Healthpeak Properties Inc (PEAK) 2015 Q4 法說會逐字稿

Good day, and welcome to the HCP fourth-quarter and year-end earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to John Lu, Executive Vice President. Please go ahead.

Thank you, operator. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations of our tenants. These statements are made as of today's date, and reflect the Company's good faith beliefs and best judgment, based on current information. These statements are subject to the risks, uncertainties and assumptions that are described in our press releases and SEC filings, including our annual report on Form 10-K for the year ended 2015.

Forward-looking statements are not guarantees of future performance. Actual results and financial condition may differ materially from those indicated in these forward-looking statements. Future events 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 on this call. We have provided reconciliations of these measures to the comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC today, and are available on our website at www.HCPI.com.

Also during the call we will discuss certain operating metrics including occupancy, cash flow coverage, and same-property performance. These metrics and other related terms are defined in our supplemental information package. I will now turn the call over to our CEO, Lauralee Martin.

Thank you, John, and welcome to HCP's 2015 fourth-quarter earnings conference call. Joining me this morning are Tim Schoen, Chief Financial Officer; Justin Hutchins, Chief Investment Officer of Senior Housing and Care; and John Lu, EVP of Corporate Finance and Investments.

2015 was a very active year for us on almost every front, and we are proud of the performance we achieved in our operating portfolio. I will be covering these accomplishments later in the call, but I'd like to start with HCR ManorCare. As many of you are aware, the post-acute and skilled nursing industry has transformed remarkably over the past five years, beginning with the 2011 RUGs-IV cuts.

The three most impactful trends have been lower reimbursement rates, accelerated payer mix shift towards managed care, and increased regulation and risk management requirements for patient care delivery. These changes have prompted operators to become more efficient while continuing to provide their quality care. Over the long term, these changes should ultimately benefit patients, payers, and quality providers like HCR ManorCare, whose core operations have a high quality mix, and better margins compared to their peers.

We are seeing heightened volatility in the public post-acute operators, due to these industry-wide changes and headwinds. HCR is confronting the same challenges, which resulted in their normalized fixed charge coverage declining 4 basis points to 1.07 times for calendar year 2015. Both we and HCR management were disappointed with HCR's results in the fourth quarter, which is typically its seasonally stronger quarter.

These results were impacted by core operating performance weakness, and $14 million of unfavorable non-routine items, including short-term disruption related to the sales process of the 50 non-strategic assets, 33 of which are have closed to date, with 17 still in process. So some disruptions will continue into the first half of this year, as well as legal costs associated with the Department of Justice defense.

For 2016, HCR anticipates normalized EBITDAR of $577 million before the temporary impact from the pending asset sales and Department of Justice defense costs. After adjusting for these items, HCP estimates 2016 EBITDAR to be $555 million, supporting their ability to meet the master lease obligations. Furthermore, we have applied sensitivities to key census assumptions in their forecast, to produce a potential range of outcomes.

Our forecast for HCR's 2016 EBITDAR ranges from $505 million to $555 million, resulting in a fixed charge coverage range of 1.06 times to 1.16 times. Our range includes the current contractual rent, and a 3% increase that goes into effect in April. With the declining trend of operating performance in the second half of 2015, the DFL investment has been placed on cash basis, effective January 1. In addition, given the lower growth outlook over the next few years, the carrying value of our HCR real estate portfolio was reduced by over $800 million to $5.2 billion, as of year end. Tim will cover the financial details shortly.

Our other objectives outlined in the April 2015 lease amendment are proceeding on track. We have received fee ownership in seven of HCR's nine recently-built post-acute facilities, with the remaining to close by April. And we have sold 33 of 50 properties, generating proceeds of $280 million. The remaining facilities are all under contract and scheduled to close over the next two quarters which will bring total proceeds to $350 million.

Resolving the HCR ManorCare portfolio issue is our highest priority. Our goals in revolving the HCR ManorCare challenges are: reduce our concentration to HCR as an operator, improve the coverage and credit quality of our lease, and ensure HCR's high-quality care and service delivery continues. We have engaged Barclays Capital as our financial advisor, to pursue discussions with HCR ManorCare's management team, to jointly explore all solutions to achieve our goals. Now let me turn the call over to Tim to discuss our financial results and 2016 guidance.

Thank you, Lauralee. Let me start with our fourth-quarter results. For the quarter, we reported a NAREIT FFO loss of $0.99 per share, reflecting non-cash impairments of $836 million related to our HCR ManorCare investments. The impairments reduced the carrying value of our HCR ManorCare DFL real estate portfolio from $6 billion to $5.2 billion at year end, which approximates a fair value of the assets based on market-level coverage and cap rate assumptions.

In addition, the carrying value of our 9% equity investment in OpCo was reduced by $19 million. Excluding the impact of impairments and other items totaling $1.79 for the quarter, we reported FFO as adjusted of $0.80 per share, and FAD of $0.67 per share, representing growth rates of 1% and 2% respectively, compared to the fourth quarter of 2014. The results benefited from accretive acquisitions closed in 2015.

Fourth-quarter same-store cash NOI performance declined 30 basis points compared to prior year, due to the HCR ManorCare lease amendment in April 2015. Excluding the HCR ManorCare portfolio, we achieved solid same-store cash NOI growth of 3.5%, led by a 7.8% increase in life science, and a 6.6% increase in RIDEA, which Justin will cover in a few minutes. Also benefiting the quarter was a $0.01 per share gain from monetizing our senior housing development project in Olney, Maryland.

Turning to our full-year 2015 results, we reported a full-year 2015 NAREIT FFO loss of $0.02 per share, that was primarily impacted by non-cash impairments related to HCR ManorCare. Excluding the impact of impairments and other items, 2015 FFO as adjusted was $3.16, and FAD was $2.72 per share, representing year-over-year growth rates of 4% and 6% respectively. The earnings performance, despite the amended HCR ManorCare lease, was driven by same-store cash NOI growth of 3.7% from 75% of our portfolio, and accretive acquisitions totaling $4 billion since 2014.

In addition, the results included a $0.04 of one-time gains from monetizing three senior housing development loans. Absent these gains, on a recurring basis, FFO as adjusted per share increased 3% and FAD increased 4% in 2015. Overall, same-store cash NOI for the year increased 50 basis points, consistent with our last guidance. Our 2015 cash dividend of $2.26 per share resulted in an FAD payout ratio of 83%.

Moving on to financing activities and balance sheet, in the fourth quarter, we raised $600 million of senior unsecured notes at a 4% coupon. Proceeds were used to refinance a $500 million bond maturity last week, representing 36% of our 2016 total maturities, and to pay down on the revolver. During 2015, we successfully raised $2.3 billion of debt at an attractive blended rate of 3.5%.

We continued to deliver on the capital recycling front, generating $430 million of additional proceeds during the quarter, bringing our total for the year to $560 million. Proceeds for the quarter included $208 million from the sale of HCR ManorCare's non-strategic assets, $110 million from creation of a new institutional JV on our Memorial Hermann MOB portfolio, and $45 million from monetizing our interest in MOB Ventures III and IV.

We improved our liquidity and financial leverage with these proceeds, although the benefit to financial leverage was offset by our fourth-quarter non-cash impairments. Leverage ended the year at 45%. Fixed charge coverage and net debt to adjusted EBITDA for 2015 were 3.9 times and 5.6 times respectively. Secured debt ratio improved to 4.4%, as we continued to refinance higher rate mortgage maturities, with lower cost unsecured notes. At year end, we had $1.6 billion of liquidity.

Next, our full-year 2016 guidance and dividend. The majority of our portfolio continues to generate organic growth, complemented by recent accretive investments. But our earnings continue to be moderated by the HCR ManorCare lease restructure, as we enter 2016.

Before providing our 2016 guidance, I would like to discuss a few important assumptions reflected in our projections, that impact year-over-year comparison. First, beginning January 2016, income from our HCR ManorCare investments will be recognized on a cash basis, resulting in a reduction to our FFO run rate totaling $150 million, or $0.32 per share, $90 million of which was previously recognized in DFL revenue, with the remaining $60 million in equity income from unconsolidated joint ventures.

There is no impact to our cash performance metrics, including same-store and FAD. Our 2016 guidance reflects contractual rent of $456 million from our HCR ManorCare real estate portfolio, inclusive of a scheduled 3% increase in April. In addition, our guidance reflects $130 million of proceeds in the first half of 2016, bringing total proceeds from HCR ManorCare's non-strategic asset sales to $350 million.

Second, you will recall that as part of our 2014 Brookdale transaction, Brookdale agreed to pay $55 million of lease restructure payments and installments over a three-year period, as consideration to convert 49 assets from a triple net lease to RIDEA. Starting in July 2016, the payments step down and will be phased out by the third quarter of 2017. Also, as part of this transaction, we have a rent reduction of $6.5 million this year, in exchange for cancelling 49 purchase options on Brookdale's triple net portfolio.

Third, we entered into a purchase and sale agreement with Genentech who exercised their purchase option on our Life Science Campus in South San Francisco. The first tranche of the transaction will close in November for a price of $310 million, and the second tranche closing in 2018, for $270 million. Proceeds will be reinvested to fund our development at The Cove in South San Francisco, including the recently-commenced phase 2.

Lastly, in 2016, we will continue to reflect our Four Seasons unsecured notes on non-accrual status, and will record interest payments received as a reduction to our investment. Our guidance does not include the impact of any future acquisitions or dispositions, other than what I just mentioned.

With these assumptions, we expect full-year 2016 FFO to range from $2.74 to $2.80 per share, which reflects placing our HCR ManorCare portfolio on a cash basis. FAD will range from $2.62 to $2.68 per share. Same-store cash NOI growth to increase between 1.5% and 2.5%.

The remaining 75% of our portfolio, excluding HCR ManorCare, to increase between 2.3% and 3.3%. The midpoint of our same-store growth rates by asset class include: senior housing at 1.75%, which is impacted by the Brookdale triple net portfolio I just mentioned, and reflects RIDEA growth of 3.5%. Post-acute SNF is forecasted to decline by 60 basis points due to the HCR ManorCare lease amendment in April 2015. In our operating office platform, life science is projected to grow 6.7%, and MOB at 2.4%. Finally, our hospital segment is projected to grow at 2.2%.

Allow me to quickly run through a few other assumptions. G&A is forecasted to be $87 million, including stock-based compensation of $20 million. Amortization of below market lease intangibles and deferred revenue of $4 million. Amortization of deferred financing costs of $21 million. Straight line rents of $16 million.

Other depreciation and amortization of $12 million. Lease restructure payments of $17 million, related to the 2014 Brookdale transaction, reflecting a step-down in the installments payments, starting in the second half of 2016. Our 49% share of FFO contribution from the CCRC joint venture to range from $28 million to $30 million, and FAD contribution to range from $45 million to $49 million, inclusive of non-refundable interest fees.

Leasing costs and second generation tenant and capital expenditures of $90 million, representing 5% of cash NOI. In addition, total development, redevelopment, and first-generation capital investments of $410 million, including $150 million in 2016 for the completion of Phase 1 and commencement of Phase 2 life science development at The Cove in South San Francisco.

I'll conclude with a few words on our 2016 dividend. Last month, we increased our quarterly dividend from $0.565 to $0.575 per share, marking the 31st consecutive year of dividend increases and continuing HCP's representation in the S&P 500 Dividend Aristocrat Index. The annualized dividend of $2.30 represents an increase of $0.04 per share over 2015.

After taking into account the increase in the dividend, and based on the midpoint of our guidance, our projected 2016 payout ratio is in the mid-80% range. As a result, we expect to retain $165 million in cash flow after dividends and recurring capital expenditures, to continue growing our portfolio. With that summary of our financial results, I will now turn the call over to Justin. Justin?

Thank you, Tim. Let me start by highlighting our senior housing portfolio performance.

Our total senior housing same-store cash NOI grew 3.7% in 2015, driven largely by rent steps, and in part by our Brookdale RIDEA portfolio. We are encouraged by Brookdale's indication that their merger integration is in their rear view mirror and by the recent additions to their senior management team.

These factors, along with the significant program max CapEx investment, have contributed to the recent improvement in growth in our RIDEA properties, and we expect them to have a positive impact on the triple net portfolio. We are in regular communication with Brookdale management regarding ways to work together to create value through asset repositioning, operating and market analytics, and identifying opportunities to cull the portfolio.

Our same-store RIDEA platform reported a very strong fourth quarter, with year-over-year same-store growth of 6.6%, driven by improved occupancy, rate, and expense management. We are encouraged by this performance, and are particularly pleased to see positive momentum where fourth-quarter occupancy grew 60 basis points on a year-over-year basis, and 70 basis points on a sequential basis, outperforming the NIC average by 90 basis points year over year and 60 basis points sequentially. The entire Brookdale RIDEA portfolio has performed consistent with these solid results.

Our triple net senior housing portfolio has a trailing 12-month cash flow coverage of 1.07 times, down 2 basis points from the prior quarter. The triple net portfolio is largely represented by the leases with Brookdale, where the coverage in 2016 is expected to improve by 2 basis points, due to a contractual rent reduction that was committed in conjunction with the 2014 transaction with Brookdale, that Tim mentioned earlier.

We remain actively engaged with our operators through our asset management platform, continuously reviewing local market dynamics, operating trends, and the physical condition of our properties. We continue to monitor new supply in our senior housing markets, and have included a new presentation of this information, which is featured on page 27 of the supplemental.

We measure new supply using a five-mile radius based on a recent study, showing that the average time a consumer is willing to travel to a local business is approximately 15 minutes. Our internal research indicates that a five-mile analysis is generally consistent with that of a 15 minute drive time. 21.2% of our RIDEA NOI, or 2.7% of our total portfolio income, has new construction or expansions of similar care types within a five-mile radius.

A large majority of this new supply will open in 2016. We are mindful of the potential pressure on pricing and occupancy that the new supply could cause in these markets. However, we like our market position relative to the new higher-cost competitors.

Moving on to investments, during the fourth quarter, we expanded our relationship with Brookdale and MBK, with $57 million of investments in four senior housing communities, all stabilized, with occupancy above 90%. Our priority pipeline includes $400 million of senior housing communities with new and existing operator relationships. We plan to fund these investments with capital recycling, and the assumption of in-place debt. We are primarily focused on acquiring private pay communities that offer both assisted living and memory care services, and located in targeted markets with favorable supply/demand characteristics.

I would like to emphasize that we remain conservative and selective, as we advance capital into senior housing assets. As part of our underwriting and due diligence process, we carefully scrutinize operators' track record, financial alignment, and local market industry fundamentals, including potential impact from wage pressures and new supply. Now, Lauralee will cover our medical office, life science, and international portfolios.

Thank you, Justin. As I opened, 2015 was a very active year for us on almost every front, and we are proud of the performance we've achieved despite operator challenges. In 2015, we sourced over $2 billion of accretive investments at a blended 6.8% cash yield across four of our property sectors, bringing our two-year investment total to $4 billion at a blended 7.3%. These investments are performing at or above our underwriting, including our CCRC and Chartwell portfolios managed by Brookdale, our international investments with HC-One and Meridian in Alabama, our medical office acquisitions of on campus MOBs in Philadelphia and Houston, and our premier life science development, The Cove.

We accomplished almost 90% of our 2015 growth through our existing partners, but we also added new high-quality relationships, including Thomas Jefferson University Hospital in Philadelphia, MBK Senior Living, and several companies within our life science portfolio. We remain selective and disciplined in allocating capital, with three-fourths of our 2015 investments concentrated in private pay senior housing and on-campus medical office buildings, and more than half of our investments were completed through joint venture partnerships, emphasizing our focus on mutual alignment.

One common theme we have seen over the past year is strong increases in occupancy across our operating portfolios, supported by the location of our properties, and their competitive position in their markets. We delivered occupancy growth in our RIDEA, life science, and medical office portfolios.

Justin already covered RIDEA portfolio growth, so I will focus my comments on our office platform. Our life science portfolio has had strong leasing momentum this year, drawing occupancy to a new all-time high of over 98%, a 300 basis point improvement over prior year. We have now pre-leased half of our state-of-the-art development at The Cove with CytomX Therapeutics and Denali Therapeutics as lead tenants.

CytomX will lease 76,000 square feet beginning in the fourth quarter. They recently had a successful IPO, based on their cancer-fighting research. Denali will lease 38,000 square feet beginning in the third quarter. Led by former Genentech neuroscience leadership, Denali is a private Company focused on neuro degenerative diseases and seeded with over $200 million, the largest first round venture financing in biotech history. We are very pleased to welcome both CytomX and Denali as our first two clients at The Cove, and we look forward to continuing to build more relationships with innovative and growing companies like these.

In response to our Phase 1 leasing success and continued strong demand from life science users in South San Francisco, where direct vacancy is still below 1%, we recently commenced the $185 million development of Phase 2, which will add two Class A buildings, totaling up to 230,000 square feet, and is expected to be delivered by the third quarter of 2017. We acquired Edgewater Science and Technology Park in South San Francisco for $83 million. The six building campus was recently renovated and is 100% occupied.

Our medical office portfolio also had a solid year of leasing, with year-end occupancy close to 92%, representing 110 basis points of growth over the prior year, driven by our strong retention rates of 83%, and recent acquisitions. We have expanded our MOB platform by over 20% over the past two years, primarily with on-campus buildings, while adding 11 new health system partners, and expanding two existing relationships.

We are partners with top-notch health systems in every regional area where we have a strong presence. For example, HCA, our largest relationship, has significant market share in 7 of our top 12 markets, where we have at least 500,000 square feet of office space. We won the trust of Memorial Hermann, a leading hospital system in Houston, with a 24% market share, who selected us as their partner to execute the monetization of their on campus MOB portfolio.

And they continue to select HCP as a capital partner. In January, we broke ground on a 170,000 square foot development on the campus of Memorial Hermann's Woodland Hospital. The development is 100% pre-leased and represents our third on-campus development project underway with them.

In total, we have six MOBs under development or redevelopment, totaling 760,000 square feet, of which five are expected to be completed during the first half of the year. Our MOB portfolio remains in great shape with 40% of this year's lease expirations already addressed, or in negotiations. We have achieved solid growth in our non-HCR ManorCare portfolio, which represents three-fourths of HCP's business.

In conclusion, I would like to reiterate that solving the HCR ManorCare lease issue is our highest priority. Operator, could you now open the line for questions?

(Operator Instructions)

First question comes from Nick Yulico with UBS. Please go ahead.

It's Ross Nussbaum here with Nick. I was hoping you could help us bridge the normalized EBITDAR forecast for HCR ManorCare from the $110 million in the fourth quarter, or I guess maybe $121 million, if you adjust for the losses on those 11 properties, on up to that $505 million to $555 million run rate. It would imply some pretty healthy EBITDAR growth at ManorCare and it seemed perhaps optimistic, given the joint replacement bundling model that's going on, and the bundled payments initiative, because there are some additional pressures coming across the industry.

Ross, going from the fourth quarter there were some items, I'll start, that affected the fourth quarter, both legal expenses and disruption or distractions from the asset sales that, probably in the $10 million to $15 million range, depressed the fourth quarter. Then if you look at the first quarter, there's generally some seasonality and pick-up in census, which we expect to happen, and HCR ManorCare has indicated that they've got a pick-up in census here in January. So it's really census pick-up and then some of the one-time items that they experienced in the fourth quarter.

Okay. Nick's got a question, as well.

Just a couple here. One on, if we look at the EBITDAR that's outside the facility, it's $100 million plus, I guess. How should we think about that business at HCR ManorCare, what that business would be worth, and specifically how it's viewed as an asset in relation to the term loan providing some support for the term loan that's outstanding at HCR ManorCare?

First of all, their hospice business is number three in terms of ranking, so it's a highly successful business. It's a business that they continue to grow. So today putting a valuation, I prefer to let investment bankers do that, but it is a highly successful, very valuable business.

As you point out, we have the corporate guarantee over our lease, our master lease, and that is adding additional coverage to our performance on our lease. It is security for the entire bank group, as well. So valuable asset adds to our lease, and continues to be a successful part of HCR's business model.

And then the one other question I had was, you mentioned hiring an advisor. It sounds like you're looking at a lot of options, one of which, wondering is, if you were to sell a piece of the HCR real estate today, you say you marked it down to $5.2 billion, but let's assume it would be difficult to maybe sell all that, could you sell $1 billion of it? Could you sell $2 billion of it? Who would buy it? What's the buyer pool like, and is that a plan that you're thinking about, from hiring this advisor?

It's premature to go into nuances, as you suggest. We've engaged Barclays. HCR is almost 25% of our portfolio, so incredibly important that we evaluate all options for our shareholders. And our goal is to reduce our concentration to HCR, improve the credit quality of our lease, its coverage, and the credit quality of our operator, and we will be doing that on behalf of shareholders for the best outcome.

I guess just a follow-up to that is you gave all the math in the 10-K about the impairment and how you looked at valuation inputs. Do you realistically think that for the portfolio, that there's a 1.35 times rent coverage on the skilled nursing portfolio, that you can get a sale done at an 8-something cap rate for $1 billion or $2 billion today based on what's gone on with the markets in the last six months?

It's Justin. Just to step back on the process we used. We obtained a third-party appraisal, and they took the approach of evaluating the properties from highest and best use standpoint. They used some market coverage ratios, you mentioned, you might use a range of a 1.25 to 1.35 for SNF, 1.05 to 1.15 for AL memory care, market lease rates, 7.5 to 8.5 for SNF, 6.25 to 7.25 for AL and memory care. And from our perspective, there was some good market support for the ranges that they used.

All right. Thanks everyone.

The next question comes from Juan Sanabria with Bank of America-Merrill Lynch. Please go ahead.

Just first, if you have any update on the DOJ investigation, and any assumptions you're making on the potential settlement cash flow trends?

There's really nothing significant to update you on. The only things that have been happening in the interim have been just administrative. The one thing I would say is HCR, as we pointed out in our prepared remarks, is spending about $1 million a month for defense, but other than that, we have no comment.

And just to be clear, does the $110 million in EBITDAR in the fourth quarter, that normalized number, that includes the drags, the $10 million to $15 million that Tim mentioned?

Yes, it does, Juan.

Okay. Great. And have you taken any accounting hit to the IOU, the $200 million IOU with ManorCare? Is that under --?

That was all part of the allowance we took against the DFL.

Okay.

That was considered in there as well.

And just the last question on Brookdale, just to switch gears a little bit. How confident are you on of their coverage levels improving from here? Is there a downside that you have looked at there that, and anything you're thinking about to help maybe mitigate any downside risk there?

This is Justin. First of all, we share Andy's enthusiasm about his new management team. Labeed and Cindy offer a fresh perspective, and very relevant experience in their respective backgrounds, and elevating Mary Sue Patchett, who has 25-plus years of senior housing operating experience and mirroring her with Labeed, just seems like a great fit.

So we're impressed with the management team, and we're optimistic about their ability to carry out their plan. They've talked about putting a more efficient operating structure in place. They have a community-level feedback loop that's going to help them to make decisions to simplify the business. They're tightening their use of incentives, and going more shorter term than longer term, in terms of price incentives.

And the economies of scale that they have as the largest operator in the space should come into play. Purchasing power and reducing insurance costs. And so if you look at our triple net portfolio, it was impacted significantly through integration, because you have largely legacy Emeritus properties.

Certainly, the integration is behind us. We do think that there will be some new supply and wage pressure on the fringes that portfolio will face. From HCP's standpoint, we're enhancing our asset management. We're going to have a similar focus on our triple net portfolio that we've had on our RIDEA portfolio, and one example of that would be to continue to work with Brookdale to deploy capital expenditures.

There's about $50 million available for Brookdale to draw to invest in the triple net portfolio. That would be a significant investment of a few thousand dollars per unit. Certainly, we've proven that has impact in our RIDEA portfolio performance. We would look for some similar results in the triple net portfolio over time.

Having said all of that, a lot of this is fresh. I know Brookdale's talked about using 2016 as a year to really put the business plan in place, and take advantage of their ability to execute on all of the things I just mentioned. And so, we're not expecting a big pop by any means in the triple net portfolio, but we're optimistic that it will be stable, and we'll look forward to seeing the results of their business plan over time.

Thank you.

The next question comes from Joshua Raskin with Barclays. Please go ahead.

I think I have to stay away from ManorCare at this point. Could you just help us on 27, on that new slide with the new supply. How should we be thinking about this from the new disclosure? What does that 2.7% now calculate? And then, maybe, what did that look like a year ago, or just some historical perspective?

It's Justin again. One point I think that's a key take-away is the fact that really only about 2.7% of our NOI would be impacted by new supply. Having said that, most of that new supply is going to happen in 2016. The growth outlook we have in our RIDEA platform at around 3.5% reflects some impact of new supply, and on the fringe, some impact of wage pressure.

I'll give you an example of how the new supply has impacted us. If you look at the last two years, we've had 18 openings within a five mile radius, and that's impacted, actually to compare to that 2.7%, only about 1.3% of our portfolio income, you know from our RIDEA results that we moved growth right through the impact, but I can tell you in those respective markets, we actually experienced flat occupancy, and then a very modest rate increase of about 50 basis points. So if the markets that we expect to have some impact in 2016 perform similar to our experience over the past two years, that reduces the growth outlook a little bit.

Okay. And when you say the potential NOI impact, you're saying if you somehow you lost 100% of your NOI on a specific property, right, like that's not an actual realistic view of what would normally happen, right? That's just absolute worst case scenario, is that right?

That's right. Rather than using number of units or number of communities, we wanted to use NOI as the number, just to identify our concentration in the markets that have new supply.

Okay.

I'll give you another follow-up stat about -- in our -- specifically in our RIDEA portfolio, if you use their NOI, then you're around 20%. But whole Company, you're down at 2.7%. But in any event, we've worked with Brookdale to factor in any impacts that we're going to experience in 2016, and that's reflected in the outlook that Tim mentioned.

Okay. And then just last one for you, Justin. What would be like a normal growth, assuming you have some supply coming in over the next couple of years, et cetera, but where do you think that Brookdale RIDEA portfolio, same-store cash NOI growth, what is a long-term growth rate for that?

From our perspective, when making the decision to invest the capital expenditures, we wanted to be sure that the result would be to outperform what a triple net lease portfolio would give us, which would be about 3% growth. And so we're expecting 6% growth, and in fact, we're achieving that so far. And so over time, when we get into end markets where you're not impacted by new supply, we'd be looking to see around a 6% growth rate.

Okay. Thanks.

The next question comes from Kevin Tyler with Green Street Advisors. Please go ahead.

Yes, thanks. Going back to ManorCare for a second, so of the larger scale nursing operators, ManorCare has one of the higher proportions of revenues coming from Medicare, and probably Medicare Advantage. Is ManorCare doing anything proactively to shift the patient mix to be more Medicaid-focused, in light of the Medicare Advantage headwinds?

This is Justin. Let me just step back a little bit on their business plan, and I'll talk about a number of things that relates to that question. If you step back to why they are where they are, I think it's important to look at this.

Their senior management team has a 10-year, and this is senior and divisional managers of over 20 years, and the business plan that they've executed over a 20-year period was to put themselves in position to be the market leader in terms of clinical and rehabilitation care and services. They've successfully done so. In the 11-market cluster where they operate they're a leader in nine of those, they're in second place in two of those. To your point, they've achieved about a 66% -- percentage of their revenue that's in Medicare and in managed care, and if you take that 66% number, it's about twice the industry average.

So they're uniquely impacted by the shift to managed care and reduced length of stay, and certainly they've had to work through that. Some ways they've done that, they have the hospice business that Lauralee mentioned earlier. They have an assisted living business that's been growing. They are looking in some of their tertiary markets to dedicate some beds to a memory care program that would accept Medicaid reimbursement to help stabilize cash flow.

But they do remain committed to their core business and if you're interested in how that plays out in a mature managed care market, you can look at California. California is a state where they operate seven properties, and they have about 1,000 beds, so a pretty good sample size. The length of stay in that portfolio is about 18% less than the rest of their Company. They have only 40% of their admissions are coming from Medicare, and 60% are managed care.

So they would describe this as a mature managed care market. They actually grew admissions in California by 2.5% over this past year, and they grew operating income, as well. So they found stability in the payer sources, they've been able to grow the business.

And then I'd add another point to their core business. If you look at their business across the Company, they've actually grown their admissions 1% a year, each of the last four years. So they are, in fact, expanding market share. However, it has not been enough to overcome their reduced length of stay.

Thanks, I appreciate that extra level of detail, Justin. Shifting back to senior housing. On the call earlier today, Brookdale talked a bit about the returns that you've been receiving on the CapEx spend, both up front and then I guess over time on the assets in the agreement that you have with them.

But thinking about CapEx going forward, and how you're allocating dollars for 2016, is CapEx in the RIDEA portfolio largely accounted for at this point, given the money that you put in initially, or how should we think about a number on a per unit basis for 2016?

On an aggregate portfolio basis I talked about in my prepared remarks about $410 million in CapEx. $70 million of that will go into our RIDEA portfolios.

Okay. That's split over the whole thing? Any more color, I guess, in terms of breaking that out specifically?

I'll add a little color. If you look at our spending in the RIDEA portfolio, if you use the $1,500 per unit number from a routine spending standpoint, which is what we're allocating, we actually spent another $2,600 per unit in 2014 and 2015 on major refreshes. Brookdale called this program max. In 2016, we've actually allocated another $1,500, but we're going to -- for routine but we're going to spend $3,300 per unit in the major refreshes. And so there's actually on a per-unit basis some more major refresh capital being deployed this year, and then we do expect that into 2017 getting closer to a normal run rate at that time.

Thank you.

The next question comes from Smedes Rose with Citi. Please go ahead.

You mentioned that you have hired advisors to help with your situation with HCR ManorCare. Do you know, has HCR ManorCare and their owners, have they hired an advisor, and just given what looks like increasingly tight coverage, would you think they would consider any type of bankruptcy option at this juncture?

Well, first of all, I can't comment on whether they've hired advisors or not, but let me go to bankruptcy. There's been no discussions of bankruptcy. Their forecast and the fixed charge coverage forecast that comes with that says that they can pay our lease, and their debt obligations, and continue to invest the CapEx as appropriate. They also have $125 million of cash, and none of their debt matures for over two years. So we would believe it's very premature to be discussing bankruptcy.

Okay. The other thing I just wanted to ask you, you recently made some changes in the Company's bylaws, that allow for easier shareholder proxy access. Was that in negotiations with investors, or what was the impetus for that change?

That was on our proxy last year, Smedes, and we adopted a level of resolution that's consistent with the New York Comptroller.

Okay. Thank you.

The next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Can you highlight what actually occurred in the second half of 2015 that drove the weakness for HCR ManorCare? Was that largely driven by the temporary disruptions mentioned in the prepared remarks, or was there another core operating issue that occurred?

That was part of it. But it was really the census and the shorter -- driven as a result of the shorter length of stay, Michael.

So I guess, what was the actual issue impacting the census? Medicare Advantage has been a problem right, for the past I guess few years, you highlighted. Is there something specific that occurred that caused the census?

You've got the mix shift that continues into Medicare Advantage, which results in shorter length of stay. Actually, HCR ManorCare's admissions were up year over year, which they've done for the last several years, but the shift to Medicare Advantage has resulted in shorter length of stay, and that has a downward impact on census.

Okay. And then what's the drivers that you believe will cause census to go higher in 2016? Because that's what pointed to why you think results will improve in 2016?

Yes, as I mentioned there were some one-time -- there were items, non-core items in the fourth quarter, call it $15 million, that caused census to be low in the fourth quarter. Typically, the fourth quarter actually is a pretty strong quarter in terms of census, and has been for the last several years. This year was a bit of an anomaly. So we would expect census, and HCR started to see census increase into the first and second week of January, and through January. So they had a good census rebound is what I would call it for the early part of the first quarter, more along historical averages.

Okay. Great. Thank you.

The next question is from John Kim with BMO Capital Markets. Please go ahead.

In reducing your exposure to ManorCare, is there a goal as to how much you'd like to decrease it to? Also, is it correct to assume that you are considering asset sales and rent cuts, or are there other options on the table?

There's been no discussions of a rent cut. So what we've talked about is that we want to focus on reducing concentration, no defined level at this point in time, improving the credit quality of our lease and its coverage, and I think it's important that what we want to be doing is evaluating potential long-term solutions, comprehensive solutions, to make sure that we do the right thing for shareholders.

Sure. I guess you could either sell assets or part of the ManorCare portfolio, or you could buy other assets to reduce your exposure. So is the second option on the cards as well?

There's lots of solutions all to be evaluated as we continue through this.

Okay. If you do go the asset sale route, it looks like your payout ratio will probably increase from where it is today. At what levels do you feel comfortable operating that payout, before you consider the potential rental or sorry, dividend cuts?

We give you our dividend coverage ratios on the more conservative FAD basis. The companies run up until about 2011 or 2012 into the high 90s. We could run at that level, if we needed to, but we've got quite a bit of cushion. I mentioned we've got $165 million in free cash flow after our dividend payout ratio today. So we've got quite a bit of cushion today, and continue to have cushion in our dividend payout ratio.

But in that bearish case scenario, does that also consider asset sales?

Well, John, that's where we're at today. We have $165 million in free cash flow today, and that equates to a mid-80% payout ratio. You can run any sensitivity you want to from there, but we've got quite a bit of room and cushion in our dividend coverage, on the more restrictive FAD measure.

Sure. Okay. And then finally a follow-up to Juan's question on the Department of Justice investigation. Did the recent Kindred settlements impact your decision at all on the impairment of your equity in ManorCare?

No.

Okay. Thank you.

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

Thank you. Just to stick to ManorCare, you alluded to that rent cut has not been considered right now. If you go back to when the rent was cut, I'm just wondering what you assumptions you had laid down at that point? Was this envisioned as a more bear case scenario, and going back, do you think a bigger rent cut would have probably been appropriate, or were you always saying if there's a more bearish scenario, we'll think of another rent cut down the road?

If you remember, at the time we did our lease amendment, we felt that we had done the right after of rent concession for the pay forwards that we received from HCR, the nine assets, which obviously are very valuable. They're new post-acute facilities. The deferred lease obligation, which is ahead of Carlisle's equity position. So we felt that was appropriate pay forwards, and have no regrets about that decision. The situation today has really been as we've described. There was a significant decline, particularly in the fourth quarter end of year that was not anticipated, and clearly that's what's driven our decisions today.

So it's not unreasonable to think that one of the options could be a rent cut?

There's been no discussions for rent cut.

I'm not saying if there's discussions, I'm just saying in the broader options, it's not unreasonable to think that would be one of the options.

We're looking for a long-term comprehensive solution to reduce our concentration to ManorCare, and have a higher quality credit lease.

Okay. Just turning to, on the RIDEA side, you highlighted the exposure and then some math around how supply's impacting it. I'm just wondering, if we look over the next year or two, in the past, you said you'd like to grow the RIDEA business. And correct me if I'm wrong, today you're somewhere in the low teens as a percent of NOI. In the past, you have indicated you'd like to take that up maybe 15%, 20%. I'm wondering, is that still the goal? Has that changed?

This is Justin. I just wanted to -- I want to qualify this, that we're very mindful -- we want to grow the RIDEA platform, but we're very mindful that we're in an environment that has new supply, competitive pressures from new supply, wage pressure. So as we enter markets, we're going to be very focused on underwriting local market fundamentals, the strength of the operators.

When we consider structures, whether it's triple net or RIDEA, or other forms of a joint venture, we're always mindful of financial alignment, to make sure that both parties are motivated to create value in the portfolio. So it's going to certainly be part of our growth plan but we'll be very selective as we pursue operating risk in the near term.

Okay. And then just last one, Tim, for you. I know you've taken care of some of the debt maturities. Just wondering, given all the broader concerns around whether it's CMBS or spreads widening in other parts of the capital structure, just any -- if you were to go to market today, what pricing do you think you could get, and could you maybe just update us on plans to tackle the remaining 2016 and 2017 maturities?

Yes. I'll take your comments in reverse order. In terms of the remaining maturities, I mentioned that we've got about $1.6 billion in liquidity underneath our line. We've also got $400 million in asset sales that are contractually in place today.

So call it $2 billion, plus our free cash flow, so call it $2.1 billion, $2.2 billion. We've got left, Vikram, about $900 million in contractual debt maturities this year. So that gives you the liquidity picture.

And then in terms of the debt coming due, we've actually got an average coupon of anywhere from mid to high 5s in the near term, and into the low 6s, as we look out into 2017 and 2018. So we've still got refinancing tailwinds. And then finally if we were to go to market today, obviously you followed the credit markets the last couple weeks, you'd probably be in the mid-4 range on long-term 10-year debt, 10-year unsecured debt.

Okay. Thanks.

The next question comes from John Roberts with Hilliard Lyons Capital. Please go ahead.

Thanks. I'm trying to get my head a little more around the guidance, FFO guidance, Tim. Obviously you reported $3.16 in the current year. You're $2.74 to $2.80 for -- excuse me, $3.16 last year. You're $2.74 to $2.80 for this year. You add the $0.32 back from the HCR ManorCare cash accrual issue and you're at $3.06 to $312. I'm trying to get where the reduction is when you're assuming that you were going to have same-store FFO growth, same-store NOI growth of 2.3% to 3.3%, excluding HCR ManorCare.

There's a couple of items, John, that affect the growth. There's -- our same-store growth should add about $0.08 to our run rate, but there's a number of items that we're going to anniversary. There's still the one quarter of the HCR ManorCare rent cut that we have, that affects the first quarter of 2016. And then you've got the non-accrual associated with the Four Seasons investment, and then in 2015, we had $0.04 of one-time gains in our senior housing development platform. And then as I mentioned as well, there was a Brookdale triple net rent cut that paid for the cancellation of the 49 purchase options, and that's really the universe, and that adds up to about -- that offsets that $0.08 of growth and then some, in the same-store.

Can we expand? Obviously you want the cash accrual on the HCR ManorCare, but we can anticipate that you're expecting to get that, even though it's not in the number?

That's in our guidance, the HCR ManorCare cash rent.

Is in the $2.74 --

$456 million for this year.

Okay.

Including the 3% bump, John.

Okay. Can you discuss the general SNF conditions at your other tenants, and any of the same issues you're seeing at HCR ManorCare potentially, to happen there, as well?

This is Justin. Our coverages are -- first of all, we don't have a lot of other concentration of debt besides ManorCare in our SNF business. To the extent we do, the coverage ratios are good. Generally as I mentioned earlier, most operators are less impacted.

They're impacted as managed care penetrates markets and reduces length of stay and rate in the market, but ManorCare is more impacted, because they're a market leader in that payer source. So any declines we've seen wouldn't have been as pronounced.

Okay. Thanks, guys.

The next question is from Tayo Okusanya with Jefferies. Please go ahead.

Just back to ManorCare again, because it's the topic of the day. Could you just remind us in 2015, how much debt ManorCare still has on its balance sheet, and the amount of interest expense they're paying?

They've got just under $400 million of term debt, and that comes due you about $380 million, and that comes due in 2018, and it equates to about $20 million in interest expense for the year.

$20 million of interest expense. That's helpful. And then secondly, you talked about the fixed charge coverage in the back half of 2016, back half of 2015, I'm sorry, dropping to 0.97 times. Could you specifically split that out in regards to what it looked like in third quarter and fourth quarter, and whether it progressively sequentially got worse.

Yes, they did sequentially get worse. As we mentioned, the third quarter was slightly above 1, Tayo, and then in the fourth quarter it was below -- between 90 and 95 basis points. That's one of the reasons obviously, as we talked about, there was an uncharacteristic reduction in the census in the fourth quarter.

Got it. Okay. That's helpful. Do you have any sense if ManorCare is having any discussions around debt restructuring, to maybe ease things up for them?

I can't comment on ManorCare's discussions with other parties. We have no knowledge.

Got it. Okay. That's helpful. And then just back to a former question, in regards to cash same-store NOI guidance for next year. You walked us through some of the variances on the senior housing side. Could you talk a little about the hospital side as well, because it seems like you're expecting a slowdown in cash same-store NOI growth in that segment?

No. That's pretty consistent, Tayo. It's obviously it's a small percentage of our portfolio. It's 4% to 5% of our portfolio, and we expect it to grow around 2.2%. So that's pretty consistent. We do get some add rent that can create some upside there with our Medical City of Dallas investment but 2.2% is pretty standard for that segment.

I thought you were as high as 2.8% this year. Am I reading that wrong?

Yes, we were this year, and that had to do with some add rent at a couple of our hospitals. But 2.2%, the mid-2%s, 2% to 2.5% is the range we would expect for that portfolio, Tayo.

Okay. Great. Thank you.

The next question comes from Jordan Sadler with KeyBanc. Please go ahead.

Just sorry to belabor the point, but on your comments regarding the 4Q census, you've used the words anomaly, uncharacteristic to describe what happened, and if that is the case, what would cause you to write down the portfolio, in the event of a one-off occurrence that was an anomaly or uncharacteristic, relative to what you would have expected?

It was really the second half of the year, Jordan. Somebody asked a question, in specifics, what impacted the fourth quarter. But really, we did see a declining trend over the second half of the year. Plus I think when you look at the continual mix shift that we've seen the last four or five years, we've seen continual industry headwinds not only for HCR, but the post-acute space. And we think that's going to continue to exist.

Okay. Okay. So this is not really new news, as it relates to what you saw in the fourth quarter, it was just, this is the unwinding as it relates to this broader trend that we've known about and discussed. So what's the --

It's what we talked about, this largely reduced outlook, and look no further than the publicly traded SNF operators that are out there in Kindred and Genesis.

I understand. But maybe Tim, you or Justin can give us what the revised growth expectations are for HCR, as you've underwritten it now?

Listen, when we look at it, I think, you can look at the sensitivities we've provided in our disclosures today. That represents a flat business plan in the SNF business at the high end, and growth in hospice and AL. But at the lower end, it represents continued census pressure from the mid-80s to the lower 80s, and then a flat growth in the AL and hospice business. So that's what we've provided in our sensitivities for 2016.

But even -- you think that pressure continues beyond that, is that what you're baking in?

Yes, well, we're continuing to see the mix shift, and we've continued to see that over the last three or four years, and that -- while the speed of the shift has declined, we continue to see the shift to Medicare Advantage and other managed plans.

Okay. And then, just cash burn rate at HCR, looks like cash was down $25 million sequentially. Is that a good proxy, do you think?

No, I think year-over-year, if I recall correctly they ended last year I think around $150 million in cash at the end of 2014, and ended 2015 at $125 million you just mentioned. So it's not a $25 million a quarter. It was $25 million over the year, last year.

Well, that doesn't seem fair relative to the deterioration you talked about being in the second half, as opposed to the first half.

Right. But there is some seasonality to that business as well, so --

Okay. And I guess lastly was just on the equity. What was it written down to, and have you considered impairing the value of the deferred lease obligation yet?

I'll take the OpCo. The OpCo's been written down to zero. We looked at it and say the OpCo is a highly levered entity, and with the reduced growth outlook that Tim just talked about. So the OpCo's cash flow is going to meet the obligations of our lease, the debt service and CapEx, which means there's limited cash to equity holders, which is why the equity value is at zero. Earlier, we commented on that, as we did the impairment, the deferred lease obligation was effectively reduced also, as part of that valuation.

So what's the carrying value of that now?

Zero.

The carrying value of the DFL was $6 billion which includes the DRO, Jordan. And now it's been written down to $5.2 billion, and that included the DRO balance. So the $6 billion included the DRO and then it's been written down to $5.2 billion. But the DRO is still out there, and it still sits in front of the equity.

Got you. Was it $250 million originally? I forget the number exactly.

Yes, there was two pieces to it. There were $275 million, which that piece has been reduced significantly as we've taken ownership of the nine assets. We've got seven of those today, as Lauralee mentioned, and we've got two more to come so that will pay off the first tranche of the DRO. And then the second one was the $250 million.

And that's at zero?

Yes.

Okay. Thank you.

It was all part of the valuation that we took into account with the DFL. All those components, Jordan, is what I'm trying to say is, were part of the $6 billion balance that we had carried.

And the write-down was included in the $819 million or whatever that write-down was today?

Yes.

Okay. Got it.

That included the DRO, yes.

Thanks.

The next question comes from Todd Stender with Wells Fargo. Please go ahead.

Lauralee, I know you didn't want to get to the targeted concentration level, but if we just look at the strategic -- if you exclude the strategic alternatives for HCR and you look at the post sale, the 50 assets that are either sold or about to be sold, if you look at where you are pro forma, and then you exclude maybe the assisted living facilities for HCR ManorCare, which are about 15% of your HCR cash NOI, what does that start to look at? What does that look like for concentration-wise, because it may not be as drastic as maybe folks are thinking?

Well, let me start by saying first of all we used to have a 34% concentration to HCR, and we now reduced it down below the 25%. You are correct, the Arden Park Memory Care is probably a little over $1 billion of now the revised $5.2 billion. So if you're looking just for the post-acute skilled exposure, you can run the math on that.

Okay. And then can you share some of the he details on the third-party valuation for HCR ManorCare? Maybe just give us some metrics that -- whether it's cap rates, price per unit, anything that would be helpful?

Sure. This is Justin. They use market coverage ratios for SNF from $1.25 to $1.35. For AL memory care they use $1.05 to $1.15. Market lease rates for SNFs, 7.5% to 8.5%. And for that AL memory care, 6.25% to 7.25%. So that gives you a range to consider, and that's right aligned with what the third party appraisal used, and also they used the highest and best appraisal approach, highest and best use appraisal approach.

Great.

I might add, we have very good disclosures in the 10-K that might be helpful as you want to look into the details of this.

Thanks, Lauralee. And then Tim, how much CapEx did ManorCare put into the facilities in 2015, and how did that compare to what their obligation was?

They put in around, for maintenance CapEx, they put in around $50 million. The obligation is about $28 million, because we sold 50 assets, so that required CapEx has come down slightly. But call it almost double the required CapEx.

And how about for this year, what does that schedule look like?

Similar. They've been pretty consistent year in and year out, and then the additional CapEx spend has been on expansions or -- really expansions of existing facilities.

Great. Thank you.

The next question comes from Michael Mueller with JPMorgan. Please go ahead.

Couple questions. First for ManorCare, the length of stay in 2015, what was the average? And then where do you see that trending in 2016 and 2017?

We focus on their skilled census length of stay. I want to say it was around 28 days, and that had fallen about 5% from the prior year. That's fairly -- that's been consistent, but at the same time, they've been increasing their admissions by about 1% a year over the past few years.

Okay. And if you're looking out to 2016, is there further erosion in that, or do you think it stabilizes there?

Tim mentioned the forecast and all the assumptions and their sensitivities from top to bottom. But you might walk through that again. I'm not sure if you caught that.

I'm just not sure. I don't remember hearing length of stay in there, but maybe I'm wrong. Okay. And then on the RIDEA same-store NOI, the 3.5% outlook, was wondering can you walk through the breakdown of that, what's embedded for occupancy, for rate increases, et cetera?

There's some very modest occupancy growth planned. I want to say it's inside of 1%. And then rate growth of around 4%. And that will get you there.

Okay. That's it. Thank you.

The next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

So earlier in the conversation, I think it was either Tim, or I guess it was Tim that said shorter length of stay, but admissions went up. And I'm wondering if that's something very interesting. Isn't that obvious? Isn't that like saying I got a haircut, but my hair got shorter. I don't understand the significance of that. I imagine admissions go up, if length of stay goes down. Isn't that right?

The importance of admissions going up, Rich, is it demonstrates that the business model, the care statistics and results that ManorCare continues to produce, means that they're getting a greater share of the payor's business. And so in the new models, that's incredibly important. So admissions is important.

Yes, you are right. We need more admissions to offset the shorter length of stay, which to Justin's comment, that was down 5%. We need more admissions to offset that trend to get stabilization.

That comment was demonstrate that they continue to get additional market share, but it hasn't been enough to offset the length of stay.

Fair enough. Why aren't you disclosing facility level coverage, or are you and I'm just missing it?

We have facility level coverage.

Oh, you do. I apologize. What is it?

We renumbered our supplemental so I'm getting you the page number. 31, Rich.

I'm resource starved at the moment, unfortunately.

If you're away from your office, it's 0.86 times.

Thank you. Lauralee, the comment was made a few times that there's been no discussion about a rent cut. And I guess that's fine, but I'm wondering why not. You talked about a long-term solution, and what about admitting the cut previously wasn't enough, things have changed in the world around you, you want to make a decisive step to really eliminate this from the conversation, you pushed facility coverage way back up.

You reduced your HCR ManorCare percentage of the portfolio at the same time. Your stock maybe not as down as much as it is today. If you really make that type of decisive step despite the pain that it might take to admit you didn't cut it enough in the previous go-round. Could you give me some thoughts around that, and also, to what degree your expectation for rising census in 2016 from HCR ManorCare helped you come to the conclusion that you don't need a rent cut right now?

Back to my earlier comments, Rich. When we made the rent cut that we did, it was in the context of payments that we got for that rent cut that were fair for our shareholders. And that there was cash flow that HCR could grow their business, and operate. There clearly has been dramatic changes in the second half of the year.

As you know, we were, together with HCR, anticipating we would be in the above 1.25 coverage when that all happened, rather than what we're currently advising you. So different set of facts, different set of circumstances. Rather than commenting on specific solutions, again, we're evaluating all the solutions. We want to make sure that what we do is comprehensive and long term and not reactive.

Okay. Fair enough. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Lauralee Martin, President and CEO, for any closing remarks.

Well, I can tell from your questions that you agree with us, that resolving the HCR ManorCare issue is our highest priority. We definitely are focused on doing that, which just to reiterate, reduce our concentration to HCR as an operator, improve the coverage and credit quality of our lease, and all the time ensuring that HCR's high quality care and service delivery continues. We thank you all for your interest this morning.

The conference has now concluded. Thank you for you attending today's presentation. You may now disconnect.