Q3 2011 Earnings Call

October 31, 2011 12:00 pm ET


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

James F. Flaherty - Chairman and Chief Executive Officer

Timothy M. Schoen - Chief Financial officer and Executive Vice President

John Lu - Vice President of Investment Management


Bryan Sekino - Barclays Capital, Research Division

Adam T. Feinstein - Barclays Capital, Research Division

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

Michael Bilerman - Citigroup Inc, Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

James Milam - Sandler O'Neill + Partners, L.P., Research Division

Jeff Theiler - Green Street Advisors, Inc., Research Division

Paul Morgan - Morgan Stanley, Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division



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Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 HCP Earnings Conference Call. My name is Chanel, and I'll be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir.

John Lu

Thank you, Chanel. Good afternoon, and good morning. Some of the statements made during today's conference call will contain forward-looking statements, including the statements about our guidance. These statements are made as of today's date and reflect the company's good faith, beliefs, and best judgment, based upon currently available information. The statements are subject to the risks, uncertainties, and assumptions that are described, from time to time, in the company's press releases and SEC filings. Forward-looking statements are not guarantees of future performance. Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement, or at all. Events prior to the company's next earnings announcement could render the forward-looking statements untrue and the company expressly disclaims any obligation to update earlier statements as a result of new information.

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

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

James F. Flaherty

Thank you, John. Welcome to our Third Quarter 2011 Earnings Conference Call. First, let me say that we understand the unexpected nature of yesterday's storm. We all have family members in the Northeast and are very aware of the serious implications in the days to come, and our thoughts and best wishes are with you.

Joining me today are Executive Vice President and Chief Investment Officer, Paul Gallagher; and Executive Vice President and Chief Financial Officer, Tim Schoen. HCP's unique 5x5 business model continued to generate out-performance this quarter, allowing us to, again, raise our 2011 guidance for same property performance, FFO as adjusted, and FAD. We will begin with Paul providing the details behind these strong results. Paul?

Paul F. Gallagher

Thank you, Jay. Let me go straight to the 2011 third quarter portfolio performance.

Senior housing. Occupancy for the second quarter in our same-property senior housing platform was 85.3%, a 40 basis point sequential decrease over the prior quarter and a 20 basis point decrease over the prior year. Overall, facility rate increases and margin improvements in our transition portfolios offset the slight occupancy declines. And cash flow coverage for the portfolio remained steady at 1.19x. Current quarter year-over-year same-property cash NOI for our senior housing platform was up 7.8%. This growth continued to be driven by properties previously transitioned to new operators, and by improvements in the retained Sunrise portfolio. On September 1, 2011, HCP closed a strategic venture with Brookdale Senior Living, in conjunction with Brookdale's acquisition of Horizon Bay. Previously, Horizon Bay operated 37 HCP-owned senior living communities. Brookdale assumed the existing triple-net leases on 9 of the communities, assumed the management contracts on 3 communities, and signed a new lease for 4 communities, and entered into a RIDEA joint venture to manage the remaining 21 communities. Under this RIDEA joint venture, Brookdale acquired a 10% ownership interest in the assets and HCP reinvested these proceeds in the Brookdale stock. With the closing of this RIDEA joint venture, operating assets in HCP's senior housing sector represent 4% of HCP's total investment portfolio.

Post-acute skilled nursing. Our post-acute skilled nursing portfolio continues to benefit for Medicare reimbursement rates under RUGs-IV. For the trailing 12-month period ended June 30, 2011, HCR ManorCare's fixed charge coverage ratio was 1.60x, a 3 basis point increase. For our same-store skilled nursing portfolio, cash flow coverage improved to 1.78x, a 9 basis point increase over the prior quarter and a 30 basis point increase over the prior year. Year-over-year, same property cash, on the life, for the third quarter increased 3.6% driven by normal rent steps.

Hospitals. Same-property cash flow coverage declined 60 basis points, to 4.08x. This decline was driven by the inclusion of Hoag Hospital's operational results to our same-property portfolio, as this is the first quarter with 12 months available data. Hoag opened the newly renovated facility in the third quarter of 2010, and have made significant progress ramping up operations. Cash flow coverage for Hoag, for the trailing 6 months ended June 30, was 1.85x. Excluding Hoag, our same-property hospital cash flow coverage improved by 7 basis points, to 4.75x. Year-over-year same-property cash NOI for the second quarter decreased 1.5%. The decline was driven by the funding of property level expenses for a rehabilitation hospital in Plano, Texas, where HCP is in the process of replacing the existing operator.

Cirrus. To its merger with CNL, HCP acquired a senior secured loan to an affiliate of Cirrus. The loan is collateralized by partnership interest in the operations of 8 ambulatory surgery centers and surgical hospitals, as well as the assignment of management contracts. Cirrus owns the operations of these facilities and syndication with local physicians. In the third quarter, HCP recognized an impairment of $15.4 million, reducing the carrying value of the loan to $75.7 million as a result of continued delays in the sale of collateral and a decline in operating performance of certain hospitals. 4 of the 8 facilities in the collateral pool represent 85% of the total collateral value, and operations at those facilities continue to perform well. The other 4 facilities have struggled and, in certain cases, are currently being subsidized by Cirrus' partnership distributions from the 4 performing facilities. In the third quarter, the potential sale of one of the hospitals, representing 45% of the total collateral value, was delayed when the CEO of the acquiring hospital was terminated for reasons unrelated to the sale. Cirrus has since received, and is evaluating a backup offer for its equity interest in the hospital. While the loan is in default, HCP continues to work with the borrower to achieve an orderly liquidation of the collateral. The liquidation has been complicated by disruptions in the capital markets, the impact of healthcare reform on physician-owned hospitals, and the lack of liquidity for Cirrus' partial ownership interests. All have contributed to the uncertainty surrounding the eventual timing of the liquidation of the collateral. However, we are encouraged by the level of interest in Cirrus' performing hospitals. Cirrus is in negotiations to sell 2 of the 4 performing hospitals, representing 70% of HCP's collateral pool.

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