Q1 2006 Health Care Property Investors Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen and welcome to your quarter one 2006 Health Care Property investor earnings conference call. My name is Jean, I'll be your Conference Coordinate today. [OPERATOR INSTRUCTIONS]

At this time, I'll turn the call over to your host, Mr. Ed Henning, Senior Vice President and General Counsel. Sir, please proceed.

ED HENNING, SENIOR VICE PRESIDENT, GENERAL COUNSEL, HEALTH CARE PROPERTY INVESTORS: Thank you. Good afternoon and good morning. Some of the statements made during this conference call will contain forward looking statements subject to risks and uncertainties which are described from time to time in press releases and SEC reports filed by the Company. Forward looking statements reflect the Company's good faith belief and best judgment based upon current information, but they are not guarantees of future performance. Projections of earnings and FFO may not be updated until the next announcement of earnings and events prior to the next announcement could render the expectations stale.

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 first quarter supplemental information package or our earnings release, each of which has been furnished to the SEC and is available on our Web site at www.hcpi.com. I'll now turn the call over to our CEO, Jay Flaherty.

JAY FLAHERTY, CHIEF EXECUTIVE OFFICER, HEALTH CARE PROPERTY INVESTORS: Thanks, Ed. Welcome to Health Care Property Investor's 2006 first quarter conference call. This morning, we will start with a review by our Senior Vice President, Chief Financial Officer, Mark Wallace of HCP's results for the March quarter, which we announced after the market closed last evening. Then we'll have our Senior Vice President, Capital Markets and Treasurer, Talya Nevo-Hacohen summarize a number of recent HCP financing. I will conclude the call with comments on this morning's announcement concerning HCP's agreement to acquire CNL retirement properties. So let me begin by turning the call over to Mark.

MARK WALLACE, SENIOR VICE PRESIDENT, CFO, HEALTH CARE PROPERTY INVESTORS: Thanks, Jay and good morning. 2006 is off to a great start. Today we reported FFO per diluted share for the first quarter of $0.53, an increase of 20% over the $0.44 we reported for the first quarter of 2005. The improvement reflects our continued solid pace of investment activity, as well as contributions from our existing portfolio.

Turning first to acquisitions, during the first quarter, we purchased interest in $214 million of properties at average initial yields of 7.3%. In addition to our previously announced acquisition of 4 biotechnology manufacturing buildings located in San Diego for $30 million. We also completed our previously announced purchase of 15 medical office buildings for an aggregate price of 163 million. The medical office buildings consist of 882,000 rentable square feet and have an initial yield of 7.3%. The final tranche of this transaction closed on March 15th with a purchase of seven properties for 83 million which included 6 million of down-REIT units as consideration.

On February 24th 2006, we acquired two medical office buildings for 21 million, including $12 million of assumed debt. The buildings have 157,000 rentable square feet and had an initial yield of 8%. During the first quarter of 2006, we realized a gain of 7.3 million upon the early repayment from Beverly enterprises of a secured loan receivable due May 2010. This gain is reflected in interest and other income. At the time of repayment, the loan had a remaining balance of $30 million, was secured by nine skilled nursing facilities and carried an interest rate of 11.4%. We also showed interest in six properties during the quarter for gross proceeds of 21 million, resulting in non-FFO gains of 9 million.

Our consolidated balance sheet at quarter end includes six properties held for sale with a carrying value of $5 million. Consolidated GAAP basis same property NOI was 1.2% for the first quarter while adjusted NOI was 1.7%. Including fee income, our MOB joint venture contributed 3.1 million to FFO for the first quarter of this year compared to 2.5 million for the same period in 2005. Adjusted same property NOI performance for the venture was 5.2%, primarily reflecting higher tenant expense recoveries.

During the first quarter, the JV sold 22 medical office buildings with 871,000 square feet, for approximately $61 million and recognized gains at the JV level of $10 million. Our share of these gains is included in equity income from unconsolidated subsidiaries but is excluded from FFO. In connection with the sale, $46 million of secured debt was either repaid or assumed by the purchaser. As of March 31, 2006, rights of first refusal have also been exercised by the respective hospitals systems on properties with a value of about 37 million. The sale of these properties should close by mid-year, with a gain at the JV level of about 10 million with an additional of $20 million of mortgage debt expected to be assumed at closing.

Our balance sheet at quarter end includes consolidated debt of 2.1 billion, 19% of which is at floating rates. Under our dividend reinvestment plan we issued 210,000 shares in the first quarter for $6 million in proceeds. Our quarter end bank line were 375 million at quarter end, and approximately 333 million at the close of business yesterday. And now with that I'll turn the call over to Talya.

TALYA NEVO-HACOHEN, SENIOR VICE PRESIDENT CAPITAL MARKETS, TREASURER, HEALTH CARE PROPERTY INVESTORS: Thank you Mark. We have been focused on advancing our joint venture initiative while refinancing the limited current maturities in our portfolio. In the first four months of 2006, we closed on over $380 million of financing and have an additional $130 million of financing transactions that we expect to close in the second quarter. The financing that we have closed include a $150 million bond financing, a $200 million short-term unsecured loan, and two mortgage financings on medical office properties totaling $31 million.

First, let me describe our recent unsecured debt transactions. In February, we had $135 million of our unsecured senior notes mature. We replaced these notes with $150 million of new seven year unsecured senior notes at a rate of 5.58%. Although we issued $15 million of incremental debt, we were able to save over $600,000 in annual interest relative to the maturing debt. And with this transaction, we addressed all of our 2006 debt maturities. Our next senior note maturity is in January 2007 and consists of $120 million of 7.5% notes.

Also in February, we entered into an agreement with UBS and Barclays to provide us with $200 million of unsecured debt for a period of 90 days, priced at the same cost as our revolving line of credit. Our intent was to bridge the time between identified acquisitions and the mortgage debt anticipated to be placed on those assets thereby eliminating the need to issue permanent capital. We were able to document the transaction in one week, draw the full $200 million and subsequently repay it last month after 60 days, ahead of schedule.

Before turning to our mortgage financings, I would like to discuss our joint venture initiatives. We have spoken with numerous potential equity partners who were interested in multiple sectors in which we invest. If executed, the combined purchasing power of these identified ventures would total between 1 and $2.5 billion of assets. In each of these ventures, HCP would earn fees as well as hold approximately a one third stake. Now, in anticipation of closing these ventures, we have increased our activity in the secured debt market. Year-to-date, we have closed two mortgage loans totaling $31 million and have a commitment for a $92 million mortgage which we expect to close along with an additional mortgage within the next 30 days. We expect the total proceeds from these four mortgage loans to be nearly $170 million and represent 60 to 65% loan-to-value on the financed properties. These mortgages all have ten year terms and combined provide us with weighted average interest rate of about 6.1%, which is a 30 basis point discount to our unsecured borrowings. And now let me turn the call back over to Jay.

JAY FLAHERTY: Thank you, Talya. And thank you, Mark. I must say, we were pleased with our first quarter results. The fifth consecutive quarter that we've exceeded street estimates. Now, let me turn to this morning's announcement of our agreement to acquire CNL Retirement Properties and its advisor. The combined equity value is 3.6 billion and we are assuming or repaying debt of 1.6 billion for a total enterprise value of 5.2 billion. Consideration to the shareholders will be in the form of approximately 80% cash and 20% HCP common stock, or approximately 27.2 million shares of HCP and cash of approximately 2.9 billion.

The stock portion of the consideration is based upon a fixed exchange ratio. The total consideration of $5.2 billion represents a property level cap rate of 6.8% of 2007 net operating income. This valuation represents a price of $182,000 per unit of senior housing and a price of $208 per square foot of MOB space, both of which are below replacement costs. Following a vote by the shareholders of CNL Retirement, we expect to close this transaction in the third quarter of this year. I have organized my comments along the lines of an overview of CNL Retirement, its strategic fit with HCP, and the financial impact of the transaction.

Overview of CNL Retirement. By any measure, this transaction is a game changer for the health care REIT space. CNL Retirement represents a unique real estate portfolio. This is the largest portfolio of high quality, newly constructed, private pay health care real estate in the world. CNL's properties are roughly broken out as 20% medical office building and 80% private pay assisted living, independent living, and continuing care retirement communities. The medical office building portfolio consists of two separate platforms, the Cirrus group and DASCO, both of which are full service developer managers of medical office and specialty hospital facilities.

CNL's largest operator representing 42% of total 2005 revenue is Sunrise Senior Living, a leading manager of senior living communities. Horizon Bay represents 21% of 2005 revenues, the vast majority of which are in the independent living sector. Other significant senior housing operators include Erickson and American Retirement. Sunrise and Horizon Bay represent new operating partners to HCP's portfolio, while this transaction allows us to build upon our existing relationships with Erickson and American Retirement.

Approximately 50% of CNL's senior housing properties are located in the top 30 MSAs in the country and 57% of their MOBs are located on hospital campuses. These two metrics underscore the high barrier to entry profile of the real estate being acquired by HCP. Pro forma for this transaction, Sunrise will become HCP's largest operator, representing approximately 19% of combined revenues. Horizon Bay at 10%, and American Requirement Corp. at 7% of revenues respectively will round out HCP's top three operators. Our exposure to Tenet health care will be diluted to 6% of combined revenues and our total exposure to the skilled nursing sector will be reduced to just 9% of HCP …