HCP Management Discusses Q2 2012 Results - Earnings Call Transcript

HCP (HCP)

Q2 2012 Earnings Call

July 31, 2012 12:00 pm ET

Executives

John Lu - Vice President of Investment Management

James F. Flaherty - Chairman and Chief Executive Officer

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

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

Analysts

Paul Morgan - Morgan Stanley, Research Division

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

Ross T. Nussbaum - UBS Investment Bank, Research Division

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

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

Quentin Velleley - Citigroup Inc, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Nicholas Yulico - Macquarie Research

Robert M. Mains - Stifel, Nicolaus & Co., Inc., Research Division

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

Todd Stender - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 HCP Earnings Conference Call. My name is Bonnie and I will be your coordinator today. [Operator Instructions] 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, Bonnie. 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 Second Quarter Earnings Conference Call. Joining me today are HCP's Executive Vice President, Chief Investment Officer, Paul Gallagher; and Executive Vice President, Chief Financial Officer, Tim Schoen.

We are enjoying significant momentum, allowing us to increase our FFO, our FAD and our Same Property Performance 2012 guidance, realized a significant reduction in our cost of capital and announced $500 million of acquisitions and an additional $100 million commitment. First, we'll begin with a review of the quarterly results we announced this morning. Tim?

Timothy M. Schoen

Thank you, Jay. Today, I will cover 4 topics: second quarter results; investment transactions; financing activities and balance sheet; and finally updated 2012 guidance. Let me start with our second quarter results.

Our same-property portfolio continued to perform well, generating a solid 3.1% cash NOI growth compared to the second quarter last year. The results were primarily driven by contractual rent increases and occupancy gains in our life science and medical office portfolios. Paul will review our operating performance by segment in a few minutes.

For the second quarter, we reported FFO of $0.69 per share and FAD of $0.56 per share, which included a $7 million or $0.02 charge related to insurance recovery of past G&A expenses. On a year-over-year basis, FFO as adjusted decreased $0.08 per share and FAD decreased $0.06. The decrease resulted from one-time income totaling $41 million or $0.10 per share, primarily related to the gain from monetizing our Genesis debt investment in the second quarter of 2011. Excluding the one-time items from both periods, year-over-year, second quarter FFO as adjusted was flat, and FAD increased by $0.02 per share or 3.8%.

Switching to investment transactions. Subsequent to the end of the first quarter, we announced $559 million of investments encompassing 4 different property types and 3 different investment products within our 5x5 business model. These transactions are immediately accretive to earnings and include: one, the GBP 137 million or $215 million debt investment in U.K.-based Four Seasons Health Care at a yield of 12.5% in late June; two, $274 million acquisitions of on-campus MOB portfolios that represent 1.2 million square feet in total and include a DownREIT component with equity units valued at $41 million, and the assumption of $59 million of mortgage debt at a blended rate of 5.7%. We expect to close these acquisitions on or before August 31.

Three, we made other additional investments of $70 million during the quarter, including $48 million of development and capital improvements, $8 million for a pre-leased life science development with Duke University and funding for one additional senior housing development loan under our program, bringing the total of committed projects to 6.

Turning now to financing activities and balance sheet. On a capital raising front, we've generated total gross proceeds of $890 million in June and July, consisting of $376 million of common stock, $300 million of 10-year senior unsecured notes at a coupon of 3.15% and GBP 137 million 4-year term loan that serves as a hedge of our debt investment in Four Seasons Health Care. We concurrently entered into a 4-year interest rate swap that fixes the interest rate at 1.81% plus transaction cost of 17 basis points per year.

Proceeds from these transactions were primarily used to repay our $250 million bond maturity at an expiring rate of 6.45%, restore full availability under our $1.5 billion revolver and fund the cash consideration for the acquisitions announced this morning. Combined, these transactions will further strengthen our balance sheet. At quarter end, our financial leverage were slightly below 40% and secured debt ratio below 10%. In addition, our fixed charge coverage increased to 3.6x in the quarter and is expected to further improve in the coming quarters, driven by the benefit of these activities.

Our remaining 2012 debt maturities are negligible at $29 million. And looking ahead into 2013, our debt maturities total $920 million at an average rate of 5.9%, of which $650 million are due in the fourth quarter of 2013. To help further illustrate our strong credit metrics, we continue to expand the disclosures on Page 6 and 7 in this quarter's supplemental.

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