Healthpeak Properties Inc (PEAK) 2017 Q2 法說會逐字稿

Good morning, and welcome to the HCP, Inc. Second Quarter 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 of Finance and Investor Relations. Please go ahead.

Thank you, operator. Welcome to HCP's Second Quarter Financial Results Conference Call. Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurances that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and are included in our SEC filings. We do not undertake any duty to update these forward-looking statements.

Additionally, certain non-GAAP financial measures will be discussed on this call. In Exhibit 3 of the 8-K we furnished to the SEC today, we've reconciled all non-GAAP financial measures the most directly comparable GAAP measures in accordance with Reg G requirements. We've also provided reconciliations of these measures to the most comparable GAAP measures in our quarterly report on Form 10-Q, which has been filed to the SEC today and is available on our website at www.hcpi.com.

I will now turn the call over to our President and Chief Executive Officer, Tom Herzog.

Thank you, Andrew, and welcome to HCP's Second Quarter Earnings Call. Joining me on the call today is Pete Scott, our CFO. Also in the room and available for the Q&A portion of the call are Mike McKee, Executive Chairman; Senior Managing Directors, Jon Bergschneider, Life Science; Tom Klaritch, MOB; and Kendall Young, Senior Housing; and our General Counsel, Troy McHenry.

Q2 is another active quarter for the company, during which we continue to make progress executing on our previously stated strategic goals. We remain on target to meet our full year FFO as adjusted and company-wide cash SPP guidance. For 83% of our business, which included MOBs, life science and senior housing triple-net, same-property performance exceeded our expectations while our SHOP performance, which constitutes 17% of our portfolio, underperformed their expectations. So again, despite a reduction in SHOP, in aggregate, our cash SPP guidance is unchanged which highlights the benefit of our well diversified portfolio.

Across the senior housing industry, results have been challenged by outsized new supply, higher compensation costs and a bad flu season. Our SHOP portfolio consists primarily of assets managed by Brookdale. And during the second quarter, our Brookdale occupancy fell more than we had expected. In discussions with Brookdale's senior leadership, in addition to new supply and the bad flu season, we believe the root causes for the higher-than-expected decline in occupancy included delays in sales and marketing spend and above-average sales director turnover. In our view, both of which were exacerbated by the distraction of Brookdale due to their current process of evaluating corporate strategic alternative.

Brookdale has been responsive to our concerns and is executing corrective measures. Regardless, due to the sharp drop in Q2 results, our guidance includes assumptions that are more conservative than forecasts provided by Brookdale. There is no reason that, over time, our Brookdale SHOP portfolio, which has much less exposure to AL, should not perform at or above NIC averages, and Brookdale senior management team agrees and is working to recapture normalized SHOP operating results.

Of note, as we've consistently stated, we're continuing our efforts to identify ways to reduce our Brookdale concentration to 20% or less. In the last 12 months, we have sold or transferred 67 Brookdale properties, a 40% interest in RIDEA 2 and are currently marketing another 27 properties. Despite the current challenges, we continue to believe HCP is positioned to take advantage of the upcoming demographics that will fuel the senior housing industry for years to come.

Turning now to our other 2 core businesses. In the first half of the year, our MOB platform continued its strong and steady performance with 87% tenant retention, better-than-expected leasing and 92% occupancy. Note that our MOB portfolio benefits from our high proportion of on-campus properties, which naturally contributes to the strong retention and ability to backfill space as it becomes available. A long-standing portfolio and management team have some of the best relationships in the sector, and we have recently added UTHealth, Virginia Mason Hospital and Baptist Health in Louisville to our existing key relationships.

Our life science portfolio continues to perform extremely well, and we're currently enjoying 97% occupancy. To date, in 2017, we've been able to backfill space quicker and at better rents than initially projected. Additionally, through development projects and strategic transactions, including value-add acquisitions, we're able to add properties in certain of our existing campuses, which is core to our life science strategy. In South San Francisco, The Cove Phases I and II are 100% leased, and construction is underway on Phase III. We're encouraged by leasing traffic on Phase III and are seeing interest in Phase IV as well. We're also advancing our predevelopment activities on our next premier waterfront site, Sierra Point, a future 600,000 square-foot multi-building life science campus near The Cove.

The healthcare real estate transaction market has recently been very competitive in terms of pricing for high-quality assets. Although we have participated in all or most of the relevant transactions, we've been careful to not overreach on pricing. During the first half of the year, we have closed or have been awarded approximately $200 million of acquisitions and development transactions. Our current estimates is that we will close or commit to transactions in the range of $500 million to $750 million for the year. This is below what we consider a normalized transaction pace, but we think that caution is justified under current conditions.

Consistent with our strategy to exit our mezzanine debt investments, in late June, our HC-One loan was repaid in full. And combined with our Four Seasons sale last quarter, we generated over $500 million of proceeds by exiting substantially all of our U.K. debt investments. We also announced this morning that we recorded a $57 million write-down on our Tandem investment and entered into a definitive agreement to sell Tandem for $197 million. Pete will address this further in a minute. Importantly, Tandem is our last remaining highly leveraged mezzanine debt investment and our last pure SNF exposure. We have continued to take actions to further strengthen our balance sheet with the goal of achieving BBB+ credit metrics over time. Included in these actions was a successful tender offer of $500 million of our 2021 debt that was completed last week. As a reminder, we have no major debt maturities until 2019.

Finally, last week, our board adopted corporate governance enhancements for our shareholders by opting out of the Maryland Unsolicited Takeovers Act, or MUTA, as it is commonly referred to. Additionally, our board reduced the requirement for shareholders to amend the bylaws from a supermajority to a majority standard. These topics have been in focus, and our actions are consistent with our commitment to good governance practices.

With that, I'll turn it over to Pete. Pete?

Thanks, Tom. Today, I will cover 4 key areas: one, our second quarter financial results; two, an update on our recent investment, redevelopment and development activities; three, an update on our balance sheet; and four, a review of our full year updated guidance.

Let me start with our financial performance. We reported FFO as adjusted of $0.48 per share. Additionally, our total portfolio delivered year-over-year same-store cash NOI growth of 2.1%, driven by strong performance in the majority of our portfolio, although offset with underperformance in the SHOP segment.

Going into more detail on our major segments. Medical office reported same-store cash NOI growth of 2.6%, driven primarily by contractual rent steps. To life science, our same-store portfolio is 97% leased and delivered year-over-year cash NOI growth of 3.7%, driven by lease escalators and leasing activity. For our senior housing triple-net portfolio, same-store cash NOI grew 2.6%, which was in line with expectation.

Now let me turn to SHOP. As Tom mentioned, our portfolio was adversely impacted by industry-wide headwinds and year-over-year cash SPP decline of 1.6%. Our assisted living and independent living portfolio declined by 0.5%, and our CCRC JV portfolio declined 9.1%. I will provide more detail on these 2 distinct portfolios in a minute. Overall, while our SHOP portfolio had strong rate growth in the aggregate of 4%, our operating results were negatively impacted by above-average expense growth, especially in our CCRC JV portfolio, and year-over-year occupancy declined 190 basis points, which was heavily concentrated within a small group of underperforming assets.

Let me spend a moment going into detail on the 2 components of our same-store growth in the SHOP segment: the assisted and independent living portfolio, which comprised 88% of our cash SPP NOI this quarter; and the CCRC JV portfolio, which comprised 12%. We have added additional disclosure on our supplemental, on Pages 34 and 35, on each component to help investors better understand the drivers of ours SHOP results.

As I mentioned previously, these portfolios are distinct and experienced vastly different SPP growth this quarter. One important reason for that, in our SPP calculation, we exclude the net revenue impact of the nonrefundable entrance fees collected at our CCRCs while fully burdening the SPP NOI with the property operating expenses. This results in very high SPP operating leverage, which magnifies the impact that CCRCs have on our SHOP SPP, which could be positive or negative, depending on the performance. The evidence of this volatility is clear as we have disclosed year-over-year cash SPP growth ranging from a high of 27.2% in the fourth quarter of 2016 to a decline of 9.1% this quarter. We believe an important benefit of separating out the CCRC JV portfolio is that it allow investors to see how our more traditional AL/IL portfolio is performing on a relative basis. We will continue to include CCRCs in our reported SHOP SPP and guidance range.

Now moving on to our investments, redevelopment and development activities. We have spent considerable time building up our investment pipeline, and we're starting to see results in our flow business. On the acquisition front, in our life science segment, we acquired Wateridge Corporate campus, a 2-building office campus comprising 124,000 square feet in the Sorrento Mesa submarket of San Diego for $26 million. Campus is located approximate to our current Sorrento Summit and Director Place campuses and fits squarely within our life science strategy of acquiring and owning assets within our core clusters. Shortly after closing, we commenced repositioning one of the buildings, comprising 50,000 square feet, into Class A life science spaces. You'll notice this project was included in our redevelopment schedule this quarter. In our Medical office segment, in July, we closed on 3 asset portfolio of MOBs located in the Fort Worth and Austin markets for $49 million. This multi-tenant properties include tenants such as UnitedHealthcare and Baylor Scott & White.

Moving on to development and redevelopment activity. During the quarter, we entered into 2 senior housing development joint ventures for an aggregate cost of $62 million with our share being $54 million. In our redevelopment pipeline, we added 3 projects with a total spend of $62 million.

On the disposition side, let me briefly touch upon the previously announced Brookdale 25 process. We are under contract to sell 5 assets for $31 million and expect the transaction to close later this year. We continue to market and assess the remaining 20 assets and expect to sell or transition them by the end of the year.

Let me spend a moment on Tandem. For the quarter, we continue to receive our regularly scheduled interest payments. However, as you can see from our supplemental, the performance of the underlying collateral continued to decline, and as part of our quarterly review process, we took a $57 million impairment charge on our $257 million loan investment. Subsequent to quarter-end and the aforementioned impairment, we reached an agreement with the borrowers, subject to customary closing conditions, to sell them our loan for $197 million. The purchase price approximates our adjusted book value, and our agreement requires a closing on or before December 31, 2017. And in the closing, the borrowers are required to continue to pay us our full interest payment based on the $257 million original loan balance.

Moving on to the balance sheet activities for the quarter. In May, we repaid $250 million of senior notes upon maturity, and subsequent to the quarter end, we completed the repurchase of $500 million of our 2021 5.375% senior notes through a tender offer. The bond tender supports our deleveraging plan, and we remain on track to achieve our target of low to mid-6x net debt to EBITDA and financial leverage in the 43% to 44% range by year-end. As of the end of July, we had total liquidity of approximately $1.7 billion.

Now turning to our full year guidance. We are reaffirming our full year 2017 cash SPP NOI growth guidance of 2.5% to 3.5%. In terms of individual segment forecast, we're benefiting from a diverse portfolio across the private pay healthcare sectors with several of our segments outperforming through the first half of the year. Accordingly, we're increasing cash SPP NOI growth guidance for life science, medical office and senior housing triple-net: for medical office, 2.5% to 3.5% from 2% to 3%; for life science, 3.5% to 4.5% from 2.5% to 3.5%; for senior housing triple-net, 5% to 6% from 3.9% to 4.9%. As it pertains to SHOP, we are revising our full year 2017 cash SPP NOI growth guidance to a decline of 3% flat from 2% to 3%. The top end of our range lines up with Brookdale's current forecast for our SHOP portfolio. We are taking a more conservative approach and widening our range. Importantly, as we reviewed performance from last quarter, we identified 6 properties that contributed approximately 100 basis points or about half of the occupancy decline. We intend to vigorously asset manage this portfolio. And if we don't see an improvement in performance, we may look to reposition or dispose of some or all. If we were to remove these assets from our SPP portfolio, our SHOP guidance range would be about 150 basis points higher.

Moving on to our per-share metrics. We are reaffirming our full year FFO as adjusted per share to range between $1.89 and $1.95. Note, we have already taken into account the anticipated Tandem mezzanine loan repayment as part of our reaffirmation and assume a closing in the fourth quarter. We are decreasing our full year NAREIT FFO per share to range between $1.73 and $1.79, down from $1.99 to $2.05. This decrease is primarily the result of the Tandem impairment and debt extinguishment charge from the tender offer, which we will book in the third quarter. These items are not included in our FFO as adjusted. Page 48 of our supplemental provides a major assumption and other miscellaneous items embedded in our 2017 guidance, along with the comparison to the guidance provided in conjunction with our first quarter earnings call in May.

With that, I'd like to turn the call back over to Tom.

Operator, we're ready for questions.

(Operator Instructions) Our first question comes from Michael Knott of Green Street Advisors.

Can you give us some color on just sort of the process of setting SHOP guidance? It sounds like Brookdale's expecting or guiding you to 0. For the full year on SHOP, sounds like you guys are widening that a fair bit. Did the prior range reflect just solely Brookdale's input? And so can you give us just some color on that? Because of the -- I think a 3% -- negative 3% for the full year would imply something like a negative 3.5%, I think, for the second half of the year. So just curious if it can really get that negative or not.

Michael, it's Tom Herzog. Yes, if we have set guidance last quarter, we certainly had utilized some of these functions that we've worked together with on Brookdale. And as it played out, during the quarter, obviously, across the industry, the NIC data showed that the results were down more than expected due to supply and flu. But HCP SHOP portfolio for Q2 declined further than we had expected. But I would note that, that was partially offset by favorable rate growth. So when you look at the decline in the occupancy versus the uptick in the rate, revenue guidance is down about 100 basis points in total and expenses is unchanged. When you couple that with the operating leverage, it puts us at about 400 basis points down in projected NOI for the year. So as to how we look at the guidance is we utilized what information we had. We considered some of the things that we determined through meetings with Brookdale that had caused the decline, things like sales director turnover, delays in sales and marketing and a variety of other things and feel that there -- that we -- it's possible that we're being a bit conservative, but we felt it appropriate to guide down in the occupancy further than what their projections are as we set our guidances up for the balance of the year.

Yes. Based on recent track record there, that's probably not a bad assumption. Can you talk about CCRCs? And I know this was sort of a little bit of an emphasis of some of the prior regimes that -- at HCP. Does this sort of help you think about whether you want to continue to own CCRCs in the future? Or what's sort of your stance on that today, given that 10% of the SHOP portfolio sort of really screwed up this quarter and the outlook for the year?

Yes. Let me just touch for a second, Michael, it's Pete here, on the CCRCs. We did have a decline of 9.1% year-over-year. And when including the nonrefundable entrance fees, that decline, obviously, comes down substantially to minus 3.4%. We don't include, as I mentioned, those nonrefundable entrance fees when calculating our SPP growth, and that was really originally intended to reduce volatility. But it -- for what was left, it actually ended up increasing the volatility there, creating this low margins and these high operating leverage numbers. We actually did experience, if you look historically, some pretty robust growth within this portfolio, positive 27%, as I mentioned in my prepared remarks. But as we look at that, generally, and we think about the amount of NOI that's in our SPP, the decline was really just $500,000 year-over-year, and we had experienced, in fact, some increases in prior quarters as well. Occupancy within this portfolio is flat. The entrance fees are flat, the expenses obviously went up, and that's something we're going to work with Brookdale. But I don't think that the $500,000 decline just year-over-year when you compare it to the quarter is making us say, "Oh my gosh! We need to get out of these assets right now." We'll think about these CCRCs alongside our entire Brookdale position.

Okay. And then maybe just last one for me. Why would -- halfway through the year, why would a triple-net portfolio guidance go up so substantially?

Yes. And Michael, I'll touch on that again. That really has to do with Sunrise. And I think what we disclosed before is that there's some add rent component to the Sunrise lease. There was some positive performance in the first half of the year. That resulted in us taking it up. So it's really just the results of Sunrise.

Our next question comes from Jordan Sadler of KeyBanc Capital Markets.

So my first question really comes back to the SHOP portfolio. I guess the CCRCs are obviously an important piece, but I'm looking at your same-store portfolio as it relates to just the assisted living and independent living, and occupancies are doing 240 basis points year-over-year so at 100 basis points sequentially. And you've obviously, as a result, made a pretty significant revision to the guidance. And I -- looking at relative to what Brookdale is guiding, it seems that your confidence level in either Brookdale or these numbers overall would be relatively low. Is that a fair statement?

Jordan, I would say this. Brookdale has been in the middle of a process that's widely known as they consider their strategic alternatives. And with that, obviously, there's some distraction that can occur that can exacerbate the results that we're seeing. And as we look at the numbers and had conversations with them, it's not that there is not a game plan around how to correct some of the slide that we saw, but we didn't feel it appropriate to factor that into the guidance that we wanted to create this quarter. So rather, we took a more conservative approach in that guidance, and in the second half, we're going to focus very hard, at a senior level, frankly, at how to turn these assets around or deal with them appropriately. So as far as confidence, we know they're in the middle of a process. We know that they have a lot going on, and they are working hard, together with us, to seek resolution to this. But again, we felt it appropriate to add some conservatism to the numbers.

I appreciate the answer. The -- my next question is a follow-up. It's just really they're in a difficult position, given the -- what they're working through, but they're not a captive. They're a partner of yours, and it's obviously got to be pretty frustrating that it's taking this much time as you've had to work through some other challenges as well as a new management team. I'm curious. Are they at risk of breaching some covenant or issue within the management agreement? And then what would you like to see out of this strategic process?

First, no, they're not at risk of breaching any covenants at this point. So that's not of issue. I mean, we're in a position where we need to work together as partners to a resolution. As to what we're seeking or what we would like to see out of the process, I think there are a number of different directions and I won't speculate on that topic on this call. But I will tell you that regardless of what direction it goes, we will be proactively working to improve our position over time. So that much I can tell you.

Our next question comes from Juan Sanabria of Bank of America.

I was just hoping you could talk to -- within the new guidance for the RIDEA portfolio, what are the assumptions behind the top and bottom in terms of occupancy rate or expenses and whatever you can say there? And if you could give us any sense of kind of trends in the third quarter to date.

Yes. Juan, it's Pete. Let me take that question. So the revised guidance assumption here, these are all compared to a full year 2016, we have occupancy decreasing 200 to 300 basis points, REVPOR increasing 3.5% to 4.5%, resulting in overall revenues up 1% to 2%, but expenses up 2% to 3%, and that's what translates into the negative 3% to flat. As I mentioned and as I said a few times, the high end of our guidance, which is flat, is in line with Brookdale's forecast while the bottom end, as I mentioned, to those numbers is the conservatism that we've modeled in. I think -- one other thing I'm going to say, generally, about the guidance is, obviously, we hope Brookdale is right and they hit their numbers. As we think about our assumptions, we assume another 80 basis points of average occupancy declines from where we ended the first 6 months. We have an 87.5% average occupancy number for the first 6 months, and that's in our supplemental. So our assumption sort of at a midpoint is down to 86.7% at the end of the year. So that's about 80 basis points there. We're confident that our initiatives with Brookdale will have a positive impact on performance, but there is a lag time associated with the ability to actually get that performance. And then lastly, the widening of the range, I think it's important to just point out that we widened it because of the CCRC volatility. Before, we had a much more narrow range. We felt it was appropriate to have a wider range as long as we have the separate disclosures too, which we thought would be helpful. With regards to your second question on what trends are we seeing, I think it's too soon at this point in time for us to have really any numbers to report. I would say that in July, we may be experiencing, through the first 2 weeks, some additional declines in occupancy, and that is part of what's led us to believe to widen out our range and be more conservative.

And then just on this senior housing triple-net side. Given what we're seeing and what you're saying about Brookdale's performance on the RIDEA side, I mean, how comfortable are you that pro forma coverage on an EBITDAR basis will be kind of that targeted 1.2x? And any risk there?

This is Kendall. If you look at the information that's in the supplemental, that's one quarter in arrears. So you can imagine that the triple-net portfolio will perform consistently with how the RIDEA portfolio performed in the second quarter. So we would expect to see a dip in that coverage in the second quarter. But if you look at our Brookdale -- our coverage on a relative basis at 1.34x EBITDAR coverage, we think that's an adequate coverage.

Okay. And then just lastly, if you could just -- I think you made allusion to the -- what's remaining of the non-core Brookdale assets, the 25, kind of your confidence in -- at being able to sell those and kind of what the appetite's been for those assets, and I think you alluded to maybe looking at some more dispositions kind of -- if you can give us more color on that?

So we have -- of those 25 assets, 5 of those are under contract with a hard deposit. We're out marketing in a few portfolios the remaining assets, and we have a few of the properties that we would likely transition to new operators. Of the assets -- remaining assets that we're trying to sell, we've had a, I'd say, strong interest in those properties, and we're moving on into the second rounds of our sales processes in those assets.

I would add to that, that of the Brookdale 25 -- for the 20 of that, we still have -- that we're marketing, we are assessing some of those assets as to whether we prefer to retain them and transition them to other operators. So whether we sell or transition, those are both alternatives that are under consideration.

And any color on what's expected beyond the 25? I think you've kind of alluded to that in the prepared remarks.

Yes, not at this point. That depends on conversations that we'll be having with Brookdale over the coming months.

Our next question comes from Vikram Malhotra of Morgan Stanley.

So just on the IL/AL RIDEA growth, the negative 0.5%, can you give us a breakout? What -- how did IL perform versus AL?

So if you look at the -- that break out, they performed roughly the same on an occupancy basis. I think if you look at our -- the bottom-performing assets -- so Pete talked about the 6-bottom performing properties, and roughly half of that are majority independent living and half are majority assisted living. So they're performing roughly in line with each other.

So that's on a year-over-year basis. Just to be clear, that's on a year-over-year basis. Whereas if you look at it sequentially, you'd see something different. Just to avoid confusion on that.

Okay. So you're saying that IL same-store NOI and AL same-store NOI year-over-year was very similar.

I think if you look the -- on an occupancy basis, they were roughly the same. If you look on an NOI basis, just because of the margin, the assisted living performed slightly less than the independent living.

Okay. And then just in your earlier guidance going forward. Are you assuming any different trends between the 2 poles? Or are you assuming just both perform again similarly?

Yes. As far as guidance at this point, Vikram, we're blending them rather than breaking them out separately.

Okay. And then just on your senior housing triple-net, in the -- on your expirations page, there is a pretty big chunky expiration coming up next year. Can you give us a bit more color on that expiration and sort of where are you in the discussions?

Well, which expiration are you looking at specifically?

Yes. On Page -- if I go to where you gave your expirations, if you look at 2018 on the triple-net side, so Page 25.

Yes. Hold on, (inaudible) that.

We're looking into that. Let us come back to you on that.

Okay. And then just on the MOB side. If I look at the expirations, the $57 million -- sorry, the $37 million for this year versus the table below, which includes purchase options, the $45 million, is there a purchase option in there? And can you just give us more color?

We have several purchase -- this is Tom Klaritch, we have several purchase options that have been in the money for a number of years. We don't anticipate anybody exercising on those. But they're out there, and we adjust those accordingly. But at this point, we have no indication that there'll be anybody exercising those purchase options.

And when -- is there a specific date when that -- when they have to give you a notice?

Well, there's a number of them, and they're all different. Like for example, there are several that are in the money right now, actually, 6 of them, and they were exercisable anywhere from 2007 to 2013, and again, we've not seen those -- any interest in exercising those. We do have some more that will be coming up. Most of those are beyond 2020. So we have several in '21 and '22 and then some more further out from there. But generally, that's fair market value.

Okay. And would you want -- did you want me to follow offline on this -- on the triple-net expiration?

So actually, we can answer that.

So there's a couple of things going on there. On the Brookdale side, you have the 25, the Brookdale 25, where we reset expiration to 2017. And then the -- in '18, you have predominantly our Sunrise MA3 C lease that we expect them to extend.

Okay, got it. And so just quickly, clarifying on the medical offices. You said they're in the money, but you don't expect them to exercise.

That's correct. As I said, some of them have been exercisable since 2007 and '08, and there's been no indication of interest in exercising those.

Okay, got it. And just to clarify, is there a fixed price to that? Or to most of those?

No. They're all generally at fair market -- the greater of fair market value or, in many cases, the original cost. But it's usually the greater, and the fair market value is normally what we'd look to.

Our next question comes from Smedes Rose of Citi.

I was just wondering on Brookdale. Have they been changing their approach to spending as they go through their process, either in terms of property level spending or their overall marketing expenses?

So look, I can only speak to our portfolio and not Brookdale's portfolio. We've developed some initiatives with some action plans with Brookdale to improve performance, and one of those is to increase our marketing and advertising spend. We were lower in the first half than what we have budgeted, and we know that those types of expenditures generate leads. And so we are increasing our expenditures in the marketing and advertising side in the second half.

Okay. And then just broadly, could you talk about any changes that you have seen in terms of interest in foreign capital as it pertains to senior housing?

Look, we know there are -- there is foreign capital in the market. And we've met with them as others have, and we know they have interest in transactions. We've heard of some deals that they have invested in. But so far, I think it's -- I call it more of a strong interest level than having executed on a large share of the transactions.

Our next question comes from Michael Carroll of RBC.

Tom, can you talk a little bit about your desire to reduce your exposure to Brookdale? What's the exact strategy here? Is this going to be more one-off sales? Or are you willing or able to complete a larger portfolio sale to achieve that goal?

Michael, again, it's Tom. This question, it's not one that I can speak to with specificity on this call though, because again, Brookdale is in the middle of a process. I have been in conversations with the senior management at Brookdale, and it would be premature for me to speak to the proactive measures that we'll be taking over time to reduce the exposure. It's a fair question, but not one that I can answer right now.

Okay, great. And then Pete, maybe can you give us some color on the Tandem loan sale. When will that close? Could you remind us who the buyer was? And do they already -- did they already receive financing to buy that loan?

So good question, Mike. So as we announced, it's $197 million of purchase price. The buyer, who is the borrower, which is a real estate private equity firm that focuses on the post-acute space, they posted a $2 million nonrefundable deposit. They have until October to close. They will post another nonrefundable deposit August 1. And then if they have not closed by the end of October, they have the ability to extend by posting additional hard money and/or paying the loan down by at least $50 million, and then they have to close by the end of December. I think it's important to note that this buyer or the borrower is also part of the ownership group of Consulate. And that's why we felt like it would be appropriate person to enter into an agreement with. They're working through the qui tam settlement and lawsuit on their side. So they're going to get some recapitalization initiatives completed and work through the Consulate, I should say, qui tam lawsuit and then anticipate closing sometime before the end of the year. So that's the construct for why we accepted hard money today, but we anticipate closing in the fourth quarter.

Okay, great. And do they have funds to close that deal already? Or do they need to raise more capital?

They would need to raise more capital, but they are a pretty savvy private equity firm that is in discussions with a lot of partners now. And they were willing to put money hard up because they felt like they were confident they could go out and raise the money.

Our next question comes from Jonathan Hughes of Raymond James.

Looking at the MOB portfolio, you bumped your guidance by 50 basis points there, and I noticed retention and leasing spreads were a bit higher than in years past. Can you just talk about what's driving the improvement there and maybe your expectation of these trends, how the health care reform is kind of out of the spotlight or at least moved to the sidelines in D.C.?

Sure, Jonathan. we've said -- you've indicated, we've seen better retention this year. We've been able to exercise early on certain renewals in the portfolio. Our average occupancy has been better than last year. It's tightened up a little bit in the second quarter, as you can see from the difference between first quarter and second quarter results, but certainly ahead of where we expected to be. And we've actually had some good results on saves. I would assume health care reform has something to do with that. Doctors are a little more comfortable staying where they are, and they're signing a little more longer term on their leases. And with the consolidations in purchasing of group practices, we're seeing more and more hospital tenancies. So you tend to get more stickier tenants, better retention and the more likelihood to sign longer leases.

Okay, that's great. And then just one more here. What was the cap rate on the $49 million of MOBs closed in July? And your -- where do you see pricing on your high-quality medical office assets in the post-Duke sale era?

Yes. I'll take this one, and then Tom Klaritch, you can add on, if you like. That cap rate came in roughly at a 6, just slightly above that. And as you've seen, high-quality MOBs, it's not uncommon to see 5 cap deals, portfolio deals in the mid-4s. We're seeing them all over the range, and we've been in the middle of a -- all the major transactions we've looked at and have had exercise some discipline because the pricing has gotten pretty heavy based on our underwriting, and we're willing to put capital out. But that's kind of the range of what we're seeing out there for MOBs.

Was that a relationship deal? Or was it marketed?

It was a marketed deal, but we did have a relationship with the seller. We had purchased another building from them 2 years ago. So that helped with us getting the deal.

And presumably, maybe better pricing?

Probably similar to what we would've expected.

Our next question comes from Chad Vanacore of Stifel.

So you're really widen down occupancy assumptions on the SHOP portfolio. Is that from BKD's relating to you? Or is that internal and more conservative estimates?

That's internal, more conservative estimates and recognition that that there's a wider range of potential outcomes based on how things go in the second half. So again, we just felt it appropriate to be a bit more conservative, plus widen the range some, recognizing that we could have some upside, but wanting to be conservative on the downside.

All right. Then if I'm right, if -- you're assuming both AL and IL are down, same-store NOI about the same. Then does that infer that your assumptions for AL just got much weaker than your assumptions for IL?

I think they're roughly in line with each other.

All right. And then just thinking about the 25 senior housing assets that you either had sold or are being shopped. What types of buyers have largely been interested?

So it runs the gamut, private equity, operators. There was very strong interest. We receive more MBAs than any other deals that we've marketed, so there's a lot of money out there interested in transactions. So it kind of runs the gamut of the private equity and operators.

All right. Then last question for me is, what kind of cap rate did you actually sell those 5 assets for?

Yes, it was a mid-6 cap rate.

Our next question comes from Rich Anderson of Mizuho Securities.

Pete, I just want to go back to your explanation as to why you have this big guidance rates for the senior housing triple-net portfolio. So more additional rent from Sunrise, that means Sunrise is performing better and that's translating into bigger rent payment to you. Is that the mechanism?

Yes, that's exactly the mechanism. What I would say, Rich, just to add on to that, I think we've talked about this on a few of prior calls too, I mean, this an inherited structure from the CNL acquisition in 2006. And the actual rent, as you just discussed, is subject to a waterfall that determines how cash is distributed. To the extent that there is positive performance at Sunrise, there's more within the waterfall, and that's that add rent component. So that's a driver of the increase. That's basically the driver of the increase. Now when you look at the rest of it, you'd say, well, "5% to 6%, that's awfully high for triple-net." We agree. There's some noise in there from the rent reallocation of the Brookdale 25, which is actually hurting us a little bit in the first few quarters. But then as the Brookdale 25 comes out, and I think I had this on my prior prepared remarks, that has an impact of about 1.8% of the midpoint range of the 5.5% there. So when you look at the Sunrise add rent as well as the Brookdale 25, which will cycle its way through this year, you get too much more traditional 2% to 3% growth as you would expect on just general lease escalators in triple-net.

Okay. So -- I mean, there's kind of a lead-in question to why Sunrise is exceeding expectations, and I understand what's going on at Brookdale. But is there anything else that explains the polarized performance of those 2 operators? Is there a geographical issue or an asset quality issue? Is there anything you could point to outside of just the issues going on with Brookdale?

No, it's probably more the issues going on at Brookdale. And Sunrise, with the portfolio we had, did see some upside. And based on that waterfall formula, that allows them additional income to flow our way. So some of it has been -- it's the results of being deferred. And once the performance occurs, then we get an outsized add rent bump. And that's sometimes why you see it look quite more negative on the Sunrise side and then more positive is that waterfall.

Okay. And then last question, the kind of irony with HCP is you're the anti-SNF large-cap health care REIT, and yet Tandem impacted your numbers, CCRCs, which include SNFs, impacted your numbers for 2017. So I'm just curious, you're addressing Tandem. Is there any idea -- since you basically have RIDEA exposure to skilled nursing by way of the CCRCs, have you considered just altering that structure to a net lease situation? Is that something that's potentially on the title -- table for CCRCs?

Again, this comes back to the conversations that we're having with Brookdale. The CCRC is from a joint venture of 15 assets that we have with Brookdale. And we're working through with them right now. What we might do proactively going forward and the-- CCRCs are part of that discussion, but we have to wait and see. It's way too early for us to speak to that.

Our next question comes from John Kim of BMO.

You reiterated that Scott Brinker will be joining you as Chief Investment Officer in January. I'm just wondering, given the ongoing litigations he has with his former employer, do you expect to have any litigation costs as part of the process?

This is Mike McKee, John. Let me speak -- answer your question, but also say, since we have the opportunity, that we are -- continue to be delighted that Scott is going to join us. When we extended an offer to him, we have done extensive diligence, talking to people he used to work for, used to work with, people that knew him from the client, the tenant side, just extensively did a review, and it led us to a strong belief that he would be a tremendous asset to our team. When we started the interview process, we wanted to protect him from the situation that he finds himself in now. And so we indemnified him from any liability arising from us extending the offer and him accepting it. That doesn't include any bad acts that he might have taken, if he did, in terms of exiting his performance -- or his employment. But it does cover just the -- some of the litigation cost here, and maybe all of them, protecting himself from this lawsuit as long as there's no merit in the lawsuit. I will say, since we have followed this closely, and although we are not a party, we're certainly, obviously, involved. We're very aware of the discovery and the process to date. And as we expected and as we know what as the recipient or the employer to be, we're pretty aware of the process that went on here. And as far as we can tell, there's no there, there. There may be, at the end of the day, some, what I would call, immaterial cost to bring him over and go through this litigation. But we think that is a cost that we were willing to bear to bring what we think is a very special person onto our team. I would also say that, frankly, I'll just say this personally, I continue to be very disappointed and frankly dismayed, as the process worked out and as we know the facts better than most, that Scott is having to go through this situation. But he will get through it. There is a trial date in November. In his recent pleadings, he's brought a countersuit for malicious prosecution and defamation. Whether that makes or not, there is a pretty good basis, it appears, according to the lawyers. That's not just a frivolous counterclaim. But at the end of the day, the dollars here are quite de minimis. And we think that -- we're not sure quite what the endgame is on the other side. But we know that come January, he'll be on our team, and we'll be better off for it. So hopefully, that helps.

Sure. I guess the cost are de minimis for your company. But for Scott, it could be pretty significant. I'm just wondering if you had guaranteed his garden leave?

Well, if by chance -- and we don't think this is going to happen, but if the litigation were to succeed and -- from Welltower's perspective, they would get his severance payments reimbursed. That's the damages they're claiming. And so we will make him whole for that. That was part of what we thought was the right thing to do, and that's what we did. We didn't know whether Welltower would take the action that they did, but we're not naïve in terms of how we look at the world. And so we really felt that he was such a special talent that the small risk of us having to write a check was worth it. But I will also say and emphasize that as we went through the process and he did, we had counsel review his noncompete agreement very carefully, line by line, and we set up processes and procedures to respect that relationship. I think he's been in our office about 3 quarters of a day for interviews, and none of those interviews we're asking him for any confidential information. Other than that, we've had only social phone calls. And he and his wife have been looking for housing in Southern California, and we've had lunch with him and so forth in that process as we introduce him to California. But in terms of any competing or sharing of information or commenting on deals or relationships, anything like that, there has been none of that conversation. So at the end of the day, this will all come out in court. He'll have his chance to tell the story. And as I've said, I just -- so far, I can't find anything. And I've been doing this -- been around this a long time. This one is completely inexplicable to me, and I don't think there's a there, there, but.

Okay. And then related follow-up. Is there anything on hold in terms of major acquisitions for HCP? The majority of your investment year-to-date have been on the development front. So I'm just wondering if that's you might get your balance sheet in order? Or are you just waiting for Scott to start?

We have a -- it's Mike McKee again. We have an active process in the pipeline. There are several deals that are in the couple hundred million to $1 billion range. Some of those are off-market, some of them are marketed deals. Our understanding from some of the broker community, that more will be coming in the third and fourth quarter. So we'll remain active. We were a little slower, as I think Tom mentioned, in the first half, based on discipline. Some of those larger transactions, like Duke, just -- we thought got too pricey, and risk reward, we didn't think was there. But I think we do expect that through the year, we likely will come out between $500 million and $750 million is our current internal thinking of where our transactions will lay out, both stabilize and development. That would be lower than we would think as the run rate, but we think that's the market we're in, in 2017. I think you're finding, as you look around, some of the other big -- the larger diversified REITs, they're slower than their normal pace as well. So that's more of the market, we think, than our interest in being in the market.

Our next question comes from Drew Babin of Robert W. Baird.

Question on life science. Looking at Q2 performance, it looked like occupancy was down quite a bit over the tough comp, but also renewals and new leases signed below expiring rents. Is -- what specifically gave you confidence to raise the life science guidance for the rest of this year? Is it just leasing performance in past quarters? Or is there something you expect to kind of boost the occupancy in the near term?

Yes. I think through -- it's Jon Bergschneider. Generally, occupancy is down, really, as it relates to timing of a chunk of expirations and subsequent leasing that transpired between Q2 and Q3 last year and then expirations this year. A bulk of that space has already been released. So we're going to see both occupancy and growth feather back into the portfolio over the course of the remainder of the year. Our mark-to-market on the quarter is down 18%. It was really driven a fairly significant lease in South San Francisco that came off about 15 years with 4% annual growth. So when we renewed that tenant with no downtime, obviously, we're going to see some downward adjustment that reflected in the negative mark-to-market. But we have several offsetting increases to date, which will then enure to the benefit of the growth in occupancy in the back half of the year. So we feel pretty good about that guidance number and the leasing that's coming ahead of plan.

That's helpful. And I guess taking that and rolling it forward some towards next year, would you expect that retention rates next year will look kind of similar to what they are year-to-date, plus or minus? And might there be a little more volatility, given the amount of leases that are expiring next year?

Yes. Generally, we've got about 1 million square feet expiring next year. We're generally at about 10% below market for 2018 expirations. Our retention rate does oscillate from quarter-to-quarter and year-to-year because our spaces are fairly large. So retention rate itself is not of an easy number to get your head around. But that being said, where we sit with our expirations, a good chunk of those are in the Bay Area. We don't have any major known move-outs at this point right now. The market is strong. Even if we do see somebody come to vacate a space, we feel good about where our real estate is positioned relative to the market and in rents that we would release the space at.

That's helpful. And one question, just on -- to the extent that SHOP assets are sold, the use of proceeds, would you be more likely to diversify away from Brookdale while redeploying within other senior housing operators or outside of senior housing entirely?

The answer is yes. We wouldn't intend to increase the Brookdale concentration. Our objective is to decrease it over time. And it easily could have -- moving some of those doors away from senior housing and diversifying more to MOBs and life science also is very much a possibility, over time.

Our next question is from Tayo Okusanya of Jefferies.

This Austin Caito for Tayo. Most of them are probably answered. But the last one I have was this, can you just discuss why adjusted FFO per share guidance is unchanged? You kept FFO guidance the same, but you have higher dispositions now with the activity around the HC-One and Tandem.

Yes. What I would say just generally about our guidance, we did have some benefits this year. One, we talked about last quarter, we had the Brookdale 25, which we, in our previous guidance, had assumed that it would be off our books a little bit sooner than it ended up being. Same thing with HC-One as well for this quarter. We had actually assumed it would've been repaid much earlier. It ended up getting repaid a couple months after. And so the aggregate of those 2 have been helpful to our overall FFO as well as FAD.

Our next question comes from Michael Mueller of JPMorgan.

Just a couple quick questions here. On the $500 million to $750 million of acquisition, I guess, guidance for 2017, just want to confirm that's not in the numbers. And then is that all operating properties that could be acquired? I know development was thrown in there. Is some of that development spend or properties that are bought that, ultimately, can be repositioned?

This is Mike McKee. The $500 million to $750 million, the only in the numbers now is what we've closed or under contract. So if it's not under contract, it's not in the numbers. It is an aggregate number. So if we have a development project under contract, that would be in that range that I gave you. Obviously, I think the weighting will -- should be towards stabilized properties, but there will be some development in there.

Okay. But this does not have development spend in there. So if we go to the development pages on the supp, this doesn't include normal spend on that redevelopment and new development pipeline.

No, this is new third-party projects.

Got it, okay. And then just one other question on SHOP occupancy -- well, I guess 2 questions. The 86.7% that was thrown out there, was that a full year average as of year-end? Or is that an ending?

That's a full year average.

That's a full year average, got it. Okay. And then the last one, if I could slip it in there is, do you know the second quarter occupancy deceleration? Did it feel like it accelerated through the quarter? Was it relatively flattish? Or just kind of what was the pace as you exited Q2 and went to Q3?

So the -- I would say the -- in the second quarter and the latter months, you're typically trending up in occupancy. We did not see that significant lift that we have in previous years. So we're still trending down a little bit, and we factored that into our second half estimates and our full year estimates.

Our next question comes from Todd Stender of Wells Fargo.

Mike, you mentioned some of the portfolios out there. When I kind of look at your cost of equity, doesn't seem like it could support some of the market cap rates we're seeing on portfolio deals. But your development, redevelopment yields and their spreads over to -- over stabilized assets seem a little more accretive right now. How do you guys look at your cost of capital right now relative to the in-place stabilized portfolios?

Thanks, Todd. I want to kick this to the cost of capital king, Herzog (inaudible).

Todd, the way that we look at it is we would think in terms of allocating new capital, where we go out and raise capital on a blended basis, equity and debt, and assess the cost of that capital relative to what we're acquiring. We'd look at it on a yield basis to see what it does to FFO and FAD, but even more importantly, we look at where we're trading relative to NAV so that we can determine that if we are issuing new equity, that it's going to be accretive to NAV per share if we put money out. What's -- what makes our case a little bit different right now is, as I think you all know, we have gone through quite a transformation. That involved the spin last year. But even when you look at all transactions this year and removing all the noncore assets that we have, it's going to sum up to somewhere in the vicinity of $2.5 billion. And with that, we've had a number of uses and have used some of that to delever and for different purposes. But it also leaves us the ability to have cleared out our revolver quite significantly, taken down an additional $500 million of debt through tenders but will leave us some additional capital to invest in deals. And so as we look at opportunities as they come in, there's a recycling aspect that's currently in place that we're fully aware of. But from a pure cost of capital perspective, it's the way I described.

Sure. It just would seem like the proceeds coming in from the debt and your Brookdale assets are yielding higher yields than what you could deploy right now. And do you have any plans to raise new equity over the next 6 months?

Well, not at the moment. And you're right, let me just first take your first comment. Yes, you're right that the -- when we receive sale of the Tandem or HC-One or a Brookdale sale in the mid-6s, that, of course, when we reinvest, we reinvest in higher quality stock, and that's dilutive. That's in our guidance. So that's been taken into account already in the way that we thought about our numbers and then we felt a necessary part of repositioning to the company that we want to own and operate in the future. As it pertains to the second part of your question, the recycling of capital is -- there's going to be capital for us to reinvest in additional deals as we go forward. Did I catch the second part of your question, by the way?

Yes. Just it -- do you have that included in guidance? Or are you assuming an equity raise?

Yes. There's no equity raise assumed, because we do have additional proceeds that'll be coming in that we can utilize.

One just final one for me. I'm not sure if I missed this. The HC-One note was paid back for $367 million. But when I look at the balance as of Q1, it was $395 million. I wondered -- just want to see what the difference was there?

Yes. The only difference could've been FX, where we report. Because remember, that's -- that was a U.K.-based loan. So at the end of every quarter...

No reduction to the loan, nothing like that?

No. No, it was all paid back at par.

Our next question comes from Nick Yulico of UBS.

Just want to go back to the 6 problematic senior housing assets. It seems like they had a very big impact, as you talked about, in the occupancy. What was the actual occupancy decline for those assets?

It averaged 11%.

Okay. And where are these assets located?

So they're primarily in Florida, Miami and Sarasota, Chicago and one in Rhode Island.

Okay. And I know you talked about trying to asset manage these properties. But -- I mean, are -- do you think that these -- and that's a pretty big occupancy decline. Are these assets that are heavily being impacted by new supply nearby?

So there's a combination of factors that -- it's new supply and then, as Tom had mentioned in his script, a loss of the sales directors, which has a significant impact on the performance of the property.

And I would add, there was also -- there was intended sales and marketing spend that ended up being delayed. We followed that up and Brookdale's all over that now. But as Kendall indicated, there's -- or maybe it was Pete. There's a lag in recapturing some of that. So again, this is getting a lot of focus right now, but it's -- we're still in the middle of making these assessments. So there's going to be a lot of work done over the coming quarter on this.

Yes. I guess just finally, I'm just trying to understand the impact there from supply because -- I mean, there have been -- I mean, if you go around, there are examples around the country of some communities and new supply that haven't been able to lease. They are offering 3-year rate locks, and it's really hurting occupancy at some communities. I'm just wondering if that situation played out here. And what's the risk that this happens even to other pieces of the portfolio at this point?

Look, I -- the new supply is a concern, it has been and continues to be. I think if you look at the -- at starts and under construction, we see that declining. But over the course of the next quarters, there is a fair amount of new supply that will be hitting the market. We know where that supply is coming. We ready our properties for that new supply, whether it's investing CapEx, making sure that our team -- especially our sales directors, they're not poached. So we put these plans in place to ensure that we're going to compete against that new supply coming into the market.

And just to be clear, these -- I mean, these directors, where you lost directors, is this where they left the Brookdale portfolio altogether? Or are they -- did any of them got moved around to other Brookdale communities?

Yes. The ones we're talking about are ones that left. And look, you can see the -- you look at the lead generation and lead execution in our portfolio, and we're down over last year. And most of that is due to -- some is due to the spending that we talked about, the lack of the lower-than-expected spending on advertising and marketing dollars. But it's also due to the departure of these sales directors, and they're the ones that are responsible for the lead generation as well as, more importantly, the lead execution.

Our next question is a follow-up question from Smedes Rose of Citi.

It's Michael Bilerman. Just going back to the litigation costs. So the $5 million year-to-date and just over $3 million in the quarter, is that all dealing with Brinker? Or is there other litigation going on?

There is other.

There's actually other. Most of it is actually not Brinker. Most of it is actually the shareholder and derivative suits. That's the majority of it, I would say it's about 75%, 80% of it. The rest is Brinker.

And can you just give us an update on the shareholder and derivative lawsuits? And are they settled? And how much more is there to go?

Yes. Michael, this is Troy McHenry. As you probably know, these lawsuits stemmed from ownership of our HCR ManorCare assets that are no longer part of our portfolio as a result of the spin. And they are in their early stages with limited activity at this point. So it is going to take some time before they are ultimately resolved. In fact, for the class action, the next step is for the judge to select the lead plaintiff, and then thereafter, we would file our motion to dismiss against the amended complaint. So in this interim period, what we're doing is we're vigorously preparing our defense, and we believe that these allegations are without merit.

Okay. And then just going back to Brinker, I guess what was the need to -- I guess was there competing offer that he had that you had to lock it up today to have triggered all of these back-and-forth lawsuits that have -- having just not filled it right away and announce it next year?

Well, this is Mike McKee, again. That was a determination we made when we began talking to him. And as you know, we announced prior to talking to him, that Justin would be leaving to go to HC-One in London. So we had that role opened up. I must say that a number of people, as we talked about Justin's leaving the company, Scott's name was raised a number of times. Some of you that are -- have participated on the call today were free with the advice that, that would be an excellent place to turn. So we also were aware that he was a highly regarded person. And I don't want to speak for him, but I -- in conversations, he was having a number of parties reach out to him. We didn't get into a bidding war, so to speak. We felt that he was a natural addition to the team that we're putting together here and taking him off the market was to our benefit. So that was a pretty easy calculation to make. And as I've said earlier, I don't think it's going to cost us anything or much. But whatever cost there is, I think, will be well worth it.

And then just talking about market cap rates and development returns, because there may be differences in opinion as to where market cap rates are. Where do you sort of ping market cap rates for life science in South San Francisco currently, which is 3/4 of your development pipeline?

Well, the cap rates in general, if a person were acquiring a high-quality asset, you're probably in the high-4s. If we're going to develop an asset there, they're probably in the -- somewhere in the mid-7s or something like that and maybe even 8. So -- and that has been blown out by our development of The Cove. As you know, we've received -- or are receiving that type of development and return on that asset.

Sure. I'm just trying to -- I mean, is there any reason why you won't actually put a yield on the development, in aggregate, in your supplemental on Page 20 on the $850 million of cost? Because you have this footnote, 150 to 200 over respective market cap rates. Is there any reason why?

No, we can. Yes, we can -- I've been reluctant to do that because yields can change over time, cap rates change over time. 150 to 200 is a pretty safe range. We've been outperforming that. And on each of the deals that we've underwritten, Michael, we have been underwriting spreads that are higher than that. So we could increase that. But my inclination is, at least, again, a bit of conservatism and ability that -- to outperform what we're guiding to. So that's how we've left it.

Right. I just would say just give us the aggregate yield, the lease percentage, some actual data behind it rather than giving to us spread to market, which obviously is a variable number in the eye of the beholder. So just give us what you're developing to rather than a spread.

Yes. That's something -- I'll think about that. We -- that is something we could include. I find that most often times, companies don't because that's -- again, as you go through the process, you've got a number of variables that end up moving that number. So it's something I got to think through before we -- once we start doing that, it's something we'll continue to do primarily. So I just -- I want to be pretty thoughtful about it. Just looking at it though, for your benefit, for this call, just as we look at development yields down the list, and I won't get specific with them, but in general, the return on cost numbers that we're looking at are in the roughly -- probably call it 7.75% range on average. So that's what we've underwritten to when we've underwritten our deals. And you could see the locations of them, and you can, from that, ascertain roughly what the cap rates would look like. So the spreads are quite high. They're higher certainly than 150 to 200, but -- I mean, it takes time to get those completed. In the meantime, the markets move so that's why we've been conservative in the range that we've provided.

Right. And then just taking a look at Alexandria's supplemental and the disclosure that they have on the development and redevelopment, and it's probably a reasonable guide to what investors would want to see.

We'll give that a look, Michael.

Our next question is a follow-up from Jordan Sadler of KeyBanc Capital Markets.

I have a similar but different question sort of developments. I'm kind of curious on the acquisition side. It looks like MOBs have been a -- or could be a focus, life science as well on the development side and maybe, to a lesser extent, senior housing. So as you look at the inside guide for -- of $500 million to $750 million for this year, would we see you guys buy MOBs at 5 caps?

Well, it depends on the quality of what we're looking at. That MOB values, obviously, have increased, cap rates have moved in the market. If you got a very high-quality asset that we believe produces good growth with a great hospital anchor, perhaps on-campus, we wouldn't rule it out. So we'd have to take that on a case-by-case basis. Certainly, it's a fair question. And as we look at these deals across senior house and life science and MOBs, these are things we talk about in our Investment Committee process is what is appropriate pricing and what does it do to the NAV of our company and the overall yields. We have to take into account what it does to FFO, as adjusted, and FAD, as we would like to grow cash flows. But also, as we seek to recycle capital, we'd like to have a high-quality portfolio that centers in these 3 private pay segments. The pricing of those with high-quality assets, the pricing of those asset categories has just become more expensive. At the same time, we're taking great action to be disciplined and seek to not overpay, and it caused us to step away from some of the high-profile deals of some pretty good portfolios that we just decided the pricing, that's too high for what we wanted.

Okay. And then I have one little strategic one for you. Just marking your half-year anniversary, a little bit more so, so congratulations on that, in the [SCEOC]. But you've worked for REITs that have been focused on one-property type for quite a while or at least have in your history. And now you're back at a shop where you have these 3 segments, a couple of which, if not all 3, could each be pretty operationally intensive, maybe not for HCP, if you got a triple-net structure, but -- or an external RIDEA contract. But certainly, you're exposed in terms of RIDEA, and certainly you're exposed in terms of life science and medical office. And as you -- so as you look at HCP, I mean, does it make a lot of sense for HCP to be a -- this diversified?

When I think about it, it's -- the way we're setting the company up going forward, it's diversified in 3 segments, 2 of them are specialty office segments and then senior housing. Senior housing is more of an operating business, and then of course, the 2 office segments. So diversification among these 3, all private pay, it actually fits together pretty nicely, in our view. So we -- and everybody has got a different view on this strategically, different companies, I mean. We definitely had concluded at the some point that we wanted to exit SNFs. Hospitals are a smaller part of what we wanted to do, and mezz debt. So we're trying to focus on, like I said, the high-quality private pay segments of life science, MOBs and senior housing. And we do think that, over time, all 3 of those are great places to be and produce a nice diversification.

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

Okay. Well, thank you, everybody for attending. Appreciate your time and your interest in HCP. I will say that I'm pleased with our ongoing progress in our corporate goals, and we'll continue to work diligently.

We look forward to talking to you all soon. Thanks.

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