourthquarterwassoweak,andisitpossiblefor,Iguess,thesecondhalfperformancethatwesawin2015toreoccurinthefuture?
LauraleeMart in (President&CEO):
Thisisabusinessthat'sclearlyseasonal.Andquitefrankly,we'resurprisedbyQ4,becausetypicallythefourthquarterinskillednursingindustryisstrong.WewouldhaveexpectedittoliftoverQ3,itdidn'thappen.WewerepleasedtoseetheQ1performance.Thereisusuallyasoftnessinthesummermonthsandthenitpicksupagaininthelaterpartoftheyear.Wecan'tpredictthatnow.Certainly,hadalittlesurpriseeveninsecondhalfoflastyear,butthusfar,thingslookstable.
MichaelCarroll(Analyst-RBC):
Andthen,Lauralee,canyoutalkalittlebitaboutHCP'snewleveragegoals?Ithinkyoutarget6.5times,isthat6.5timesjustuntilthespinoccurs,andthenyouwanttogetbackclosertoyouHCP'slongertermgoalsthattheyhavesetordoyouplanonrunningwithalittlebithigherleverage?
LauraleeMart in (President&CEO):
No,ourlong-termgoalistogetdowntothe6times.Whatwehaveinthe6.5timesiswhatweseeaverydefinedplanthatwecanguideyoutobothwithproceedsfromspinandwithassetsalesandrelativelyfrictionlesspayoffofhighcoupondebtandsothatgetsustothe6.5times,butourlong-termgoalistogetdownto6timesifnotbelow.
MichaelCarroll(Analyst-RBC):
Okay,great.Andthen,sorryifImissedthisearlier,butdidyouguysmentionwhythesame-storeforecastforthetriplenetseniorhousingportfoliohasdropped?Areyouexpectingamendmentsthereoristhisreally[atyoursales]?
T imSchoen (CFO):
Inthesame-store,thereisarentcutthatwasgiventhatwasassociatedwiththetransactionwedidacoupleofyearsagoatBrookdale,wheretheyextinguishedthepurchaseoption.Soit'sabout$7million
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page18of28
hittoourtriplenetincomeduetothatrentcut.
MichaelCarroll(Analyst-RBC):
Andthatwasn'tcontemplatedintheguidancethatwasgiveninthefourthquarter?
Just inHutchens (CIO):
Yes.Ithinkyou'rereferencingtheslightdowntickMike.It'sactuallylittleweakerperformanceinthefirstquarterfromSunrise.
MichaelCarroll(Analyst-RBC):
Okay,butitlooksliketheRIDEAgrowthwaspickeduphigher.Therearechangestothetriple-netleasesthen?
Just inHutchens (CIO):
LetmejustaddresstheRIDEApart.Absolutely,performancewassolidthere.Same-storewasup9%andthentheoverallportfoliohadreallystrongdouble-digitgrowthoverpriorquartersequentially.Sowefeelgreatabouttheoperatingportfolioperformance.WehavenotadjustedanyguidancerelativetoourRIDEAoperatingportfolioatthistime,it'searlyintheyearasImentioned,skillednursingfeesandalsoisseniorhousing.So,youwanttoseetheyearplayoutalittlebitmoreandwe'llconsidermakingadjustmentstoourexpectationsintermsofouroperatingportfoliogrowth.However,atthispointintime,itlookslikewecomeouttowardsthetop-endofourrangeintermsofexpectationsthere.
Operator :
AndrewRosivach,GoldmanSachs.
AndrewRosivach (Analyst-GoldmanSachs):
I'mcurious,I'mguessingaspartofthisprocessyou'reseeingtheperformanceofpreviousspinsandifyouownHCPnow,youalsoownSpinCoandCCPhashadatoughrun,WPGwhereMr.Ordan[workedatitthetopfront]aswell,whatarekindofthelessonslearnedandwhyyouthinkthisspincandobetter?
MikeMcKee (ExecutiveChairman):
ThisisMikeMcKee.We'velookedatalotofspins,somehavedonewell,somenotsowell.Youreferencedacouple.IguesswhatIwouldfocusonhereisthatanumberofspinsarespinningoffassetsthatarenotwellreceivedinthemarketplacereallyforreasonsthataren'trelatedtosomeofthereasonsthatwe'redealingwithpost-acuteand[sniff]here.InonecaseitwasBmalls,inanothercase,itmightbelesserqualityfacilities.
Wereallyaredealingherewithanindustryleaderandyoucantalkabouttheindustrybeinginsomestress,butIdon'tthinkanybodywouldsaythatthisisbadrealestateorthatthekindofqualityofcarethat'sgoingonhereisn'ttopquality.Sothere'salottoworkwithhere.Initspurestform,itisaworkouttypeofsituation,butIwouldsaythatinsomeofthebrainstormingwe'vedone,therearelotsofoptionsoutinthemarketplacebecausethewholespaceisintransitionandtryingtocopewithmanyofthesameproblems.
Sowethinkthatthere'sawidearrayofstrategiesthatcouldbeconsideredonceit'sinadedicatedvehicle.SoIthinkthebasicanswer,inmypriorlife,wehadaopen-endfundthatwascutconsistentlyinthethirdquartileonperformance.Wedidalookandwewayoverweightedtosuburbanofficeforhistoricalreasons.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page19of28
Wecompletelyflippedthatandgotoutofitandnowhavetopquartileperformance.IthinkwhenSimondidtheirspin,theywerelookingattheBmalls.Bmallsareinatoughspacerightnow.SoIdon'tthinkyoucankindofcorrelateoneassetclasstoanother.Ithinkyou'vegottolookatthedynamicsofeachoneontheirmeritsandIthinkwebelievethatthere'salottoworkwithhere.
AndrewRosivach (Analyst-GoldmanSachs):
No,Ihearyou,Ijustfeelthisislike[sniffs]arebecomingkindofanalogoustobeingtheBmallsofhealthcare,ifyouwill?Youguyshavedoneaspin,Ventashasdoneaspin.Justtotaketheanalogy,didyouexploreatalliftherewasaprivatemarketthatwaswillingtoowntheseassetsandareyoudoingaspinasaresultofbeingunabletoexecuteasale?
MikeMcKee (ExecutiveChairman):
Well,firstI'dsaythatthedemographicsofhealthcareandpost-acuteisalotdifferentthanBmalls.SoI'djustpointthatout.Intermsofsales,thereisanumberofoverhangsherethataretemporarytoadegree,DOJisoneofthem.SoIthinkintermsofsales,youhavetolookattheinherentvalueandit'samatteroftiming.We'vealreadybeeninthemarketwith50properties.Ithinkwe'vegot37or38thathavebeensold.Sowe'reprettywellawareofpricingandwhat'savailableoutthereandanythingwillbedoneon--intermsofmoreassetsaleswillhavetobedoneovertime.
It'snotgoingto--anumberofpeopleinthemarkethavelookedtousandweagreewiththeadvicethatweneedtodosomethingprettyspecificandtodaywe'reannouncingsomethingprettyspecific,butasIsaidearlier,it'sgoingtotaketimeonanumberoffrontstokindofworkwiththisportfolioandmaximizeitsvalue.Sothat'stherationaleforputtingitinadedicatedvehicle.
AndrewRosivach (Analyst-GoldmanSachs):
AndreallyIspeedaround,Ithinkallofusweretryingtolikedothequarterandspinatthesametime,itlookedlikeyourinterestincomedroppedalotquarter-to-quarterspecificallyonaseniorhousinginvestment.Whatwasthat?
T imSchoen (CFO):
Ataquarter-over-quarterbasisAndrew,wehadsomeone-timegainslastyearrelativetoourseniorhousingdevelopmentloanprogram(multiplespeakers)itselfthisquarter.Sothat'sreallywhatthefluxis.
Operator :
TayoOkusanya,Jefferies.
T ayoOkusanya(Analyst-Jefferies):
Firstofall,IjustwantedtosaycongratulationstoTim,hedefinitelywillbemissed.Andthenquestionwise,IthinkIjustwantedtogobacktothequestionof,it'sbeenaskedoneortwotimes,butIfeellikewe'vebeendancingarounditalittlebitandthisideaofwithManorCare,whatexactlyasanindependentREITorSpinCo,whatwillSpinCobeabletodothatitcouldnotbedoneunderHCPjustkindoftoanextentHCPprovideddiversification,HCPprovidedalowercostofcapital.WhatcanSpinCoreallydotomaximizeshareholdervaluethatjustcouldnotbedoneundertheHCPplatform?
LauraleeMart in (President&CEO):
Well,ifwethinkabouttheinvestmentthesis,sayingthatthisisanentitythatisabletorespondtoandwhetherthechangesintheindustrycomingfromreimbursement,whatwe'vedoneisnotonlyputtheassetsinacapitalstructurethatwillbeconservativethatitcanworkwiththat,butifwethinkaboutthe
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page20of28
limitationsoftheREIT,wecanonlyown10%.
We'reputtingour10%ownershipintoSpinCo.We'realsoputtingourDROintoSpinCo,whichthemarketplacehasnotvalued,yetithasagreatdealofvaluewhenyouthinkabouttraitsandsoforthintotheoperatingcompanyandwiththeflexibilitythatitcandodifferentthingsasitthinksaboutwhatitwantstodowiththeleaseinplacetomaketradesornotandoptimizewhatithasandwe'vealsogivenitacapabilitythathaveabasisintheassets,whichwedidnothavebeforethatitcandomorethingswiththeassetsintermsofsellingthem,etcetera.
Sothere'sjustalotoftools,butinHCP,ourshareholdersexpectconsistencyandthat'sveryhardtodeliverwhenthereisanunknownexpectation.TheinvestmentthesisofSpinCoisyoumightexpectsomeunexpected,butifthosethingshappen,it'sprobablybecausevaluewascreated.Soit'sjustadifferentinvestmentthesisthatisbetteroptimizedoutsideofHCPandthat'swhatwefeelweneedtodoforshareholders.
T ayoOkusanya(Analyst-Jefferies):
Butalongthoselines,ifSpinCoisgoingtobeaREIT,IwouldthinkagaintheaverageREITshareholderwantsstabilityofcashflows,that'swhywe--theREITthatcangenerateconsistentearningsistheonethattradesatahighermultiple,likewhywouldIwanttoownSpinCoifthere'sgoingtobeallthisuncertaintyandallthisvariabilityrightoffthebat.LikeI'mjustalittleconfusedaboutthevalueIgetfromSpinCoasaninvestor?
MikeMcKee (ExecutiveChairman):
Well,Ithinkthatagain,I'lladdalittleabit,Lauraleehitonit.AsaREITandasadiversifiedREIT,aswiththekindofcreditratingandsoforththatwehave,wearegenerallyapassiveinvestor.Wecannotownmorethan9.9%oftheequity.Ifsomeofthesefacilitiesdowntheroadneedtobeoperated,wecan'tbeanoperator.Thereareanumberofthingsthatmightoccur.Wedon'tknowwhichpathwewillultimatelygodown,butSpinCocan,Ithinkitwasreferredtoearlier,wewillsetitupasaREIT,itwillbeaREIT,itdoesn'thavetostayaREIT.HCPisgoingtobeaREITperiodintheparagraph.Sowhenyoustarttokindofgodowntheoptionsthatwe--Itoldyouwespendalotoftimethinkingaboutnumerousoptions,anumberofthemwereforeclosedbecauseofthevehicleHCPthattheassetsareheldin,SpinCowon'tbesorestricted.
JohnLu (EVP):
I'lljustaddthat,intermsofthevariability,whenwedidthevaluationlastquarterandestablishedanewcarryingvalueoftheassetstoamarketlevelleaserateandcoverage,therewasareductioninourcarryingvalue.InthecaseofSpin,Iwouldexpectthatthey'reprobablygoingtolikelystartout,marketwillgivethemwhattheythinkthevalueis,itwasanimpairmentonoursideanditwillbe,justtherealityfromthestart.
MikeMcKee (ExecutiveChairman):
Youknow,I'dsayoneotherthing,SpinCoisveryinterestingtous,we'reexcitedaboutMarkOrdanandwhathecanbringtothatvehicle,butaswesaidearlier,andIdon'tthinkweshouldmoveawayfromit,thisisaboutHCP.WhenyoulookatwhatSimondidforexample,peoplesaywell,thatspinwaslacklusterafterawhile,butitdidahellofalotforSimonProperty.SoweexpectthatHCPisgoingtohaveaverystronggrowthprofileandsomeoftherelationshipswehave,thatwewanttoexploitaregoingtobeatourfrontdoornow.SoIthinkalthoughwe'respendingalotoftimeandshouldtoday,aboutSpinCo,weneedtoreallybeexcitedaboutwhat'sgoingtohappenwithHCP.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page21of28
T ayoOkusanya(Analyst-Jefferies):
Okay.Fairenough.Isthisatax-freespin-offtoHCP?
LauraleeMart in (President&CEO):
No.itdoesn'tqualifyasatax-freeunderthecode.However,takenintwopiecesforourshareholders.Effectively,theneteffectisitwilloperatelikeatax-freereturnofcapitalandthenequallyimportantforHCP,wedonotexpectthatwewillrecognizeanytaxableincomeatthecorporateREITlevel.Sonet-net,thisisanoptimumstructure.
T ayoOkusanya(Analyst-Jefferies):
Gotit,okayandthenjustonemore,ifyoumayindulgeme,inthenewguidance,youdidmaintainyourcashsame-storeNOI,yourRIDEAnumberisforcashsame-storeNOItogoup,butthenumbersfortheoverallseniorhousingportfoliocamedown?Canyoutalkalittlebitaboutwhatyou'reexpectingonthetriple-netsidethen?
MikeMcKee (ExecutiveChairman):
Yesthetriple-netcamedownforacoupleofreasons.Oneis,it'sprimarilyrelatedtotherentcutthatBrookdalereceived.Thatwasagreedtoacoupleofyearsago,it'spartofthetransactionwherewe[continuetopurchaseoptions,about$7million]reduction,sothatwasanimpactonthetriple-netsideandthenasyounoted,we'reofftoastrongstartontheoperatingportfolio.
Operator :
ToddStender,WellsFargo.
T oddStender (Analyst-WellsFargo):
I'mnotsureifImissedthis,butwhatistheamountofthedividendthat'sSpinCowillpayHCP.Hasthatbeendeterminedyet?
LauraleeMart in (President&CEO):
Whatwe'vetalkedaboutisthattherewillbedebtproceedsraisedatSpinCothatwillcomebacktoHCP,butthat'snotadividend.Theirdividendpolicywillbesetbytheirboard,butthat'llbetotheirshareholders.
JohnLu (EVP):
Itwillbemoreofadistribution?
LauraleeMart in (President&CEO):
Right.
T oddStender (Analyst-WellsFargo):
Okay,butthemoneybacktoHCP,isthatnotthecase?
LauraleeMart in (President&CEO):
That'sadistributionbacktous.
MikeMcKee (ExecutiveChairman):
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page22of28
TherewillbeadistributionbacktoHCP.Ithinktheexactamountwe'llannounceaswegetclosertothespin,becauseitdependsonjustmarketconditionsatthetime.SoIdon'tthinkweshouldgiveyouanumbernowbutthatwillcomeoutaswegetclosertothetimeofexecutingthespin.
T oddStender (Analyst-WellsFargo):
Okay.Andwhataboutthe61HCRManorCare,theseniorhousingpropertiesthatarelargelymemorycare,whathappenstothose?
LauraleeMart in (President&CEO):
TheywillbeintheSpinCoatthistime.
T oddStender (Analyst-WellsFargo):
Okay.Andthen,justIguess,whathappenstotheHCPdividendrate?Andonthecomment,youguyshavehadalong-standinghistoryofbeingadividendachiever,howdoesthistransactionaffectthecurrentrate?
LauraleeMart in (President&CEO):
Again,asIsaidearlier,ourcurrentdividendpolicywillstayinplaceuntilthespiniscompletedandthenpost-spin,wewillbelookingatwhatistherightcapitalstructure,dividend,etcetera,butourfocusisontotalshareholderreturnandinthat,it'sgrowthforourshareholderswhichincludesthedividendgrowth.So,atthispointintime,thatdividendpolicy,thatwillbethepolicybutadividendhasnotyetbeenset.
T oddStender (Analyst-WellsFargo):
Okay.Andthenjustfinally,Justin,youtalkedabouttheBrookdaleconcentrationcertainlyisgoingtodeclinethesaleoftheRIDEAportion,butyoumentionedadditionalfacilities,youmighteitherswitchofftheoperatororsell.WhatistheBrookdaleconcentrationultimatelygoto?Wonderifyoucouldtalkaboutatargetmaybe?
MikeMcKee (ExecutiveChairman):
Youknowwhat,I'mgladyouaskedthatbecauseIwantedtomakeanotherstatementregardingtheRIDEA2transaction.Thebeautyofitisthatweremainanownerinall49assets.Welikerelationship,weliketheassets,welikethemarketsandwe'reenjoyingstrongperformanceoverthepastcoupleofquartersandwe'llcontinuetodoso.Asanowner,we'rejustgoingtoownlessofitandwe'redoingthetransactionwithajointventurepartnerthatwecangrowwithovertimeandperhapsintimewemightbeinterestedinbuyingtheassetsback.Wewouldn'trulethatout.
Soitwasawaytoaddressconcentration,addressrecycling,butstillmaintainingarelationshipthatwehavealotofconfidencein,andthat'llbeanongoingdialogwe'llhavewithinvestors,because,asIsaid,we'reprobablygoingtobeaboutdowntoathirdofourportfolio.We'llbeBrookdalepost-spincertainlytoMike'spointsandLauralee'spoint,wewillgrowagain,that'sourintentandthat'llhelpdiversificationandIgavesomeexamplesearlierofsometransactionsthatarebringingnewoperatorstoourcompany,weanticipatemoreofthat.
Andtheninregardstothetriplenetdiscussions,there'sbeen25non-coreassetsidentifiedsofarwithBrookdale.There'llbemorediscussionswithBrookdale.Wehaveagreat,veryfluiddialogwiththem,andwe'reatcontinuousandconstantdiscussionsabouthowtocreatevaluewiththatportfolio.So,theremaybewaystoreduceevenmoreconcentrationwiththetriplenetbutIthinktheoverridingmessagehereisthatweliketherelationship.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page23of28
Operator :
JordanSadler,KeyBancCapital.
Jef f Gaston (Analyst-KeyBanc):
ThisisJeffGastonhereforJordon.So,afewquestionsforyou.Youmentionedearlierthatthespin-offplantargetsamidsixtimesdebt-to-EBITDA.Isthatdayoneafterthespin-off?
LauraleeMart in (President&CEO):
We'vetalkedabout6.5timesatHCPPrime,themaincompanyandagain,whatwehaveisaplanthatwiththespinproceedscomingback,withthedebtatthespin,withtheproceedscomingbacktoHCP,withtheRIDEAsalethatwejusttalkedaboutandidentifiedassetsalesinadditiontothat,thatwewouldgettothat6.5times.So,thatiswhatwe'redefinitelytargetingaswemovethroughthespinprocessandgetthatcompleted.
Jef f Gaston (Analyst-KeyBanc):
Andthen,soifyouguysaregoingtobeat6.5times,what'syourstrategyforgrowthgoingtobe?Howdoyouplanonfinancingit,post-spin?
LauraleeMart in (President&CEO):
Ourfinancingplansare60-40aswelookatnewinvestments.We'reverycommittedtobeingatalowerleverage,andwe'llmovetodothatassoonaspossible,butwethinkthatwecanbecompetitiveatthatlevelandbedefinitelyagrowthcompanyinthemarketplace.
Jef f Gaston (Analyst-KeyBanc):
Andthen,withtheexitfromtheSNFportfolio,doesthatkillyourfivebyfivestrategy,areyoumovingtoafivebyfour,howareyouthinkingaboutthatlonger-term?
LauraleeMart in (President&CEO):
Wewentoutoffivebyfivestrategyforawhile,butwhatwe'reveryfocusedonisourthreeassetclassesthatare95%privatepay,ourseniorhousing,ourmedicalofficeportfolioandourlifescience.Wethinkthesearehigh-qualityportfoliosthatgiveusalotofgrowth.Weprimarilyfocusonowningrealestate.Intermsofstructure,thereistimeswhenwedodebt,butit'stogettotheownershipofrealestate,wethinkthat'swhatREITsaresupposedtodoasaninvestmentthesis.
SoourplanwhichwelaidoutIthinkprettyclearlybothintheinvestordeckandhopefullyinmycommentstocamethroughthatwe'regoingtobeinthepremierpartofthehealthcaresectorandwethinkthatofferssignificantopportunitiesforgrowthandreturnsforourshareholders.
Jef f Gaston (Analyst-KeyBanc):
Andthen,withtheSpinCobeingatroughlyfivetimesleverage,Iguess,couldyouspeaktowhetheryouthinkitwillbeagrowthvehicleorisitgoingtobefocusedprimarilyonbeingaworkoutvehicle?
MikeMcKee (ExecutiveChairman):
No,Ithink,Imentionedearlierit'saninterestingquestionbutIthinktheinitialfocuswillbeontherelationshipwithManorCareandwe'llbetryingtomovetheassets--notmovethem,butworkwithManorCareifpossibletogettoagoodresult.
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page24of28
Andinthatsense,thereisaworkoutfocustoitbecausetheinitialfocusisthefactthatwedon'tthinkrespectfullythemarketiscreditingasmuchvalueasisthere,andweneedtotryandfindawaytounlockthattousethewordwe'veusedquiteabittoday,andthatwillbetheprimaryfocusfromtheget-go.
Ithinkwealsosaidearlierthatit'saspacethatisverydynamicatthispoint.SotheremaybeotheroptionsavailabletoSpinCobecauseitsitsinaprettyinterestingpositionwithinthatspace,butthosearethingsthatreallyMarkOrdanwillbefocusedonandIdon'tthinkhewantstoenterthisassignmentwithprejudgmentaboutwhatistheoptimalpathforward.
Jef f Gaston (Analyst-KeyBanc):
Andthen,justtoclarify,earlier,IthinkJustinmentionedmarketlevelcoveragewas1.3times.WasthatEBITDARorEBITDARM.
MikeMcKee (ExecutiveChairman):
It'sEBITDAR.
Jef f Gaston (Analyst-KeyBanc):
Andthen,finalquestion,doyouguyshavea--areyouguysabletosharewhatthecurrentleverageatManorCareisonanetdebt-to-EBITDAbasis?
T imSchoen (CFO):
Notonnetdebt-to-EBITDAbasis.Theonlyotherdebttheyhaveisabout--theonlyotherdebttheyhaveattheOpcois[about$380million,$390million]oftermdebt.Thatcapitalstructurehasbeeninplaceforsometime,Jeff.
Operator :
MichaelMueller,JPMorgan.
MichaelMueller (Analyst-JPMorgan):
Justacoupleofquickones.First,isitcorrectthatwhentheForm10comesout,ifthereisarentreduction,that'snotgoingtoshowupinthere,that'sgoingtobesomethingwe'llfindoutaboutdowntheroad.Isthatcorrect?
LauraleeMart in (President&CEO):
TheForm10willoutlinetheinvestmentthesisandwhatinvestorsshouldexpectinSpinCo.Soagain,prematuretotalkaboutanythingintermsofrestructuring.
MikeMcKee (ExecutiveChairman):
Right,IthinkyourassumptioniscorrectthattheForm10won'treallyaddressthat.Again,there'llbe,Markwillbedoingroadshowsandallofthataswegetclosertoexecution.We're[threeorfour]monthsoutandthosearethingsthatarebestaddressedwhenwe'rereallyontopofexecutionbecausethemarketwilltelluswhereweare.
MichaelMueller (Analyst-JPMorgan):
Okay.Andthenforthe$2.75billionof,Iguess,capitalbeingeffectivelyraised,howshouldwethinkabouttheuse?Firstofall,isallthat--shouldwethinkofthatbeingraisedatthetimeofthespin-off,soallthatcapitalwillbeintheRIDEAIIwe'vedonethedebtwillbeplaced,soyou'llhavethat$2.75billion.And
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page25of28
then,what'sthetimeframetodeploythat,becauseIknowthedebttalksaboutrepayingmaturitiesthrough2018.Doyouplanonacceleratingprepaymentsorsittingoncashorhowshouldwethinkaboutthat?
LauraleeMart in (President&CEO):
Yes,theplanisthatwewouldaccelerateprepayments.AsIpointedout,thatdebtisaprettyhighcouponblendedat6.4butwe'vegotpartsofitthatare6.7,6.8,soit'sagoodoptimumtimetopaythatoffandthenbeyondthat,itwouldbedeterminedonwhatwedointermsofgrowthgoingforwardetcetera.Sothegoalistobeat6.5timesleverageorlessatthecompletionofthespin.
Operator :
RichAnderson,MizuhoSecurities.
RichAnderson (Analyst-MizuhoSecurities):
So,doIjustkindofstepbackandlookatthebigpicture,investorsinHCPleveragegoesupatleastfornow,G&Aasapercentofrevenuegoesup,youprobablyhaveadividendcuttonormalizethesituation.AndthenonSpinCo,youcouldconvertitintoanon-REIT,that'snotgoodforREITinvestors.YoucouldhaveandprobablywillhaveanotherrentcutandthenyouhavetheDOJoverhang.
Soalotofunknowns,right,thatarestilloutthereandwhileIappreciateyouwantingtokindofgettothisandresolveitandmoveforwardinadecisivemanner,didyougiveanythoughttoholdingoffandwaitingtillyouhadalittlebitmoreinformationtosharewithinvestors,sothattheycanmakealittlebitmoreofaneducateddecisiononwhattodohereornow?Justcurious,whydidyoudecidetodothisnowwhenwedon'thaveawholelotofinformation?
MikeMcKee (ExecutiveChairman):
Well,Ithinkifyoulookatanumberofspintransactions,whatwe'redoinghereintermsoftimingofannouncementisprettystandard.We'vegotalotofworktodotoexecute.Wewantedtogetleadershipinplace,wewantedthatknowntothemarketandifwefeltthat--asIsaidearlier,thatwithinthenextmonthortwoorthreethatfactsonthegroundwouldchangedramatically,wemayhavecomewithadifferentstorytoday,butwedon'tseethathappening.Sowefeltthatitwasthebestcoursetoannounceadirection.
Wethinkwe'vegottherightplan,therightpeopleinplace,thatitopensupoptionalityandmoreimportantly,wethinkthatitputsHCPontherightcoursetoreallybeavery,verycompetitiveforceinthismarket.Sowewanttoexploitsomeofthoserelationshipsthatwe'vebuilt.Wherewe'vehadsomehandcuffsonthis,wewanttotakethehandcuffsoff.Sothat'swhywe'reannouncingthisandeventhoughitwilltakealittletime,whatwe'retellingyougoodbitaboutHCP,howyouevaluateSpinCowillhappenoverthenextcoupleofmonths,anditwillbeiterativebutwethoughtitwasreallytherightcoursetogoaheadandannounceit.
RichAnderson (Analyst-MizuhoSecurities):
Justworriedalittlebitaboutafalsepositivereactionherebecausewedon'tknow.Thereissomuchthatinvestorsaregoingtogetthisstubcompanyandtheydon'treallyknowwhatthey'regetting.Andthen,maybeIcouldtrytohelpwithalittlebitofthatandifyoubackintoarentcoverage,IthinkitwasJustinorTimthatmentioned1.3timesEBITDARisthemarket,andyoustartwitha0.85timesEBITDARcoveragethatyoureportedtoday,thatgetsyoufrom,callit$460millionofannualizedrevenuetomaybesomethinglike$300millioninSpinCo.Sothen,yougetto[1,3times$300million],tryingtothinkisthatabout$1billionworthofdebtthatwecouldseeSpinCoexecuteon?Isthatafairway?Ismypath
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page26of28
reasonablethere?
LauraleeMart in (President&CEO):
Well,Rich.Ithinkyouare(inaudible)yourmodelwhichIamsuregoingtodobutagaingoingbackto,wepositionedSpinCotobesuccessfulwiththeseassets,whichIthinkisincrediblyimportantbecausetoday,wecan'tdothatwithinHCPandwe'vealsopositionedHCPcouldbehighlysuccessfulwiththebalancesheetthatwe'regoingtohave.
RichAnderson (Analyst-MizuhoSecurities):
ImeantointerruptbecauseIdon'twanttodelaybutIknowit'salongcall,butnowI'mlookingatfivetimesEBITDAR,I'msorryfivetimesrevenuewouldbeabout$1.5billionindebt.I'mjustwonderingifthatremaining$2billionofraisethatyou'rethinkingaboutatHCP,isitfairthatabout$1.5billion-ishtypenumberwouldcomefromSpinCoandtherestfromassetsales?
LauraleeMart in (President&CEO):
Idon'tthinkyou'reoutoftherealmofpossibility.
RichAnderson (Analyst-MizuhoSecurities):
Okay,thankyou.AndthenifIcouldjustaskmaybeaquestiontoTimandbytheway,Timgoodlucktoyou.Hope(inaudible)inthefuture,buttherewasarestructuringpaymentof$55millionfromBrookdale.Ithinkthatflowsorstartstowaneinthethirdquarterofthisyear.Isthatcorrect?Andifso,howshouldthatshowupintheP&L?
T imSchoen (CFO):
Itdoesstarttoweighinthisyearandasyousaid,itwasinthenextcoupleyears,butitwillonlyaffectFADandthat'sinourguidanceRichtoday.
RichAnderson (Analyst-MizuhoSecurities):
Andfinally,maybeonemorebiggerpicturequestiononthedeal.Whatisthechancethatsomethingelsecanhappenbetweennowandspin-off?DothepartieshaveordoyouHCPhavetheflexibilitytocontinuetoseekoutotheroptions,whetherit'ssometypeofsaleofoneorbothoftheentitiesoranythinglikethat?Towhatdegreecanyoustillengageotherpartiestomodifythedealascurrentlycommunicated?
JohnLu (EVP):
Ithinkthatourintentionshavebeenannouncedtoday,we'regoingtopursuethisvigorously,butasthesametime,we'renotgoingtoforecloseanydiscussions.We'renotlimitedinthatrespect.So,ifthingsonthegroundchange,wedon'thavesignedagreements.We'renotreadytoexecute.Idon'twanttoputtoomuchofapointonthat,butIthinkjusttobecandidtoyourquestion,thisisanintention.It'sastrongintention,it'sadirectionthatwe'regoingtopursueandwe'llseehowthefactschangesastheweeksgoon.
Operator :
JohnKim,BMOCapitalMarkets.
JohnKim(Analyst-BMOCapitalMarkets):
YouspokeaboutevaluatingVentas'spin-offlastyear.Soincomparingyourannouncementwiththeirs,
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page27of28
theyhadbasicitemslikeNOI,FFO,anddividendannouncedatthepresentation.ItsoundslikeyoursisreliantonSpinCo'sboard,whichhasn'tbeenformedyet.Socanyoujustprovidesomeideaoftimingofwhenthesebasicparameterswillbeannounced?
LauraleeMart in (President&CEO):
Yes,theForm10willbecominginaboutamonth'stimeandthatwillcarryalotmore,ifnot,mostofthedetailsofyourquestions.
JohnKim(Analyst-BMOCapitalMarkets):
Okay,IthoughtyouansweredtopreviousquestionthattherentcutwouldnotbediscussedintheForm10.
LauraleeMart in (President&CEO):
It'stheoptionsthatSpinCotakes,theyhavetools,buttherewasnoindicationthatarentcutoranythingelsewouldbeintheForm10.
MikeMcKee (ExecutiveChairman):
Wehaven'thadanydiscussionsaboutarentcutatthispointandwehavenoindicationthatarentcutwillberequiredpriortotheformationofSpinCooreventhereafter.SoIthinkthosearefactsonthegroundthatwedon'thaverightnow.Ithinkwhenyoustarttocompareotherspins,especiallyifyoutaketheVentasspin,theyownedtheirassets,theyoperatedtheirassets.There'salotmoreyoucanplananddowhenyouhavefullinformation.Wehavecertaininformationbutnotquiteasmuchmaybeastheyhadandwe'reinadifferentsituationhere.
JohnKim(Analyst-BMOCapitalMarkets):
Okay,soSpinCowillcomeoutasisandanychangesgoingforwardwillbepost-spin?
MikeMcKee (ExecutiveChairman):
Basedonwhatweknowtoday,that'scorrect.
JohnKim(Analyst-BMOCapitalMarkets):
AndhaveyougivenanestimateasfarasthemergerrelatedcostsandendupbeingquitehighforVentasandgiveanestimateofthatandwhoisgoingtobepayingforit?
LauraleeMart in (President&CEO):
Wehavenotgiventhatyet.IthinkyoushouldexpectthatitwillbeadvisorfeesandthenwewillhavedebtprepaymentcoststhatwillbealsopartofthetransactionandthosewillallcomeoutaswehavetheForm10.
JohnKim(Analyst-BMOCapitalMarkets):
Andwhoisgoingtopayforit?
LauraleeMart in (President&CEO):
It'llbeHCP(multiplespeakers)otherthanthefinancingcostsatSpinCo.
JohnKim(Analyst-BMOCapitalMarkets):
CompanyName:HCPIncCompanyTicker:HCPSector:FinancialIndustry:RealEstate
EventDescription:Q12016EarningsCallMarketCapasofEventDate:15.93BPriceasofEventDate:36.1
©2014TheStreet,Inc.Al l R ightsReserved Page28of28
MarkOrdan'semploymentcontract,howlongisthatfor?
MikeMcKee (ExecutiveChairman):
Wehaveanagreementinprinciple,butthatwillalsobeannouncedintheForm10.
JohnKim(Analyst-BMOCapitalMarkets):
AndthenifIcouldjusttransitiontotheBrookdalejointventuresale,canyoujustwalkusthroughhowyouvaluetheplatformtodayversusyouroriginalcost.Iknowitcamethroughmultipletransaction?
MikeMcKee (ExecutiveChairman):
Actually,whenBrookdaleenteredthejointventurewiththeHCP,itwas[about6.5cap].Theperformancehasbeenchoppysincethenuntilrecentlybecausewastherewasintegrationandtherewasadistractionduetothat,butwe'veenjoyedsomeimprovedperformance,butwhenyoulookatthecaprate,itlinesupprettymuchexactlyabouta[6.5cap].
LauraleeMart in (President&CEO):
Soletmejustwrapupandclosethecall.We'vepositionedSpinCoasaninvestmentvehicletooptimizethelong-termsolutionfortheManorCareassetsforthebestofourshareholdersandwe'vepositionedHCPforgrowthandconsistentreturnsfromourhighqualityportfolioandinvestmentgradebalancesheetandwelookforwardtoyourquestions,whichI'msuretherewillbemanyandwewillbeavailabletoyoualldaytoanswerthose.
Thankyouverymuchforalotoftimethismorningandweappreciateyoursupport.
Operator :
Theconferenceisnowconcluded.
Allrightsreserved(c)2014TheStreet,Inc.
Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.
THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.
THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.