Healthpeak Properties Inc (PEAK) 2016 Q4 法說會逐字稿

Good morning and welcome to the HCP Inc. fourth-quarter and year-end conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Vice President Investor Relations. Please go ahead.

Thank you, operator. Today's conference call will contain certain forward-looking statements, including those about pending transactions, our portfolio, new housing supply, property development, leasing activities, and our guidance, as well as the financial position and operations of our tenants. These statements are made as of today's date and reflect our 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.

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 to these measures to the most comparable GAAP measures in our annual report in form 10-K, which has been filed with the SEC today, or our supplemental 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 this call, we will discuss certain operating metrics, including occupancy, cash flow coverage, cash NOI, and same property or same-store performance. These metrics and other related terms are defined in our annual report on form 10-K or our supplemental report.

Joining us on the call today are Mike McKee, Executive Chairman; Tom Herzog, Chief Executive Officer; Justin Hutchens, President; and Pete Scott, Chief Financial Officer. Also in the room today, and available during the question-and-answer portion of the call are John Bergschneider, Senior Managing Director, Life Science Properties; Tom Klaritch, Senior Managing Director of Medical Office Properties; and Troy McHenry, General Counsel. I will now turn the call over to Mike McKee, Executive Chairman.

Welcome, everyone. Today is the first earnings call that you'll hear from Tom Herzog in his new role as our CEO, and the first call you will hear from Justin Hutchens in his new role as President. With us here today in Irvine also is Peter Scott, our new CFO, who officially started with us about an hour ago. Today is Pete's first official day in the office, and we're thrilled he has joined us to round out our executive team.

As I think all of you know, with have been quite deliberate over the last six months or so as we assembled this team. Although Tom, Justin, and Pete are the most visible faces in new positions, we also have been very deliberate in assessing other critical positions and making sure we have seasoned, talented professionals in key roles.

I'm excited with how this team has come together. Yet, I know in this day and age, words can often be a bit shallow. We know that we need to be measured by our results, not our words alone, results which will translate into total shareholder return over time. So we look forward to your observations and input along the way as we execute our plan with this new team.

I want to cover our general view on a couple of key issues that we can dig into in more detail as the call progresses. First, we get asked a lot about how potential changes related to the Affordable Care Act will affect our business. From our perspective, we have a sense of validation that the actions we took in 2016 have put us on a solid foundation for the changes that might occur relating to US health policy.

It appears that whatever plans or policies emerge from Washington, DC, they will roll out over an extended period of time, likely 12 to 24 months. So by exiting the skilled nursing space last year and repositioning our portfolio towards senior housing; medical office, which is for us primarily on campus; and life science assets, we have substantially derisked our portfolio. 95% of our current portfolio's revenue comes from private pay income streams. We see little or no exposure to changes being considered to US health policy with respect to our current portfolio.

Second, as we continue to take steps to derisk our portfolio, a process that was accelerated significantly in 2016, we continue to monitor and engage with Brookdale, our largest tenant. With steps we have taken, we have set in motion a substantial reduction in our exposure.

We are on track to improve the average coverage of our triple-net assets with Brookdale to 1.21 times, and our SHOP assets continue to perform solidly. We've announced our intention to continue to reduce our concentration to Brookdale, and that remains a high priority in 2017. With that, I'd like to turn the call over now to Tom Herzog.

Thank you, Mike. It has been a few months since the closing of the QCP spin and our last earnings call. During this time, we completed our annual detailed budgeting process and are pleased to confirm the 2017 preliminary outlook we provided in November. On a personal note, I am honored to have been appointed CEO of this great franchise.

During the last several months, our team has made significant progress on many fronts, and we have much appreciated the positive response from the market. We'll work hard to earn your continued confidence, and I firmly believe our best days are yet ahead.

For those of you that I've worked with in the past, you know how important it is to me that we take a balanced approach to improving the various areas of our business. With that, we continued to embrace our strategy around balancing the three legs of the stool. The pillars of: portfolio quality, improving our balance sheet to BBB+ metrics over time, and growth in high quality cash flows. Our 2017 plan incorporates all three of these vital components.

As you know, we have sharpened our focus to concentrate on three specific healthcare segments: senior housing, MOBs, and life science. As we begin 2017, and our new executive team takes over, we're very favorably positioned. I am pleased with the risk profile and improved quality of our overall portfolio.

Also, I'm quite pleased that each of our three primary businesses is run by a highly experienced and skilled senior managing director with many years of experience. As we look forward, we expect to grow in each of these lines of business as opportunities are proactively identified.

Let me move on now to thoughts around our future growth, CapEx, and capital recycling. In order to keep our portfolio fresh, every year we will prune non-core assets, and recycle capital into higher growth opportunities.

Over the next couple of years, we expect to recycle around $300 million to $400 million per year, while also allocating $250 million to $350 million per year into NAV and FFO accretive development and redevelopment projects. We believe we have one of the best portfolios in the sector and will continue to focus on organic growth through operational execution, capital recycling, and development and redev opportunities.

We will also continue to look for opportunities to grow accretively. Given our size, we are more nimble, and smaller deals still allow us to move the needle. We intend to grow our business largely through flow and relationship transactions, while also evaluating larger deals when available to add strong real estate that enhances our portfolio and can be funded accretively. We will, however, not do deals just for the sake of getting bigger.

It should be noted that as it pertains to our UK holdings, with the change in our view on risk-adjusted returns, we are currently in assessment mode and do not expect to grow in this market in the foreseeable future, although, we will continue to focus on our existing operators. With that, I'll turn it over to Justin to take you through our operations and transaction highlights.

Thank you, Tom. I'll start with an update on our strategic Brookdale transactions. We are on track to close the sale of 64 Brookdale communities for $1.125 billion to Blackstone by the end of the first quarter.

In addition, we are making good progress on marketing 25 triple-net leased assets that are nonstrategic to both HCP and Brookdale, and are on track to complete the sale or transition of these properties by the end of the year. In January, we completed the previously announced sale of a 40% interest in our RIDEA II senior housing joint venture to Columbia Pacific Advisors and related financing of the venture.

As I mentioned last quarter, these transactions will significantly improve the overall quality of our retained senior housing portfolio, increase the lease coverage on a pro-forma trailing 12 basis to 1.21 times for our Brookdale triple-net portfolio, and 1.13 times for our overall senior housing triple-net portfolio, while reducing our Brookdale concentration to 27%. We will continue to work closely with Brookdale to strengthen our portfolio positioning, and we expect to reduce our concentration further over time, as Mike mentioned.

Moving on to our investments. During the fourth quarter, we completed $345 million of acquisitions and loan fundings, bringing our full-year 2016 total to $723 million at a blended cash yield of 6.7%. Most notably for the quarter, we acquired a portfolio of 10 MOBs for $163 million, representing a 6% lease rate with 2% escalators and a 15-year initial term. Nine are located on campus, and the affiliated hospitals are leaders in their respective markets.

In November, we entered into agreements with UK-based operator Maria Mallaband, to acquire a portfolio of eight predominantly private pay, prime care, homes located in the London and southeast England area for $131 million, or GBP105 million, representing a 7% cash yield. In mid-2017, through the exercise of a call option, we intend to convert our bridge loan provided to Maria Mallaband into fee ownership, and enter into a master lease with RPI-based escalators and a 15-year initial term.

Now, let me take you through our same-store performance. Our portfolio delivered same-store cash NOI growth of 2.6% in the fourth quarter and 3.7% for the full-year 2016, which was near the high end of our guidance range.

Looking at our individual sectors, our SHOP platform delivered same-store cash NOI growth of 7.1% in the quarter, which was largely driven by the timing of Brookdale volume purchase rebates, which were recorded in December for the full year. Excluding these rebates, SHOP same-store growth would have been 1.4% in the quarter, which was driven by 3.2% rate growth, partially offset by increased labor costs, while occupancy remained flat. Our full-year 2016 SHOP growth was 6.6%.

Digging a little deeper, our independent living communities have consistently outperformed our assisted living assets for the past two years in terms of rate growth, where growing or maintaining occupancy in the low 90%s during that same period. This is a direct function of the respective markets, which have not been significantly impacted by new construction, as well as our revenue-enhancing CapEx investments.

While new senior house construction starts have been slowing, we still anticipate this year's SHOP performance to be impacted by new assisted living and memory care supply to be completed in 2017. However, the impact will be muted somewhat, given our 57% weighting towards independent living and CCRCs.

Looking at our senior housing triple-net portfolio, same-store cash NOI declined 1.3% in the fourth quarter, reflecting rent steps, offset by Brookdale's contractual rent credits and lower contribution from our Sunrise portfolio. For the full year, cash SPP for senior housing triple-net was positive 0.4%, impacted by the same items.

Turning to life science, our same-store portfolio remains 97% leased, and delivered same-store cash NOI growth of 4.8% in the quarter, and 7.8% for the full year. We had a record year in 2016, with 2 million square feet of leasing executed, and continue to have strong tenant demand for our vacant space, with manageable near-term expirations. Note that while we had a strong year of growth in 2016, due to the prior-year occupancy gains and burn-off of rent abatements, we expect performance going forward to be at a more normalized run rate.

We continue to see positive leasing activity at The Cove development in South San Francisco, driving our overall performance ahead of underwriting projections for the first two phases. We signed a lease with Five Prime Therapeutics for 115,000 square feet, projected to commence in January 2018, bringing Phases I and II of The Cove to 86% leased. Fundamentals and leasing momentum are still very strong in the Bay Area, and we continue to see significant demand for our remaining space, as well as our recently re-leased Phase III projects.

Our medical office portfolio maintains strong occupancy of 92%, with cash NOI same-store growth this quarter of 2.2%, bringing full-year growth to 3%. We currently have four on-campus ground-up MOB development projects underway, which are 64% leased.

Finally, let me give you our updated 2017 guidance for same-store cash NOI for each of our segments. We expect overall same-store cash NOI growth to range from 2.5% to 3.5%, which as Tom mentioned, confirms our preliminary outlook provided on November 1, with some movement within the sectors as we have refined our budgets and incorporated fourth-quarter results.

For life science, we increased our guidance to a range of 2.5% to 3.5%, which at the midpoint is 80 basis points higher than our preliminary outlook, driven by new leasing and renewals from tenants who were previously anticipated to vacate in 2017. For medical office, we expect steady performance in the 2% to 3% range. For hospitals, and our UK real estate, we are expecting 0.75% to 1.75% growth.

For senior housing triple-net, we increased our guidance by 65 basis points to 3.9% to 4.9%, primarily due to removing from our same-store population most of the 25 previously announced, nonstrategic Brookdale communities that are planned to be sold or transitioned this year, as well as better performance expected in our Sunrise portfolio.

And finally, we expect 2% to 3% growth in our SHOP portfolio. At the midpoint, this is 200 basis points lower than our previous preliminary outlook because now we have a higher jumping off point for 2016 due to the Brookdale rebates received in December. It is important to note that our SHOP NOI expectation for 2017 is actually slightly better than our November 1 preliminary outlook. Now I'll turn the call back over to Tom to walk you through our fourth-quarter earnings and 2017 guidance for the overall Company.

Thank you, Justin. During this portion of my remarks, I'm wearing the CFO hat, but plan to pass that to Pete immediately following this call.

Let me start with the fourth-quarter and full-year results. Reported FFO as adjusted of $0.59 per share and NAREIT FFO of $0.35 per share for the quarter, and for the full year, FFO as adjusted at $2.74 per share, and NAREIT FFO of $2.39 per share. These results were $0.02 per share above our expectations. $0.01 was due to our SHOP portfolio performance, which Justin just discussed, and the additional $0.01 was represented by a handful of other miscellaneous items.

With the completion of the QCP spin on October 31, we have also provided comparable FFO as adjusted per share of $0.53 for the fourth quarter and $2.04 per share for the full year. This metric provides FFO as adjusted after removal of income from the assets transferred to QCP, and interest expense related to debt repaid from the proceeds of the spin.

I should point out that the 2016 comparable FFO as adjusted of $2.04 per share is not directly comparable with the 2016 pro forma FFO as adjusted run rate of $1.92, which we disclosed last quarter. The $1.92 run rate adjusts for QCP, as well as the previously announced impact of the RIDEA II transaction, which closed in January, the pending sale of 64 Brookdale communities expected to close later this quarter, and gains from monetizing three participating development loans in 2016.

Moving to the balance sheet. The QCP spin financing provided $1.75 billion of gross proceeds to HCP during the fourth quarter that were used to replay $1.2 billion of debt at a blended rate of 6.3%, and the balance to pay down the revolver. We ended 2016 with a fixed charge coverage and net debt to EBITDA -- adjusted EBITDA of 3.56 times and 6.17 times respectively on an annualized quarterly basis.

As mentioned, the RIDEA II transaction closed in January, generating $480 million of proceeds, which were used primarily to repay amounts outstanding on our revolving credit facility. The previously disclosed sale of 64 Brookdale communities expected to close later this quarter will generate $1.125 billion of proceeds, which will be used to further delever.

We remain on track to reach our 2017 year-end balance sheet goals, targeting a low to mid 6 times net debt to EBITDA and financial leverage in the 43% to 44% range. In addition, other than the $250 million of senior unsecured debt and $475 million of mortgage debt that will be repaid with proceeds from the Brookdale 64 transaction, we will have no major debt maturities until early 2019. As of today, we have $1.6 billion of liquidity, consisting of cash and availability under our credit facility.

Now turning to our full-year 2017 guidance. We are reaffirming that we expect full-year 2017 NAREIT FFO per share to range between $1.88 and $1.94, and FFO as adjusted per share to range between $1.89 and $1.95 per share. And as Justin discussed, we also continue to expect full-year 2017 same-store cash NOI growth of 2.5% to 3.5%.

I will also direct you to page 41 of our supplemental report, which presents the primary assumptions embedded in our 2017 guidance, with a comparison to the 2017 outlook we provided on our third-quarter earnings call in November. You will note that our assumptions are generally consistent with differences related to: timing of the Brookdale 64 transaction from mid-first quarter to the end of the first quarter, timing of the RIDEA II transaction from late 2016 to mid-January of 2017, higher recurring CapEx driven by leasing activity in our life science segment, changes in same-store performance between certain segments but unchanged in aggregate, and increased development and redevelopment projected spend due to three new projects.

As Mike mentioned, we're very excited to have Pete Scott join our team as CFO. Pete comes to us from Barclays and was a key advisor to HCP during the QCP spin process. It's a rare opportunity to work directly with someone for almost a year prior to them joining the Company. Pete brings a number of skills that will be key to the execution of our strategy and complementary to the skill set of our executive leadership team. With that, let me turn it to Pete to say a few words.

Thank you, Tom, and hello to everyone. It is very nice to meet all of you over the phone. As Tom mentioned, HCP had the opportunity to take me out for an extended test drive before making a decision to hire me as CFO. It worked in my favor as well, as I had the opportunity to get very well acquainted with the entire executive management team and also the Board of HCP.

By way of background, I spent the last 15 years working as a real estate investment banker, much of it covering the healthcare REIT sector. Starting in 2015, I had the opportunity to work closely with HCP on various transactions, including the spinoff and financing of Quality Care Properties. I am very excited to be joining such a great Company.

Over the course of the last few weeks, I have had the opportunity to meet more of the HCP team, and I have been extremely impressed with the quality and professionalism of everyone here. I look forward to meeting many of you live or telephonically in the upcoming weeks and months. With that, I'll turn it back to Tom.

Thanks, Pete. Operator, let's go to the first question, please.

(Operator Instructions)

Our first question comes from Juan Sanabria of Bank of America. Please go ahead.

Hi. Good morning.

Good morning, Juan.

I was just hoping you could spend a little time on the assumptions behind the RIDEA growth for 2017 in terms of rate, occupancy, and expense, and maybe the differences between IL and AL at a high level. If you could just, as part of that, touch on exactly what changed with the guidance with the bringing forward of those Brookdale bookings, what exactly that is in reference to?

Juan, hi, it's Justin. Let me touch briefly to start on the rebates that were mentioned, because that's a big part of the change in SHOP. And then I'll walk through all the changes, and then Tom might want to add a little detail on the rebates as well.

As it pertains to the rebates, Brookdale tracks these throughout the year; they're related largely to food and supplies. They had not been pushed down to what they refer to as their managed communities until December. This is our SHOP portfolio, and there was an impact, as I noted.

Moving forward, we don't expect any big pops at the end of the year. We think it will be more seamless and about the same level of rebates, and those have been incorporated already into our 2017 forecast.

But let me just give you some more highlights to focus on, walking you from the 2016 performance to the 2017 performance expectations. First, you noted in our outlook that we had a midpoint of 4.25% growth for our SHOP portfolio; that came in higher at 6.6%.

Part of that growth was organic; we estimate that to be about 2.5%. Another part of it came from revenue-enhancing projects, came from nonrecurring expense savings; that part is not noted in specifics, but it was certainly a driver. And then about 2.4% came from the rebates that I mentioned, and that was about $3.4 million.

So I'll stop there and just make the point that the total NOI number that we projected in our outlook and our 2017 number is basically the same. But there's a higher jumping-off point due to the rebates.

Now, let me talk about 2017, where we talked about a range from 2% to 3%. The number hasn't changed in total, as I mentioned, so our performance expectations are the same. We think we'll probably have organic growth in the portfolio of 1%, 1.5%. We also expect to see some growth from our revenue-enhancing projects, feeding that 2% to 3% growth.

Let me give you some specifics. If you get into the revenue growth for our SHOP portfolio, we're expecting about 4.4% in total; REVPOR at 3.5%; occupancy, 160 basis points. Then expense growth of 5.3%, which is driven by higher wages due to competitive pressures, but also the additional labor that would come with the additional occupancy.

Thanks for that. That's fantastic. And then on just the IL versus AL, I don't know if you guys have looked at it like that, but any thoughts on the differences in growth rate or different levers, like occupancy, as you think about those two different buckets?

Let me do this. I'm going to -- I have some information on IL, AL I could share that pertains to new supply and competition in their respective markets. So let me pivot for a minute to that point and make some points about new supply and how we're differentiated within our IL portfolio.

The first high-level point is that construction starts peaked in the fourth quarter of 2015. I think it's widely known at about 4.3%. About 33% of the pending new construction is scheduled to open starting in the first quarter of 2017, and that's up from last year. And so, we believe most of the deliveries will occur in 2017.

As it pertains to more color on our portfolio, construction as a percentage of inventory is about half as much in IL compared to AL. Also, for both IL and AL, this percentage has come down significantly over the past three quarters. Let me give you those numbers.

The combined number for construction as a percentage of inventory in the second quarter of 2016 was 7.8%. AL was 9.5% at that time; IL was 4.9%. If you move to fourth quarter of 2016, that combined number goes down to 4.5%, AL's at 5.7% IL is at 2.8%.

Now, just a little bit more for you. If you go by NOI and you look at our assisted living communities, about 13% of our NOI, as it pertains to our assisted living communities, have been impacted by recent openings in the last year compared to 2% of our IL. 32% of AL communities are exposed to pending new construction, compared to 11% of our IL. And as I've noted on the call, we have about 56%, 57% exposure to independent living in our SHOP portfolio.

So long story short, we're expecting less competitive pressure in IL. Therefore, there's some better performance projected in IL. That supports the 2% to 3% growth rate; however, we're not breaking up the components as part of our guidance.

Thank you for that.

The next question comes from Michael Knott of Green Street Advisors. Please go ahead.

Hey, guys. Good morning. Question on life science business. I think in the prepared remarks you mentioned that lease expirations were manageable. But when I look at the schedule, I see 2017, and then particularly 2018, I think 10% and then 20% of your life science revenue expiring.

Just curious if you can give us any commentary on how you're looking at maybe both of those years combined? A lot of leasing there to do, but obviously, a pretty healthy environment to do so. So just curious any thoughts you have on that?

Michael, it's Tom. I'm going to turn this to Jon Bergschneider who leads our Life Sciences Group.

Good morning, Michael. Jon Bergschneider here. As we look at 2017 and 2018 expirations, we have about 0.75 million square feet expiring in 2017. It's about split 50/50 between the Bay Area and San Diego.

We're 2% above market in that, 2017. We feel very good about where we're at right now with discussions with a majority of those expirations, and feel that we'll be able to address a good chunk of those.

As you move to 2018, about 1.3 million square feet. We're slightly below market, bringing our two-year average to roughly flat. Again, of that 2018, about 90% of it is in the Bay Area, where we're seeing some of the strongest demand, over 2 million square feet that we're currently tracking, and considerably increasing rental rates and dropping concessions.

So we feel very good where we sit right now with 2017 and 2018. The total portfolio is about 5% below market. So again, as we look to the next several quarters and years, we feel fairly good about where we're positioned within those core markets.

Okay. Thanks. And then for my second question, I'm going to break the rules a little bit and squeeze two in related, if you don't mind. Just any comment on the flu, as it pertains to senior housing so far?

And then just curious on your senior housing initiative to corral operators and try to add value to their process. Just curious, any update on how that initiative is going and any early wins or anything that you can speak of on that front would be helpful. Thanks.

Hi, it's Justin again. Let me just mention that it is a strong flu season. When you have a strong flu season, you typically have more pressure on your assisted living and independent living occupancies.

If you're a holder of skilled nursing, which we are not, then you would have a little bit more demand for that skilled nursing product. So I'd characterize the flu season as strong, and, of course, that was considered when we gave the guidance for the portfolio.

In terms of initiatives that we have in place working with operators, we have a couple priorities. One is actually narrowing down a pool of 26 operators that we have within the Company to a smaller group that we'll grow with over time. And so, there's been a lot of consideration to -- how to pick priorities and pick priority operators to grow with.

There was some examples of dispositions that we did in the fourth quarter where we were starting to reduce the operators that we work with. We have a team in place that has an operating background, as you know, and they're working to track performance and give feedback to operators. And we have a regular monthly cadence with all of our operators, and it's been received well and, we think, quite impactful.

With that, what comes from the regular interaction with our targeted operators are potential growth opportunities. And so, over time we anticipate the opportunity to grow with these operators and all of these initiatives are underway.

Thank you.

Thank you.

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

Hi. The first question, I may have missed it, but did you mention a rough value for the 25 additional properties to be either sold or transitioned? And what does it feel like it's more likely to happen at this point, more sales or just more transitions?

Hi, it's Justin again. It looks like we're coming in sub 6% cap rate on those 25. There's been a tremendous amount of interest in the properties, and we're leaning more toward selling. Right now, we just have about three that we anticipate keeping.

Got it. And then for the follow-up, for the UK, just to clarify, are you sitting still and putting any new dollars to work over there, or just any new dollars outside of existing relationships?

Michael, this is Tom. I'm sure what you're partially referencing is that there was an article that we had reduced our operations in the UK. The fact is, we have not stepped away from the UK but we are assessing whether we'll grow there in the future.

Specifically as to your question, we did add one investment this last quarter for about $135 million with Maria Mallaband in the form of an option to acquire real estate. And so, it isn't that we're not interested in recycling some money; we do have some money that could come back to us, as there's some debt that is pre-payable. And that could reduce the size of our holdings in Europe.

And then with that, we did choose to eliminate our infrastructure in Europe. As based on the size of the portfolio and the fact that we're not looking at the current time to grow there, we felt that we could manage that from Denver. So that's where we're at with the UK.

Got it. Okay.

I'm sorry, from Orange County, how about.

Okay.

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

Thank you. So just your opening comments on recycling additional non-core assets, $300 million to $400 million from here on. I'm assuming that's over and above what you laid out, and correct me if I'm wrong. But can you give us a bit more color? What would you consider non-core over the next three years from here?

Hi, it's Justin. Examples of non-core, it could be a life science asset that's not located in one of the premier cluster markets. Could be a rural regional senior housing operator. It could be lone investments. Tom mentioned there's some potential proceeds coming back from the UK.

Moving forward, we'd like to have less emphasis on debt investments, and although it's a small piece of our portfolio now, it had been a strategic priority for prior management, we would like to see the loans pay off and then reinvest into real estate. And then older assets that don't pass the smell test, meaning they would be significantly enhanced through redevelopment. And then off-campus, or I'd say tertiary market MOBs would be on the hit list for disposition or recycling as well.

So the overall goal is to improve the quality of our portfolio by strategically -- excuse me, by disposing the non-core assets. And you've seen some of that take place already, and we'll continue that over time.

Let me just add one thing to that. I think one of the things you can expect as we go forward is we'll be looking for our key growth in the three lines of business that we've spoken of. But with that, too, is going to come a certain amount of pruning of assets every year, which we'll refer to as capital recycling. So that's something you should expect to see not just in 2017 but on a permanent basis.

That's helpful. And then just as a follow-up on the CapEx comments you made, can you maybe just give us a broad sense of on the main food groups, what you spent on revenue-enhancing CapEx over the last two years and what that will look like in comparison to over the next two years?

I can start and Justin can add. This is Tom again. I would point you to page 41. We have enhanced our disclosures dramatically in this area. I'm going to point you to two pages, page 41, which provides guidance, and then our capital expenditures page, this is in our supp, which is page 14. I'll start on page 14.

You're going to see a lot of new information with breakout among the various categories of revenue enhancing, initial capital expenditures, first-gen TIs, development, redevelopment, et cetera. So we're going to give complete visibility into where our spend is in those areas. And from this page, you can see where we saw it in the fourth quarter, and on page 15, what our full year looked like in 2016.

And then if you go to the guidance page on page 41, you're going to find a capital expenditure section of a few lines at the bottom of that page 41 that provides our guidance in each of the major buckets. So you'll see that visibility going forward, and I think it will be easier as we have conversations around our CapEx programs for us to talk through the results that we're seeing and how we're thinking about them.

Okay. Just to clarify, when you talked about over the next two to three years, so is this the run rate we should expect over the next two to three years?

I wouldn't say it's a run rate, if you're looking at the guidance, the development and redevelopment I would think about this way. We've got a land bank -- let's start with development.

We've got a land bank of about $250 million, and that creates a shadow pipeline that is quite sizable. You can do the math on what you think that might be. From a redev perspec -- and that's primarily life science.

From a redev perspective, we've got, as you know, a tremendous holding in on-campus properties, which is fantastic, but with that comes some age in some of these assets and tremendous redevelopment opportunities. So going back to development, if we can continue to reload and start projects as we complete them, and you know we've got a lot of coal going through the pipeline right now, then I think you could see that development spend stay status quo for what we're looking at right now. That would be the goal, but we'll see as we go forward and we develop this out further our thinking, where we fall out.

From a redev perspective, I would have you think in terms of probably $70 million, $75 million to maybe $90 million to even $100 million per year in the MOB space, with some sprinkled in, in other assets over the next, probably, four to five years.

From a revenue-enhancing perspective, we had a fairly sizable spend in 2016, as you're aware, as we brought some of those new SHOP assets in that needed work. And we intend to put some additional money into those assets in 2017.

As it stands today, that's our thinking. But I think going forward, you could see that start to taper down rather quickly as we complete that effort. That's how I'd have you think about the three major buckets.

Great. Thank you very much.

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

Thanks. Towing the line, two questions. So you talk about Brookdale going to 27% of your portfolio after -- I think after the 25 later this year. Question is, if Brookdale gets privatized, to what degree does your strategy change?

Is this a concentration issue or is this a credit issue with Brookdale? And if Blackstone owned Brookdale or if somebody else owned Brookdale, would you change your line of thinking about concentration issues?

Richard, this is Mike McKee. Your question has a lot to it. Unfortunately, also in the question is a lot of facts we just don't know yet. We don't -- I would say that our conversations with Brookdale have been absolutely appropriate from the perspective of two public companies talking to each other. We have a great working relationship day to day, a lot of transparency operationally, and so forth.

In terms of their strategic plans, we have no insights other than what we read in the newspaper. And we are not talking to them about anything strategic; we're talking about things that are operational. So if you don't mind, I think it would probably be our view that their call is tomorrow; you can talk to them.

We've taken the steps we've taken. We've set a course to continue to reduce our exposure, as I mentioned. We see that as much more of a corporate policy on our part than a reflection on the assets that we hold with them. We have learned our lesson about strong concentrations and believe much more than we may have a few years ago in terms of diversification. Tom, any more on that?

One thing other thing I'd add, Rich, is Brookdale is a good partner to us and an important partner. And so that obviously factors into the relationship as we go forward. But we have had good results from a SHOP perspective. Our triple-net has been reorganized at a 1.21 times coverage. And we're working very well together with them on a variety of matters. And at all different levels within the Company, we're in routine communication.

So it's just a concentration issue, it's not a -- to Mike's point, right? That's the main.

I'd say we've got concentration that, over time, will work together with Brookdale to bring that down in a way that works for both parties.

Okay. Second question is, Tom, knowing you for as long as I have, I think I believe the call and everyone there, Justin, everybody that you really are focused on a seamless and transparent situation. We took issue with the medical office purchase of the community assets, as you know. That flew in the face a little bit with the idea of being low risk and all that stuff. And then you're adding to the RIDEA platform, that adds risk.

So what would your response be to those two items in particular about, well, we're going to derisk the situation, and yet, we're taking on Community, maybe the worst hospital company, in terms of situation right now, and then adding risk in the form of RIDEA?

Well, Rich, let me just start and I'm going to turn it to Justin, and I'd also like you to hear from Tom Klaritch, who heads our MOB group. Let's start with CHS. We feel CHS was an excellent investment and the underwriting was quite sound.

And I appreciate the question, because I know that there were some folks that had questions on that deal. We would like to clarify how we were looking at it and the facts. Justin, why don't you hit a few high points, and then I'd want Tom to provide a little bit more detail.

Sure. First I'd mention the investment is accretive. And as we underwrote the cash flows, they were very stable and projecting them to be stable for the long term. They're good quality, purpose-built MOBs. They're strategic to the affiliated hospitals and they're mainly on campus. There's many more attributes. I'm going to ask Tom to walk through those for you.

Good morning, Rich. Well, these assets are guaranteed by CHS the parent. What we found really attractive with them was the fact that they're master leased by the affiliated hospitals associated with the buildings. As you know, it's increasingly rare to see master leases on asset purchases, and we really felt that the returns were much more attractive with these leases in place.

These hospitals that are affiliated with the MOBs are among the leaders in their respective markets. They generate just under a 21% market share on average for the seven hospitals. In addition, they're some of the top performers in the CHS chain. While they're only about 6% of the hospitals, they generate about 10% of the EBITDAR of the Company.

In addition, their occupancy is well ahead of both the Company average of 43% and industry average of 51%. These hospitals generate about a 53% occupancy. So we feel they're very strong, they're very active campuses, and in the long run, they're going to be very good assets for us.

Rich, to your second -- do you have any follow-up on that or I'll go to your second?

No, that's good.

Your second question I think was as a second item that you were asking if we feel we're adding additional risk, was by picking up some additional SHOP exposure. And as you're aware, we're more heavily weighted to triple-net in senior housing.

One of the things I'd remind you, and I know you know this, but there aren't a lot of triple-net deals to be done today. SHOP is where things have moved, and it's not that we wouldn't entertain triple-net with the right deals, but there is a lot more activity in SHOP, and with the proper alignment, those can be good transactions.

We have -- again, I think you're aware of this, but we're much more heavily weighted in SHOP toward IL versus AL, and have escaped some of the new supply issues. Like we're somewhere in the vicinity of 60% IL in our total SHOP, including with Brookdale. So that's been one of the items.

A focus for us is when we make a senior housing investment to be pretty particular about what we're investing in. We studied the demographics. We studied the new supply within a five-mile radius. Things that you now see fully disclosed in our supplement so that you can get a feel for how we're seeking to manage that risk.

Fair enough. I appreciate the candor. Thanks.

Thank you.

The next question comes from Jeff Pehl of Goldman Sachs. Please go ahead.

Hi, thanks for taking my question. Just want to turn back to your life science NOI growth guidance. Has The Cove development created pressure on the rents and occupancy of your existing portfolio?

Jon, go ahead.

Hi Jeff, Jon Bergschneider here. Generally speaking, The Cove has been very well received in a market where, for the last several quarters or years, we've seen negligible availability. A good chunk of the leasing that is coming to The Cove is through expansion of existing clients in South San Francisco.

You've got AstraZeneca obviously coming to town that's consolidating some of its more regional offices. And where we have seen occupancy created in the market, or availability created in the market as a result of these expanding tenants, that space has been quickly absorbed, whether it be in HCP's portfolio or with the larger competitive supply.

So market rates continue to increase and concessions continue to decrease, and we feel really good about where we sit right now. 86% leased on the first two phases and Phase III coming out of the ground right now, where we believe we can beat any of the other competitive supply to market, maintaining our first mover advantage.

Great. Thanks. Do you think it could impact any near-term lease roles you have?

The question was asked earlier about where we sit relative to 2017 and 2018. Both in the Bay Area, as well as the broader portfolio, we feel really good about where we're at with some of those large expirations. In short, no, I think there's obviously some wood to chop there, but where we sit right now in the beginning of 2017, we feel really good about that.

Great. Thanks.

The next question comes from Nick Yulico of UBS. Please go ahead.

Thanks. In your senior housing operator segment, the occupancy's below 90%, I guess some of that's because it's more IL, it's more CCRC than some other REITs out there. But how should we think about how much occupancy upside is left for the portfolio overall? I think you did say that there was some occupancy growth built in for 2017 guidance.

Yes. This is Justin. In 2017, I referred to 160 basis points of occupancy growth within our SHOP portfolio. Couple other data points for you, I mentioned that the IL portfolio is basically spot-on the NIC averages, low 90s. Our AL portfolio is about 100 basis points below NIC averages. So there's some upside relative to the averages in that portfolio.

Okay. But, just thinking about your -- I know fair a amount of the portfolio was purchased with some lower occupancy, and you were raising occupancy, and that was why the investments were compelling. As we fast forward to the end of 2017, is the portfolio more mature at that point and you're facing occupancy pressures similar to what some of the industry is facing?

I would say this, that in certain markets, as I noted earlier, where we have assisted living, there is definitely some pressure from new supply. But if you look at the metrics I mentioned, our revenue growth of 4.4%, our REVPOR of 3.5%, and our occupancy of 160, that's actually a little stronger than 2016.

What's offsetting that is expense growth. I think that's where more of the pressure -- where we're feeling the pressure in 2017. Labor expenses due to competitive pressures, both from new supply, but also just working within a lower unemployment environment. And then also, added expense as we add some of that occupancy that we've planned.

Okay. And then, and that's helpful. Just last one quickly. You talked about some of the issues that are driving the same-store triple-net guidance to be better than normal this year. Is 3% the right number to be thinking about for what's the embedded real same-store cash NOI growth in that segment without all these benefits?

When you remove the noise, in fairness, we've had some over the last couple years, it's about a 3% run rate.

Right. Okay. Thanks, everyone.

Thank you.

The next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Thanks. I just wanted to talk a little bit about investment opportunities and activity at the margin. During the quarter, you obviously focused on MOB and a little bit of a RIDEA addition. But how should we be thinking about what you'll be underwriting in 2017 and focused on for new investments?

Hi Jordan, it's Tom Herzog. We are focused on all three lines of business. Certainly, you've seen some activity in MOBs, and the transaction market's been fairly robust in the first five weeks of the year and the very end of last year. And we do like MOB, and certainly would add to our portfolio in that area.

From a senior housing perspective, if we identify the right assets in the right locations that provide proper yields, those are transactions that we would do. It's been a little bit quieter on that front, other than some -- a couple of significant transactions that are out there. But certainly, something that we would consider.

And from a life science perspective, it gets a little bit lumpy because these are big transactions in a couple of major markets. We saw a few big transactions last year. Of course, we look at everything that comes through. Hasn't been much so far the beginning of this year, but that is common, in life science, you typically don't see a whole lot in the first quarter and then it heats up. But in life science, that is another area that we are interested in growing. We like the segment.

And for what we can't have growth, when we could do so accretively through straight acquisitions, I think we continue to put effort into our renewal of our development pipeline in that area. As long as we're still getting our spreads that we seek, which are trended 175 to 200 basis points plus. Which, by the way, I should just take a moment to mention that for our existing pipeline of about $800 million or so, which about two-thirds of that is Cove, our spreads are much higher than that for what's currently running through the pipeline.

Okay. You purposely didn't mention hospitals.

I purposely did not mention hospitals, correct.

And then just as a follow-up, I presume, and this is a little bit of a nuance. I presume you guys were adequately conservative in forecasting the timing of the Brookdale sale, 64 to Blackstone. Just curious if there was anything in particular that popped up that caused the delay relative to what I would have thought would have been conservative expectations.

Hi, it's Justin. First of all, we do think it's completely on track to close by the end of March. We've had reassurances from Blackstone. We've had reassurances from Brookdale. So we're confident in the closing.

The delay has come from some operating licenses that need to be transferred in certain states that have taken a little longer than anticipated. But other than that, everything is right on track.

Okay. Thank you.

Thank you.

The next question comes from Chad Vanacore of Stifel. Please go ahead.

Good morning, all.

Good morning.

I was thinking about Justin's comment about tearing down the 2016 housing operators, and I was wondering how that squares with your strategy of reducing your Brookdale exposure at the same time? And then, how should we think about that working? And then with the operators, are you thinking about asset sales or transitions to existing operators?

Chad, this is Justin. I'll give you an example. We had a regional operator that had a relationship that was -- a primary relationship outside of HCP. They were a lower priority for us, and so we worked out a sale of the assets where the operator bought their assets and brought it to a different relationship.

That sale is noted in our disclosures, and just so you can find it, I'll tell you the amount was $88 million sale at a 6.4 cap. And so that went very cooperatively.

We have some other operators that are in a similar situation where we may have one or two assets with them, but they have other capital partners that have a bigger exposure. And so we'll have conversations to see if there's an opportunity over time, it's not a big rush here, to help find a better alignment for both HCP and for those operators.

And then to your Brookdale concentration question, as we grow, and I mentioned that we're identifying our priority growth partners within senior housing as well. As we grow with those partners and through MOB and through life science, naturally our concentration with Brookdale will go down.

And I would anticipate that we'll probably find some other opportunities with Brookdale to dispose assets over time as well, that are either -- that are non-core assets to Brookdale. There will be a variety of actions taken, all with careful planning.

It's fair to say this is -- the paring is really a matter of administrative paring, pulling back on that and making it simpler process?

I'm sorry, I didn't catch that.

I'm sorry.

I think the answer to your question is yes, that's part of it. Having as big a number of small operator -- well, not small operators, but where our participation with them is small, we would rather change the profile of having 10 or 12, rather than 24, and go deeper with them. And I think we see the opportunity to do that.

All right. Thanks, Mike, appreciate it. And then just one other question. So AL, IL coverage improved in quarter. Was it mostly related to sale and conversion of those underperforming BKD assets? And then with recycling, where do you think coverages are by year end?

I missed the first part of your question.

That AL, IL coverage has improved. Was it mainly due to the Brookdale transactions, which the answer is, of course, the answer is yes on that. Where we see it at year end. It depends on -- as we work together with Brookdale and other operators, it depends on the outcome of that. So that will be part of our year's work.

Mike, if you were to underwrite a triple-net senior housing deal today, what coverage would you look for?

To Tom's point, they've been few and far between, but we would expect, if you were to underwrite a triple-net senior housing asset, if you could go in at about a 1.1 times cover, that should give you -- depending on the market and, of course, the strength, track record of the operator, if all that checks out, that should give you adequate coverage to move forward and anticipate stable rent income streams.

Of course, we would also underwrite the credit quality of the operator at that point of the tenant. So that, obviously, would factor in as well.

All right, guys. Thanks for taking my questions.

You bet.

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

Hi. Thank you. I just wanted to ask you, you mentioned on the 25 Brookdale assets for sale that you are seeing a sub 6% cap rate on those, which I think is a little lower than what you had initially anticipated. What kind of buyers are you seeing there and what are they -- how do you think they're thinking about those properties that they're willing to pay what seems like a relatively lower cap rate versus a lot of what we'd see in senior housing now?

This is Justin. You're right, we had previously mentioned a 6% cap, but as we've been in the market with those assets, we're seeing sub 6%. First to that point, the reason they're sub 6% is because these are underperforming assets. There's some upside that the buyers are seeing as potential upside with some operational turnaround. So that's getting priced into the transaction.

The type of buyers, there's been some -- a mix of large regional and small regional companies that are looking to expand their platform, and they've been partnering with smaller REITs and private equity firms as they've approached us. So a combination of operations, operators that are actually bringing significant capital partners to the table.

Okay, thanks. And then just on senior housing, as well, in the UK, you're converting the bridge loan into ownership for some properties there. Was the option to just be paid out on that loan and you're deciding to convert to equity? Or could you just provide a little more detail on that decision?

Yes, let me just explain the purpose of the loan. We put the loan in place because the way this company was organized, you had an operating company and all the assets related to that company, real estate included, co-mingled. What we're doing, or what Maria Mallaband is doing while the loan's in place is they're reorganizing the company.

So that if we fall through on our intention to purchase the real estate, then we would be buying the real estate assets separate and apart from the operating assets. And that is our intention. Any other questions related to the -- that portfolio?

No, thank you.

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

Thanks. I believe you touched on this a little bit earlier in the call, but can you give us some additional color on the debt investments that are prepayable in 2017? I believe they're two of the Tandem loan, and I think you talked about the AC1 loan a little bit.

I'll just start with the AC1 loan. That's prepayable, and there very well could be a prepayment. That's something we'll work through with the borrower, but we have that currently in our guidance.

That's something we've already factored in. So that one is -- has been considered. We'll see where it falls out. As to Tandem, do you want to take that one, Justin?

Sure, let me touch on Tandem. That investment, it's a $257 million mezz investment that we made to a PropCo. That investment, you probably noted, is actually on the watch list, and the reason for that is just performance issues and headwinds in the skilled nursing sector.

But it's also important to note that it is a PropCo investment. So there's a 1.29 debt service coverage ratio covering our debt investment. And that -- what's covering it is a rent income stream and then you have an operator above and beyond the rent income stream that's responsible for it.

At this time, based on just some of the issues the operator's facing and the status of the loan, we're not anticipating any payoff. We think that we'll continue to be in this investment for -- throughout 2017. However, it is something that we're watching closely as well.

That one expires in 2018. So have you had discussions with -- do you want to collect that fee once it expires or what's the plan there?

We are -- and to my point earlier around debt investments, we are prioritizing recycling into real estate investments. And so, usually we're going to prefer a loan payoff, and at this point in time, that's how we think about the Tandem investment.

Great. Thank you.

Thank you.

The next question comes from John Kim of BMO Capital Markets. Please go ahead.

Thanks. Good morning. I wanted to follow up on the noise in your senior housing triple-net guidance, which I think you said, Justin, that it includes improved performance at Sunrise. I'm just trying to understand how that would impact your triple-net income and if Sunrise got any relief on the cash rent last year.

Sure, John. As you've noted, I mentioned some of this in my prepared remarks, so let me give you a little bit more color. The Sunrise performance did decline in the quarter, and that was driven by a lower add rent versus the prior year. There were past due rents that burned off, which caused the income to HCP to drop in the fourth quarter.

I should also note that the occupancy remained steady at 89%. The lease coverage remains solid at a 1.1 times. And since this is not expected to occur in 2017, we anticipate a higher contribution from the Sunrise portfolio, as I noted in my prepared remarks.

The way these are structured, these are leases with an add rent component, which can contribute triggers for additional rent payments to HCP. It's a legacy structure. It came to us when we did the CNL transaction years ago.

So add rent, is that like a percentage rent concept in retail or how does that work?

Well, this is Tom. What it is, is the way these things were structured is that there's a mechanism that determines when certain cash payments are made. And if the lease payments are not able to be made due to the operations, then they'll accumulate, and at a later date, then the payments can be made when the cash is available.

So the bottom line is it just can create a little bit of lumpiness sometimes in the earnings stream, and that's just what you've seen. From time to time, you'll note that we'll have a positive number come in that creates a bit of lumpiness, and it can go the other direction as well.

Okay, and then my second question is on revenue-enhancing CapEx. Can you just maybe provide some detail on the returns you expect on this? And in particular, the revenue-enhancing CapEx in your triple-net portfolio, does that actually mean a higher rent for you or is that just revenue enhancing for your partner?

The revenue-enhancing CapEx, I'd have you think about it in terms of there are two different places we're spending money. One is in triple-net and in that case, we do get a return on it on and of the investment. So that's how that works.

And the revenue-enhancing CapEx around our SHOP portfolio is what I described a little bit earlier, but I'll give you just a little bit more color on it. It really comprises what we think of as four different buckets of opportunity.

Sometimes there are -- and a lot of this is on the SHOP assets that we purchased fairly recently where there was some work that needed to be done. And we could have put it in as initial capital expenditure [ice] type money, but we're treating it this way instead.

We'll take units down, either on [kerns] or sometimes in blocks, but they can involve -- the four buckets are renovations of old and tired units, and make them look new again. Conversions, there can be energy savings-type programs; sustainability; and then just pure unit upgrades.

The other thing is that we've got some large categories of spend around completely sprucing up common areas or conversions where we might take an AL to a memory care. So that's where we're spending our money on the SHOP side.

Do you have an estimate on the yield or expected return?

Yes, we've actually been doing a fair amount of work around that, and we do have some calculations. I tell you what the difficulty in it is, is that the measurement of it is hard, because you have a variety of components.

For instance, when you take an asset down, how do you factor in the down time on a unit, relative to then the earn-in of the spend, especially if that property might have been 85% occupied? How do you deal with certain defensive-type investments where you had an older investment that could slide relative to the new product? And in a defensive action, we can bring that asset to something that looks much more new, and capture rent.

So I would say this, we are working toward identifying a way to quantify that spend and be able to speak to it more clearly, and we're part of the way through that process, but not ready to lay that out yet. But I will add this, we do feel that we're getting a good return on our investment.

Okay. Looking forward to following up. Thank you.

Thanks.

The next question comes from Tayo Okusanya of Jefferies. Please go ahead.

Good afternoon. Just a couple of quick ones from me. First of all, just going back to the life sciences portfolio, you guys seem fairly confident about (inaudible) of The Cove. But there's just so much development happening in that market with ARE, possibly BioMed, the Chinese development, and all that stuff is meant to come online, 2018, 2019. How confident do you feel that Phase III really can be as successful as Phases I and II with all that development?

Tayo, it's Jon Bergschneider. I'll start by saying that we continue to be very positive on the South San Francisco market. Again, tracking well in excess of 2 million square feet of demand.

But more importantly, right now where we sit, there's a couple things going on in South San Francisco. You mentioned ARE, Merck, that is a build-to-suit of fallow land on East Grand Avenue, so it's not really competitive supply; it will be construction. It will be great job growth for South San Francisco, so I think that's a real positive for the market.

In terms of competitive supply, really with what The Cove has done is established a, I'll call it a center of gravity in South San Francisco, where we have an established set of amenities that are up and running, tenants occupying, doing business, the hotel coming online in Q3 of this year. So I think we still have a superior site there.

Sitting here two and-a-half years after the first release, I think we had to expect some supply coming online based on our success, and we factored that into the economics and underwriting that we put forth in Phase III. So we feel really good about where we sit right now.

Great. That's helpful. And then, I'm drawing a blank, the non-accrued loan in Europe on -- why am I drawing a blank on the --?

You're talking about Four Seasons?

Yes. Thank you very much. On Four Seasons, is there any update there? I know that's probably one of the ones you're trying to convert over to real estate as well.

Four Seasons, as you know, we had impaired that a while back. It's on our books. It is non-earning. And how would I want to describe it? We're working on it. So stay tuned on that one.

Got you. All right. Thank you very much.

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

Just getting back to the MOB transactions in the quarter, were there any repricing going on, late negotiations, this would be post-election? You've got chatter, the repeal of the Affordable Care Act coming to the surface. And then, if you can just go you through the cap rates for each of the deals. Thanks.

Hi, Todd, this is Tom Klaritch. There was no retrading of anything toward the end of the deal. All the metrics we looked at in the underlying underwriting was in line with what we expected, so did not retrade it.

The cap rate on the CHS transaction was 6%. The other two, which were Twin Peaks -- Twin Creeks, I'm sorry, and the Kingwood transaction were in the 7% to 7.2% range.

Okay, thanks. And then just look at the lease rolls for those. Can you just go you through the lease rolls and what that may look like over the next two years or so, and how rents are looking compared to market?

The CHS transaction was a 15-year master lease, so there's no roll on that for 15 years. The two smaller transactions are typical of a multi-tenant MOB; they're in the 10% to 15% a year range. And as we see in most of our portfolio, the retention is very strong, in the 75% to 80% range, so we tend to keep those tenants.

Okay. Great. Thank you. Congratulations to Peter.

Thank you.

The next question is a follow-up from Michael Knott of Green Street Advisors. Please go ahead.

Hey, guys, I know it's been a long call. Sorry, this will be quick, other than I just preface it by saying, Tom, sitting here in Newport, I can see some snow-capped mountains. So I can understand why you said Denver a while ago.

My wife was skiing yesterday, so I was thinking about that.

My last question would just be on the AL versus IL difference, as you guys think about your portfolio's construction and how you might allocate capital over the next few years, can you just talk about any changes you see in your weighting AL versus IL and how you view the tradeoffs of IL being more cyclical, but AL being more needs based but more supply now? Thanks.

Michael, it's Justin. Let me start by describing the -- you made a point, I'll just describe the difference between the two. Clearly, assisted living is a more needs-driven product. So is memory care.

You're dealing with, usually there's an incident at home, family has to pursue medical care, and then there's a quick decision that occurs in terms of whether the loved one needs placement. That's a need-driven demand characteristic, which obviously makes that product very popular and has led to developers to pursue new supply in assisted living.

The independent living product is a discretionary decision. There could be -- there's some need-driven component to it; let's call it a third or so of the residents that move in probably do have some needs. They might access home health services.

But by and large, there's some planning involved. They're going to sell a home ahead of making the decision to move in. You have a longer length of stay with independent living. You have a short, about three years on average, plus, in independent living; you're two years and under in assisted living.

And so, there's a little bit more risk associated in one versus the other. Assisted living has the need driven, shorter length of stay, there's a regulatory component. Both are private pay.

And so, as we're looking at it, and Tom made this point earlier when he was talking about the growth expectations for the Company, it really comes down to where we're buying the asset. Does the market have strong supply/demand characteristics? Who's operating it? Do they have a long track record in creating value within that product type? And the risk-adjusted return.

And we're going to probably get a little bit better yield on assisted-living investment. We'll get a little lower yield on independent living, but that will be a consideration we make at the time.

Okay. Thanks.

This concludes our question-and-answer session. I would now like to turn the conference back over to Tom Herzog for any closing remarks.

Thank you, Operator. In summary, just let me tell you how we're thinking about the business broadly, post our repositioning. As we view it, we have a high-quality portfolio of private-pay assets, a solid and improving balance sheet, and an experienced team of healthcare professionals excited to be back playing offense, who are focused on operations, transactions, and adding shareholder value. We've largely recaptured our cost of capital with opportunities for further improvement, and are now well positioned for future growth.

So with that, I want to thank all of you for joining us today. We look forward to meeting with many of you over the next few weeks, and we'll talk to you soon. Thanks, everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.