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HCP execs tout spinoff's flexibility in managing troubled tenant

executives expressed hopethat assets leased to HCR ManorCare will no longer weigh down the company's portfolioafter a planned spinoff,and argued in a conference call that the newly spunoff REIT will have the flexibilityto deal with the troubledoperator in ways that HCP cannot.

In particular,the spinoff might not remain a REIT forever, HCP Executive Chairman Mike McKee said,adding that HCP's leaders "do not see the spin as an end in itself, but asa means to an end."

"Witha long-term perspective, we believe there is significant value embedded in our HCRportfolio that is presently not being recognized by the market," he added.

"Likeany spin, we expect SpinCo to be successful. But moreover, we look forward to returningHCP to a healthy, competitive and growing capital provider in the evolving worldof health care."

McKeeemphasized throughout the call that the spinoff will have options that HCP doesnot have.

"Asa REIT, and as a diversified REIT with the kind of credit rating and so forth thatwe have, we are generally a passive investor," McKee said. "We cannotown more than 9.9% of the equity; if some of these facilities down the road needto be operated, we can't be an operator. There are a number of things that mightoccur."

"Wewill set it up as a REIT, it will be a REIT, it doesn't have to stay a REIT,"he added. "HCP is going to be a REIT, period, end of paragraph."

Presidentand CEO Lauralee Martin said the remaining 75% of HCP's business has faced an overhangfrom the ManorCare relationship, adding that its growth dynamics would improve witha cleaner cost of capital and a "clearer vision by the marketplace" ofthe HCP portfolio.

"Forquite some time, a disproportionate amount of our conversations with you have beendominated by questions around our HRC ManorCare investment," Martin said. "Wecan now focus on the strength of our remaining portfolio."

Companyexecutives hinted broadly, with few specifics, about courses of action that thespinoff could take to manage the ManorCare relationship. Many analysts coveringthe company have long called for a further reduction in the operator's rent underits master lease with HCP, but HCP executives did not directly address that optionduring the call.

"Whatwe've tried to do, and I think we've done it very well, is give SpinCo all the toolsto realize the value that's embedded in the HCR portfolio," Martin said. "So,contrary to HCP, who is a committed blue-chip REIT, they have choices, and theycan use those choices. They are a REIT, but it doesn't prohibit them from makingother choices, as they think about what they want to do to maximize that value."

HCP hasbeen in contact with ManorCare and its majority owner, Carlyle Group LP, about thespinoff, but does not need their approval, the executives said. HCP's roughly 9%equity investment in the operator is intended to be part of the spinoff.

Askedabout the mixed record of success among recent REIT spinoffs, McKee said other companieshave spun off assets "that are not well-received in the marketplace" becauseof their lesser quality.

"Weare dealing here with an industry leader, and you can talk about the industry beingin some stress, but I don't think anybody would say that this is bad real estate,or the quality of care that's going on here isn't top quality," he said.

"Inits purest form, it is a workout type of situation, but I would say that in someof the brainstorming that we've done, there are lots of options out in the marketplace,because the whole space is in transition and trying to cope with many of the sameproblems," McKee added.

"Sowe think that there's a wide array of strategies that could be considered once it'sin a dedicated vehicle."