Healthpeak Properties Inc (PEAK) 2017 Q4 法說會逐字稿

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

Thank you, operator. Welcome to HCP's Fourth 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, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risk and risk factors is included in our press release and detailed in our filings with the SEC.

We do not undertake any duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed in this call. An exhibit to the 8-K we furnished to the SEC today, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures, in accordance with Reg G requirements. This exhibit is also 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 Fourth Quarter and Full Year 2017 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: Tom Klaritch, Chief Operating Officer; Kendall Young, Senior Managing Director of Senior Housing; and our General Counsel, Troy McHenry.

By all measures, 2017 was a pivotal year in our transformation of HCP. As we embark on 2018, we are focused on executing the several remaining pieces of the repositioning initiatives that we started in 2016. Over the past 18 months, we have spun off, sold, monetized or in the process of selling over $10 billion of non-core real estate and mezzanine debt. We continued to work through the various transactions we disclosed last quarter, including sales and transitions of Brookdale assets, the resolution of our Tandem investment as well as our strategic decision to exit the U.K. in order to focus on our core U.S. private pay portfolio.

We are making excellent progress on each of these items. While the heavy blasting of our repositioning is behind us, there's naturally some noise associated with the various moving parts, which Pete will describe in a few minutes.

With proceeds from our transactions and non-core sales, we've repaid debt and reinvested in development, redevelopment and strategic acquisitions. In 2017, we closed or committed to nearly $1 billion of acquisitions and development, 3 quarters of which were focused in our specialty office platforms of medical office and life science. And we repaid $1.4 billion of debt. As a result of our repositioning efforts, we will own a vastly improved portfolio that produces significantly higher quality cash flows, which, in turn, will support consistent earnings and dividend growth over the long term.

Our efforts going forward will be squarely focused on executing our strategy to position HCP as a top tier health care real estate company. Our strategy is to meet the real estate demands for private pay health care companies and seniors, and to capitalize on the favorable demographic trends of aging baby boomers. Our portfolio is focused on medical office, senior housing and life science. We believe all 3 of these segments will benefit from the demographic trends without exposure to the bumpy ride of government reimbursement.

We do not intend to move back up the risk curve with new investments and mezzanine debt, SNFs, international investments or investment in new hospitals. We will maintain a strong balance sheet with a goal to achieve BBB+ credit metrics over time. We will raise external capital for acquisitions only when we trade at a premium to NAV. We will keep our portfolio fresh by investing between $400 million and $500 million per year in development, redevelopment and revenue enhancing CapEx. This will be self-funded with annual capital recycling as we strategically prune our portfolio of slower growth assets and older capital-intensive properties that no longer meet our return thresholds. It is also our strong desire to be viewed as a trusted real estate owner and partner of choice. This will be achieved through collaboration, fair practice and always doing what we say we're going to do. Finally, we are committed to being leaders in important areas such as sustainability, transparency and corporate governance.

Now let me provide an update on our significant Brookdale transactions and the remaining components of our repositioning. Our initial transactions that we announced last quarter remain on track, including sales of assets in Brookdale, the sale of our remaining interest in RIDEA II to Columbia Pacific Advisors, as we work through the normal closing processes and license transfers. With the additional 68 Brookdale assets that we will either transition or sell our discussions with leading operators and potential buyers are in advanced stages, and we continue to work collaboratively with our partners at Brookdale to ensure smooth transition. We feel very good about the progress and timeline and look forward to sharing additional details as we have updates.

With that, I'd like to provide some highlights on our portfolio, because it has changed dramatically during the last 18 months. All in, the execution of our repositioning, our higher quality, differentiated portfolio will have approximately 55% concentration in specialty office based on value, with the balance in senior housing and a small portfolio of well-covered hospitals.

In MOBs, our 81% on-campus portfolio will represent 27% of our NOI, and spans 19 million square feet. We continue to target the #1 or #2 hospital for on-campus properties, or specialty off-campus assets anchored by a leading hospital or large group practice. We have assembled a strong and diversified tenant base and have built solid relationships with industry leaders such as HCA Healthcare, a $70 billion healthcare service provider, Providence Saint Joe's, the third largest health system in the nation, and Memorial Hermann, the largest not-for-profit health system in Houston and Southeast Texas.

The stable nature of our MOB portfolio assets has resulted in average occupancy and same-store cash NOI growth of 92% and 2.5%, respectively, over the last 5 years.

In addition to consistent internal growth, we're targeting $70 million-plus per year in low risk redevelopment projects, keep our irreplaceable on-campus portfolio modern and fresh, we expect to generate 9% to 12% cash on cash returns from these investments.

Moving to senior housing. We have a cautious view for our SHOP portfolio in 2018, given new supply headwinds, wage growth pressures, one of the toughest flu seasons in recent years, and potential temporary disruption due to operator transition. Yet the long-term baby boomer demographics and higher penetration rates are irrefutable, and we believe will create opportunity through the cycles. Our recent investments in senior housing have been strategically focused on select operators in the markets where we would like to grow. This includes our Watertown Square acquisition in Boston, and 620 Terry, a participating debt investment, in an urban high-rise senior housing development in downtown Seattle.

From the disposition side, the Brookdale transactions we've previously announced materially improved the quality of our SHOP portfolio and strengthened the coverage of our remaining triple-net portfolio. As I mentioned, we're rebalancing our operating mix as part of our Brookdale transition, and that effort is well underway. So more to come next quarter.

In life science. Our 8 million square foot portfolio represents roughly 25% of our NOI, and is located primarily in the core life science markets of South San Francisco and San Diego, and we just marked our strategic entry into Boston with our acquisition of Hayden.

Notably, we have the largest life science landlord in South San Francisco, a market where we and our predecessors have operated for over 2 decades. With the tremendous success of our Cove development and are pleased to start our next project, Sierra Point.

The fundamentals for the life science sector remains favorable with record VC funding and M&A activity, an open IPO markets and strong recent performance of the pharmaceutical and biotech industries. Our portfolio has benefited from these industry tailwinds, but we have also been actively working with our tenants to creatively meet their evolving needs for space through our ownership of clusters, while driving HCP's internal growth.

Finally, as we recently announced, Mike McKee will step down from his role as Executive Chairman, effective March 1. Mike will also retire from the board at the company's annual meeting. On behalf of the entire HCP team, we wish Mike well, and thanked him for his countless contributions to HCP over nearly 30 years.

Finally, I'm very happy with the talent and experience we've built, and how well the team has come together. In a few weeks, we'll be joined by Scott Brinker, who will round out our senior leadership team.

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

Thanks, Tom. Today officially marks my 1-year anniversary at HCP, and I'm incredibly proud of the accomplishments the team has collectively achieved over the course of my first year. We have made substantial progress in repositioning HCP, and we have a clear path forward to complete our transformation.

On the call today, I will provide an overview of the following: an update on key acquisition and development activity, a review of our fourth quarter and 2017 results, an update on the balance sheet, and a review of 2018 guidance.

Starting with key transaction activity. Along with our earnings, we announced that we closed on 3 important transactions in the fourth quarter, totaling $424 million. The first transaction, The Residence at Watertown Square, is a 90-unit, 3-year-old senior housing community located in Boston. We acquired the community at a consolidated joint venture with LCB Senior Living for $45 million. We are pleased to welcome LCB into our group of operators. We've been trying to find opportunities to partner with them for quite some time, and this was an excellent fit, as we continually look to add high-quality assets to our portfolio.

LCB has been one of the pioneers in modern senior living, with a targeted focus in the high barrier-to-entry New England markets. We also announced the acquisition and closing of the Montecito medical portfolio for $151 million, in an off-market transaction.

Montecito is an 11-asset, off-campus medical office portfolio, totaling 378,000 square feet, and is 97% occupied. The majority of this portfolio is anchored by strong hospitals and large specialty group practices, with a weighted average lease term of 8 years. Lastly, we closed on the previously announced Hayden Research Campus acquisition worth $228 million. We have included a picture of 65 Hayden on the cover of our supplemental this quarter. Based on our leasing progress to date, we are well underway to achieving our initial yield of 5.9%.

In addition, we look to capitalize on the late 2019 positive mark-to-market opportunity on a lease maturity, further enhancing our yield at the mid-6% level. We are close to having final approvals to begin construction on an additional 209,000 square feet of last days on campus. We look forward to kicking off the development phase of this project with King Street, and we will continue to evaluate additional opportunities to grow in this important life science market.

These 3 transactions are great examples of our hard work on the acquisition front coming to fruition. For the year, we completed $562 million of acquisitions across all 3 property segments.

Moving on to development activity. In December, we entered into a participating debt financing arrangement with Columbia Pacific Advisors to fund the construction of 620 Terry, a $147 million, 243-unit, high-rise urban senior living development, located in the First Hill neighborhood of downtown Seattle. The property will be managed by leisure care, one of the preeminent operators in the Pacific Northwest.

We will provide up to $115 million of financing and earn a 6.5% interest rate on the outstanding loan balance, and receive a 20% participating interest in the development profits. Our initial fundings will be in mid-2018, and the development is expected to be completed in 2019. The participating debt investment sits well in our development loan program that we initially created in 2011. We had significant success harvesting our historical positions through asset purchases for recognition of the participation gains.

Finally, and as a result of the leasing success at the Cove, we have commenced construction on Sierra Point, a 600,000 square-foot multi-building campus in the South San Francisco life science market. The project is designed to be developed in phases, with Phase 1 consisting of 2 buildings, totaling approximately 215,000 square feet, with an initial expected delivery date in late 2019, and roughly $170 million of remaining spend.

Moving on to our results. For the fourth quarter, we recorded FFO as adjusted of $0.48 per share, and our total portfolio delivered year-over-year same store cash NOI growth of 1.2%. For the full year, we reported FFO as adjusted of $1.95 per share and same-store cash NOI growth of 3.4%. All segments were at or above the midpoint of our third quarter guidance.

Going into more detail in our major segments. Medical office reported same-store cash NOI growth during the quarter of 2.1% and 3% for the full year. Our market-leading portfolio continues to generate strong, steady and stable growth. During 2017, our team executed leases on 2.9 million square feet of space, and achieved an 83.1% retention rate.

For our senior housing triple-net portfolio, same-store cash NOI grew 2.6% during the quarter and 5.6% for the full year, coming in slightly above the midpoint of our guidance. On a pro forma basis, after giving effect to the Brookdale sales and transition, our EBITDAR and EBITDARM coverages would have been 1.13x and 1.34x, respectively.

For our SHOP portfolio, we finished 2017 with year-over-year same store cash NOI growth of positive 20 basis points, essentially at the high end of our previously adjusted third quarter guidance range. The portfolio of occupancy in the back half of 2017 drove the improved results. SPP for the quarter was negative 8.3%, which, importantly, was in line with our expectations.

As I have mentioned on previous earnings calls, we have outsized volume purchase rebates recorded in the fourth quarter of 2016. These rebates as well as other items, create a distorted year-over-year comparison. For more details on these items, please see footnote 3 on Page 37 of our supplemental.

On a normalized basis, year-over-year SPP for the quarter would have been slightly positive. Sequentially occupancy in the fourth quarter increased approximately 80 basis points. We hit a low point in July and August, and then captured gains in September and October, which were maintained through the end of the year.

Touching briefly on the CCRCs quarterly performance of negative 17%, which is included in the SHOP performance for the quarter. I want to remind you that it is important to look at our growth inclusive of nonrefundable entrance fees, which were exceptionally strong for both the fourth quarter and 2017. Inclusive of nonrefundable entrance fees, our CCRC growth for the quarter was positive 10.5%. Life science reported same-store cash NOI growth during the quarter of 5.1%, and 4.2% for the full year. During 2017, we continued to expand our market-leading presence in South San Francisco, through Phases 1 and 2 of the coast, which are 100% leased.

Just this past week, AstraZeneca moved into their 115,000 square feet of space, joining other market-leading tenants, including Denali, CytomX, and Five Prime. In San Diego, I am pleased to report, we recently signed LOIs within an existing tenant for a 150,000 square-foot lease on our Ridgeview development, which will bring this property 100% leased ahead of when we originally contemplated.

Let me briefly touch upon 3 important accounting items in the fourth quarter. The first item. We incurred a $55 million charge in conjunction with the Brookdale transaction. The majority of this charge is related to the write-offs of noncash intangibles associated with the triple-net leases that will be terminated.

Additionally, as you are aware, the Brookdale transaction included lots of puts and takes. GAAP requires us a fair value certain of these components, including the fair value we received from the management agreement termination, and the fair value we relinquished from the above-market lease termination. We've included a summary table on Page 51 of our supplemental, which showed the GAAP impact of this charge. Importantly, there is no impact to cash NOI.

The second item, our Tandem investment. Today, we announced an impairment of $84 million, reducing our carrying value to $105 million. We are actively pursuing strategic alternatives, including a potential sale of our loan position.

The third accounting item, we incurred a $17 million noncash charge as a result of the corporate tax rate changes enacted by the Tax Cuts and Jobs Act that is signed into legislation in December 2017. All 3 of these charges were reported in NAREIT FFO, but have been added back to FFO as adjusted and FAD.

With regards to the dividend. The company's Board of Directors declared a dividend for the first quarter of 2018 of $0.37 per share, which is unchanged from 2017. Based on our differentiated high-quality private pay portfolio, our dividend is very safe and we are comfortable at this level.

Moving on to the balance sheet. As a result of no longer receiving interest on our Tandem investment, combined with the timing of our acquisitions in the fourth quarter, we finished the year with a net-debt-to-adjusted EBITDA of 6.6x on a trailing 12-month basis, and 6.8x on a fourth quarter annualized basis. These elevated leverage metrics are temporary and we anticipate reducing our leverage materially in the first half of the year as we complete our announced sales.

Moving on to our 2018 guidance. For the full year, FFO as adjusted per share will range between $1.77 to $1.83 per share. 2018 total cash, same property NOI growth will range between 0.25% to 1.75%. The growth rates by segment are: medical office at 1.75% to 2.75%; life science at 0.25% to 1.25%; senior housing triple-net at 0.5% to 1.5%; SHOP at negative 4% to 0; and finally, other at 0.5% to 1.5%.

Let me take a minute to describe the impact of some onetime items that affect our same-store guidance. As mentioned on our third quarter earnings call, life science same-store is affected by the $6.5 million mark-to-market rent decline at a 147,000 square-foot lease in South San Francisco. The impact on life science same-store is negative 300 basis points.

Our triple-net SPP guidance takes into account a rent reduction of $2.5 million, which is one component of the larger Brookdale transaction. The impact on triple-net same-store is negative 100 basis points. Excluding both these items, total cash same-store growth at the midpoint will be 2.0%.

Let me spend a minute on our SHOP guidance. The range is larger than typical as a result of some important items. First, while construction starts have abated, we are in the midst of senior housing peak deliveries and expect that to persist throughout 2018; second, we are in the middle of a very challenging flu season. We have not experienced significant move-outs, but we have been impacted by embargoes in certain assets, which has resulted in a reduction of move-in. As a result, we are being cautious as we project forward. Third, we're in the process of transitioning approximately 1/3 of the SPP pool from Brookdale to other operators.

While we anticipate smooth transition, we, nevertheless, expect there to be some heightened volatility and performance while this is ongoing. As we progress through the year and get more clarity on specific items, such as of the severity of the flu, we intend to tighten the guidance range.

Moving to the key timing on our capital recycling transaction that are embedded in our guidance. For the 6 assets, we have agreed to sell to Brookdale, we closed down one in January, and estimate closing on the remainder of the asset near the end of the first quarter. For the sale of the remaining RIDEA II investments and our U.K. portfolio, we have assumed closing these transactions during the second quarter. For the assets currently managed or leased by Brookdale that we plan to sell to third parties, we have assumed closing lease transactions at mid-year.

We currently plan to utilize the proceeds from these dispositions and others to repay approximately $1.5 billion of debt at a blended rate of approximately 4%. The remaining proceeds are assumed to be reinvested into a combination of capital expenditures and investments. Beyond capital recycling the fund acquisitions, our guidance does not assume any additional acquisitions to occur. To assist with modeling, we have provided additional detail regarding our guidance and related assumptions on Page 50 of our supplemental.

One last item before turning the call back to Tom. To improve our disclosures and create greater comparability to our peers, we have decided to exclude unconsolidated JVs from same-property performance in 2018 and going forward.

Although CCRCs will no longer be included in SHOP, guidance and NOIs, and nonrefundable entrance fees can be found on Page 50 of the supplemental. We have also included a summary of our 2017 results including and excluding unconsolidated JVs on Pages 52 to 54. You can see that in 2017, there would have been very low impact from this change.

And with that, let me turn the call back to Tom.

Thanks, Pete. As we near the completions of what has been nearly a 2-year repositioning process, I would like to express my sincere appreciation for the incredible effort our entire team has put forth. I'm very pleased with the progress we've made to date and excited about where we're headed, creating a fully differentiated REIT within our space.

With that, operator, please open up the line for questions.

(Operator Instructions) And our first question comes from Jonathan Hughes with Raymond James.

Could you, maybe, just go a bit further though, and break down your SHOP guidance assumptions in terms of occupancy rate and operating expense growth? And then, maybe, also, how occupancy comp in the first half of the year looks versus the second half, given the flu season?

So this is Kendall. So starting with the guidance. At the midpoint, our guidance range assumes roughly 150 basis points occupancy decline, 3% REVPOR increase, 3% expense growth. And when you think about that 3% expense growth, it reflects the ability to flex certain variable cost, including labor, resulting from the 150 basis points decline in our guidance. We've gone through a lot of detailed analysis over the past few months. We've worked with our asset managers. We've worked closely with our operators. We pored through supply data and analysis, and the reality is there's a number of uncertainties, and those are reflected in the wider guidance. And then, the question now on the how the occupancy looks. So we do show a dip in occupancy at the start of the year, which is seasonality -- typical seasonality adjustments. When we look at the financials we received -- January financials, we saw a decrease in occupancy from December, and if you look at how we were heading into the fourth quarter, we did have a sequential increase in occupancy now that we are -- have the preliminary results in January, we did see a drop in occupancy in January, part seasonal, part, we think, due to the flu. And -- but on the positive side, we did see some positive metrics. These included higher inquiries, higher tours, and we had higher move-ins toward the end of January, higher than we've had in the past. And those move-ins were in the properties that were not impacted by the flu.

Okay. That's great. And then, when I look at your SHOP NOI exposure to new supply, compared to one of your peers, I think it amounts lower. So when you saw guidance given by a peer last week, did that lead you to rethink your outlook you issued this morning? And you have become, maybe, more conservative with the magnitude or range of expectations?

Jonathan, fair question, this is Tom. I mean, the bottom line is, as Kendall said, we had a lot of noise in senior housing, and we've been over this for the last few months. The supply has been hard to predict. You probably noticed that NIC pushed back when the deliveries -- peak deliveries will occur, they modified absorption, that's fairly recent. This whole flu thing has been extremely difficult to determine. As we mentioned, we're not seeing the move-outs, but the embargoes are affecting the move-ins, and how long will this thing persist? And then, we've got the added item of some transitions of properties, as we remove some of those Brookdale properties, and typically what happens and we've got some experience in this as due to the operators we're working with, you'll see a bit of a dip, and then it starts to come back, and the timing of that is hard to determine. So we've got almost different uncertainties, so we could be that we're coming in a bit conservative, but maybe not. So we'll see how it plays out as we move forward and the facts become more clear, but we were settling in on this range prior to the Ventas call.

Okay. That's great. And then, just one more, if I may, for Pete. You touched on leverage in the last slide deck. It was targeting a sub-6x number by the end of the year. But interested to hear if that's moved or changed after the Tandem news? Or lower-than-expected pricing on the Brookdale third-party transactions?

No. I think we're still targeting that 6x net debt-to-EBITDA by the end of the year. So that has not changed. Obviously, it's slightly elevated at this year end because of some of the transactions. And then, we'll have some of these dispositions closed in the first quarter and the first half of the year. But we're still comfortable with that 6x net debt-to-EBITDA.

Our next question comes from Michael Knott with Green Street Advisors.

Just on the life science guidance. Obviously, the actual guidance number is a bit lower because of that renewal from the above-market lease, but the number ex that looked pretty good, I think, 3.75%. So just curious how you guys are feeling about that business, the recent transition you had in leadership. And then, also, if you guys can ballpark what the overall mark-to-market on the overall portfolio is today? That would be helpful.

Why don't I start on that, Mike. I'll just confirm that you're correct when you adjust for that one lease, which we've talked about for quite some time now. The range is, at the midpoint, we go from 75 basis points positive to 3.75%. So you have that accurately, and then, we have a range around that, but it's in the high-3% to low-4%. I'll let Tom talk about, just generally, what we're seeing in that market now.

We still consider the mark-to-market's in place today about 10% to 15% below where existing rates are. So we would see improvement on that moving forward, even with the Rigel lease, we saw some positive in the mark-to-market rate (inaudible). So we're very confident with that.

And this is Herzog. As far as -- 2 Toms in the room, obviously. That was Klaritch. As far as the business and the leadership, we feel great about where the business is at, with VC funding, where it's at, how biotech pharmas are doing, the markets that we're in, the demand that we're seeing. And I think the last part of your question was, how do we feel about leadership? As I've mentioned on earlier conference calls, Tom Klaritch has had a fair amount of experience in life science since we've purchased the Slough transactions, he's been involved, and hit the ground running. He, along with Scott Bohn and Mike Dorris, the folks that run San Francisco and San Diego, and Ryan Anderson, whose been working with Boston, we think we have a very strong team here. So we have been a -- I've been very pleased with the leadership in life science.

And then, my last question will just be, I think you had sort of alluded to it during different points in your prepared remarks, but at something like a 20% NAV discount, how are you thinking about how to allocate capital going forward? It looked like you did acquire an MOB portfolio. So just curious here, sort of your thoughts on that going forward in the current environment today?

Yes. Fair question. We think that we purchased during the last couple of years has been purchased with recycled proceeds. As I mentioned in my scripted remarks, we will have jettisoned $10 billion of assets, part of that through the spin, but also a decent part due to sales, and that's created a lot of cash that we've used to pay down debt, and we've made strategic acquisitions in the 3 core segments that we would like to continue to grow. And so how we think about this is we will continue to recycle capital, probably a decent amount of it into our development pipeline, redevelopment, and at times, strategic acquisitions. But you won't see us grow from external funding until we're trading at a premium to NAV. So we will retain that discipline, as I've said, since I arrived.

Our next question comes from Tayo Okusanya with Jefferies.

First question is just around the coverage on the triple-net senior portfolio. Again, it's about 1.09, just a little bit tight. You do have a couple of tenants in there where the coverage (inaudible) on an EBITDA basis, is below 1x. How do we kind of think about the safety of the rent with some of these tenants that have tight coverage, especially just kind of given the flu season, the pushback we're starting to see with the NIC data saying things are probably a little bit worse before they get better?

So this is Kendall. So first, I'd just point out that our coverages are on that EBITDAR basis, and that's after a 5% management fee. So there's 7 leases that are below a 1.0x cash flow coverage, and if you look at those -- 5 of those 7 are where we have pretty strong corporate guarantees, and there's a minimum of 3 years left on those leases, we -- as you look at the leases, these are multiple property leases, there's usually 1 or 2 properties that are driving the performance down, and we're in discussions with some of these tenants on how to solve that. And sometimes, it's investing the properties, but a lot of times, it's selling those assets. And we have baked into our guidance for the year, solving some of those leases.

Yes, I would add, this is Tom, again, Herzog. I would add that when you look at our coverages in our triple-net portfolio, on a pro forma basis for the Brookdale sales that we've already announced, we really have improved the coverages pretty dramatically. If you want to cross our entire portfolio, our triple-net coverage would be at a 1.13x on an EBITDAR basis -- on an EBITDARM basis, it will be 1.34x. And if we just focus specifically on Brookdale, obviously, we've done a lot of work there, along with Andy Smith and the team, our pro forma coverage there, on an EBITDAR basis will be 1.28x, and on an EBITDARM basis, would be 1.48x. So we've actually created quite a nice cushion in those coverage ratios.

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

I wanted to come back to, I guess, your answer to Michael's question, regarding sort of deploying capital and using, essentially, asset sale proceeds. I'm trying to reconcile today's guidance with the debt you guys presented with the prior earnings call, and I'm seeing net dispositions of $1.8 billion to $2.4 billion in the guidance now. And that seems, I guess, a little bit higher than I was anticipating. One of those reasons might have been, because previously, you guys had suggested that you would reinvest the Genentech purchase option proceeds in the U.K. -- portfolio sale proceeds, back into additional investments at a 5.5%-or-so. Have you sort of just, as a measure of conservatism, stripped that out, number one? And number two, are there additional asset sales that you've baked in here besides what you may have laid out in November?

Jordan, it's Pete here. I think you're referring to Page 8 that we've put out in our Brookdale deck, which was actually posted as part of our third quarter call. The answer is actually no. We're assuming the same amount of net dispositions. It hasn't changed really all that much over the course of the last couple of months. What I would just point out from that bridge before, maybe to just help walk you through how we came from $1.95 to $1.80. As we look at it, really, there's $0.15 in there from transactions that we completed in 2017, which were the Brookdale 64, the initial RIDEA II deal, we had HC-One, we had Four Seasons. And then, the anticipated 2018 transactions, which I said haven't changed. Those are -- and that's really the Brookdale transaction, the sales that we are doing back to Brookdale, the third-party sales, which were in the market now, and we put, actually, in our footnote on Page 50. The range of that, which is around $600 million to $700 million. Genentech's been in there for a while. RIDEA II is no different. And then, you U.K. portfolio sales. So that really hasn't changed. What can really bridge now from that $1.95 going down to $1.80, with $0.15 of capital recycling. We did have some positive benefits in year-over-year NOI growth of a couple of pennies, plus we have some developments coming online, which is a couple of pennies, that's $0.04 there. But that's offset by, really -- the Tandem proceeds. We have originally assumed $197 million. We're assuming less now. You will note that the carrying value, we've written that down to this quarter. Plus, we had a negative $0.01 impact from the tax rate change. Also, it takes it down a little bit. And then, we had a few additional items. There's some immaterial asset sales. There's some of the remainder Brookdale 25 sales. There's an Atria sale as well in there, but they're fairly immaterial. And then, we also have a couple of redevelopment assets that we will do mostly in MOBs and life sciences this year, and that's about $0.02. So that's the bridge from $1.95 to $1.80. I know it's quite complicated, but I want to make sure you have all the different pieces.

Yes. Well I guess, the -- more specifically, on Page 50, if I add up your dispositions that are in footnote 5, I would get, $2 billion to $2.2 billion, which makes sense. I guess, are you investing or assuming you're going to invest that $550 million and the $269 million from the Genentech repurchase option? Are you assuming any acquisitions in this guidance? Or no?

Yes. So let me walk you through that. We are, but it's modest, and it's all funded through capital recycling proceeds. So we have $2.4 billion in total dispositions, so added to the numbers you just talked about are Tandem as well as some of those other immaterial sales that I mentioned, so that's $2.4 billion. We are going to repay approximately $1.5 billion of debt, and then, the balance of that, we have, all around, $550 million of CapEx that we will spend this year, that's exclusive of that CapEx, and then, the balance is actually what would be used towards acquisitions. Some of that is the additional purchase option, the 10% that will take out Brookdale on very shortly. And then, there's a little bit of an additional (inaudible) in there, but it's relatively small when you actually do the full choices and (inaudible).

Okay. I could follow up with you guys offline. But I just -- it seems like you guys are paying down a little bit more debt than I previously -- than you previously sort of posted in the -- in that prior deck on Page 7. So I'm just not catching it. But the other sort of question I had for you is just, any update in terms of the transitioning of Brookdale portfolio assets in terms of the operators who you've selected or where you stand in the process there.

This is Kendall. So we're in the process of transitioning roughly 40 assets. We've been working with several operators. We've agreed to terms with most of them, and we're preparing the definitive agreements. In the meantime, the operators are going through their due diligence. We don't want to disclose the operators just yet, but they're all well-known, high-quality operators, and we think they will be ones that you like. Timing-wise, we expect the transitions to commence mid-March, and to be mostly completed by the end of the second quarter.

Are they -- so 40 of the 68, Kendall, the old transitions?

Yes. It's roughly that number.

Yes, not quite as many, but in that...

In a range.

And the operators are new to HCP or are they existing?

Well, mainly, they're existing. But I will tell you that when you hear the operators, when we are able to announce that, I think you'll be pleased.

Our next question comes from Smedes Rose with Citi.

I wanted to ask you, in your release, you noted some marketing expenses for Brookdale that are up, I guess, relative to their normal run rates. And I just wanted to ask you, so when they say that, that marketing expenses are up, does that include things like discounts for people to move in initially or what sort of the nature of the marketing expenses? And is there a chance that, that level stays elevated just given that it's tough conditions in 2018, which could become a bigger drag on your guidance for that segment?

Yes, Smedes, it's Pete here. I wanted to talk about that for a second. So we did note that we had when you do the fourth quarter year-over-year a distorted comparison. What really went on with the sales and marketing fees, and we've talked about this before, was they were underspent in the first half of the year. And as we look towards the second half of the year and positioning the portfolio for 2018, we have worked and collaborated with Brookdale on it, and said we want to spend those dollars. Spending those dollars, there's evidence that you actually get real move-ins from spending those dollars. So that spend picked up a lot more in the fourth quarter, and that's why you have this year-over-year distortion. It's around $1 million when you think about the gross dollar amount, and then it's about -- and we said this in our footnotes, it's about a negative 230 basis point impact on the fourth quarter.

This is Kendall. I would add to that, that we are seeing the benefits of that increased spending, as I mentioned earlier, some of the leading indicators and the sales metrics, leads and lead conversions and some of that occupancy pick up, as the move-ins at the end of January.

And I just wanted to ask you on your MOB acquisition, you noted that it was an off-campus acquisition. Do you consider that more sort of a one-off type transaction? Or maybe you just talk about buying on-campus versus off-campus and maybe the associated cap rate between the 2.

Yes, Smedes. It actually does fall right in to line with -- this is Tom Herzog, right in the line of how we think about MOB strategically, either being on-campus or if they are off-campus, they're anchored by a #1 or #2 hospital or physician group, so it did fall into what -- how we think about it strategically. But Tom Klaritch, why don't you provide the answer to the rest of his question?

Sure. If you look at the portfolio, it -- as Tom said, it fits into that latter group of off-campus that are anchored by either a major and leading hospital in the market or somebody's large group practices. If you look at this portfolio, out of the 11 properties, 7 of them were anchored by the leading hospitals in their markets. They have, on average, of 42% market share. The other 4 are anchored by a very large group practice. For example, 3 are anchored by EmergeOrtho, which is one of the largest orthopedic practices in the U.S. They actually have 132 doctors long-standing. They've been around for between EmergeOrtho and a predecessor organization for about 40 years. So exactly the kind of tenants we're looking for and when we do look at an off-campus building. With regards to cap rates, the yield on this acquisition was 5.9%. So significantly above where you saw high-quality on-campus buildings or portfolios trade in 2017. So a nice 100-or-more basis point improvement over those numbers.

Tom, it's Michael Bilerman speaking. You commented that you're not going to have much new incremental investment until you traded a premium to NAV from a capital allocation standpoint. Consensus NAV is about $27 for HCP, you're $22.50 today. You trade at double the discount of your peers, and I recognize the company in the last 5 years has been in some form of transition for a while, it's not just the last 2 years that you've been there. So I guess, at what point do you and the board step back and say, if we're not going to achieve and now our discount to peers, or even get to a point where we're trading at a premium to NAV to be able to invest capital. At what point do you take more deliberate and strategic action to narrow the gap?

Yes, it's a fair question. And it is something that we spend time talking about. And you're right, we have been in some form of repositioning for a solid couple of years, and with that comes noise, just connecting the changes that occur in the portfolio as we've liquidated out of the non-core holdings and reduced debt, et cetera, and had some resets. So we need to complete the execution of what we've started. We also have put a lot of work into putting what we believe to be a very strong team in place. We're looking forward to Brinker joining us shortly, that will round that team out. And as we complete the remaining steps of the repositioning, which I've heard from many investors that they're excited to get that done, we do think that it allows us to stabilize, and we should be able to recapture some of the value that was lost. So that's how we're looking at it. But I'll take the second part of your question too. What if, over time, we don't recapture that discount, which I don't think will be the case, but if it is, that's the same question any REIT has to answer that is trading at a discount, which is a whole lot of REITs right now, not just HCP. And of course, one has to look at the different strategical alternative. There's always the opportunity to repurchase shares, which is an accretive action if you're trading at a big enough discount and you do it well. But my view on that, having been through that in my past, is that you really want to be trading at a sizable discount for sustained period so it has a material impact on the outcome, and we're not in that place right now. And we're not inclined to lever up to do something like that. So we feel good that at this point we're taking the right actions, we're executing on what is a very good plan. We will come up the other side of this with a differentiated REIT that is heavily weighted towards specialty office, has a nice mix of senior housing, and I think we're going to be positioned well.

That's how I would answer that.

Our next question comes from Nick Yulico with UBS.

On Tandem, I assume there's 2 options, they're either selling the mezzanine investment or foreclosing on the assets. Which is the more likely option at this point?

Yes, you're right. There were 3 options: the 2 that you mentioned and the third one was the [DPO]. I think the DPO is probably pretty unlikely at this point. If we were to foreclose, which is something that we considered, it would put us back in the SNF business, at least, for a while, which we're not wild about, but we could certainly take that on. It would be about $400 million of SNF assets coming back on to our books, so it's something we had to think about. As we have gone through process marketing the paper for the note receivable, there was a lot of interest in it. We're very deep into that process right now. I think that's probably the more likely outcome, and hopefully, we have some news back to you guys at some point in the near term on that.

Okay, that's helpful. And then I just want to go back to Mike McKee stepping down from the board. What was the decision process on appointing Dave Henry as the new Chairman rather than bringing a new person into that role? And if we look that Dave is on 3 other REIT boards plus several other private boards, so does he plan to step down from any of those, given his increased role at HCPI now?

Well, I'll just take a minute on Dave. Dave has been a lead independent for the past 2 years. He's been a very strong contributor to our Board of Directors since 2004, so he knows the company well. And I just looked at his background, he's got extensive experience in the industry. I think everybody knows this, but he was CEO of and Vice Chairman of Kimco Realty, and he does have some very forward experience. As far stepping down another board, at this point, that's not something that we've talked about. But I do think Dave is going to be a great contributor as our nonexecutive Chairman, and I'm looking forward to working with him in that role.

Our next question comes from Vikram Malhotra with Morgan Stanley.

I just wanted to circle back on sort of your assumptions around RIDEA for this year. If we look at sort of the higher end of your range, can you maybe give us some sense of what were your baking in at the higher end, what would you need to see, potentially, to even maybe get a little bit above that?

I think the big factor is going to be the occupancy, and the wider range reflects the uncertainty around the things that we discussed, the flu, the Brookdale transition assets and new supply. So to the extent that we're able to improve the occupancy, that's what is the big driver getting to the higher end of the range.

Okay. And then just sticking to RIDEA. The revenue-enhancing CapEx that you've budgeted for this year, it seems like that you've been -- there have been investments now for probably 4 years, if I'm not wrong. Can you give us a sense -- in the nature of maybe $50 million or $60 million, can you give us a sense of how much more do you anticipate over the next 2 years? And is this -- seems like this is sort of a more of a recurring number now than more of a onetime enhancement.

Vikram, it's Pete here, let me take a stab at answering that. So our revenue-enhancing CapEx consists of a variety of different things. But it's primarily what we call Program Math, it's actually a Brookdale term, which is converting from AL to memory care. We've done a lot of that in the last couple of years plus some more extensive renovations as well as unit upgrades when, generally, you have to wait to do those upgrades and you have to wait until actually the resident vacates. What I would say is we've looked at this and spent a lot of time figuring out the returns that we get from these investments, and we do get substantially higher returns when we compare it to redevelopment. Now the useful life of these kind of investments is not as long as like a redev and life sciences. We tend to think it's probably around 7-plus years, and we're getting a return. And obviously, it's helping our same-store metrics, but we don't look at it as recurring CapEx. I mean, we are getting the return, and we've done quite an extensive analysis looking at all the projects we've done in the last few years. I think, at this point in time, we're probably about halfway, maybe a little bit more, through the revenue-enhancing CapEx. And when you look at the age of our assets, we think it's important for us to continually invest in these. So it's probably not a good run rate number forever, but I think, for the next 1 year to 2, it would be at the levels that's it at, and we'll continue to assess the returns we get.

Okay. And then just last one real quick, if I may. On the medical office portfolio, I think it seems to be some amount of expirations over the next 2 years. Can you just give us a sense of any known maybe large move-outs and where you think rents are relative to market?

I'll answer that -- this is Tom Klaritch. I'll answer the rent question first. The past, probably, 4, 5 years' rents have been pretty close to market, and we continue to see that. We are seeing some improvement in re-leasing spreads for the past 2 years, in fact, in '18, we expect them to be up over 1%. With regard to the leasing, we had seen an increase in leasing volume in the past 2 years. I think one of the reasons that's being driven is -- and we've talked historically, at least, for the past 4 or 5 years about the consolidation in this space and hospitals buying group physician practices, practices merging together into larger groups, that's caused an increase in the size of the spaces. For example, if you go back 10 years, the average size of space in our portfolio was probably 2,800 square feet, in 2017, that was actually 4,500 square feet. So we've seen an increase. And we've actually seen -- just from '16 to '17, as these spaces started to roll, the larger spaces, we've seen about a 50% increase in lease roll over 10,000 feet and almost an 80% increase in lease roll between 5,000 and 10,000 square feet. So we are seeing the impact of that. So it's really not a result of large spaces rolling. Certainly, we do have a number of spaces over 50,000 or 60,000 square feet, but that's not really been the reason. I think it's the trend that's happened over the past couple of years.

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

Just on the RIDEA guidance, I was hoping you could discuss what you're seeing in terms of new leases and renewals, the apartment concept and kind of what you're expecting for 2018 in your guidance range, maybe at the midpoint.

So I'll take the second part first. So we're reflecting a 3% REVPOR growth. So that takes into consideration various factors, but most of it is the underlying rents, there is also some services in there. I think it -- look, it depends on markets, so you have some markets where there is a lot of new supply. And as you're trying to build occupancy in a property and you're rolling over the rents, those will potentially be going down. And then there's other properties where we have high occupancies and we're able to push rates greater. It really is a rate and occupancy mix to try to drive the most revenue growth. We passed through -- most of our leases adjust at the beginning of the year in January, and we had 3% to 4% increases depending on, again, the occupancies and properties. And so far, we're hearing that there hasn't been significant pushback on those increases.

Okay, so with 3% to 4% increases to your existing and new, on average, would be slightly down then?

I would say slightly up.

Okay. What kind of typical retention do you assume then?

Your average stay is between 18 and 24 months.

And a difference between IL and AL, obviously. But retention really isn't the issue, it's more the term that the senior lives in the community.

Okay. And then I just wanted to go back to a point about the seniors' housing triple-nets. It sounded like, and correct me if I'm wrong, that you are assuming some level of rent cut in guidance? Is that correct? And can you just give us a sense of what the quantum is of any potential rent cut?

The rent cut within the guidance is a rent cut that we agreed previously with Brookdale at $5 million. Now $2.5 million of that is in our same-store pool, which is why you see the adjustment we make on that footnote 2 on Page 50. The other $2.5 million is an asset that, as we've assessed it, we especially like it up in Northern California. As opposed to sell it, we are -- we think there's a lot of upside to that we will convert that to RIDEA, but we're looking in our guidance at the $5 million rent cut.

Just to be clear, Juan. Just to be clear, we're showing that rent cut in the SPP results. Pete carved it out so he could quantify the impact of it, but that rent cut was just one of the gives and gets of many in the Brookdale transaction. So even though it does affect our same -- our SPP, it is a distortion to the year-over-year results, so I just wanted to make that clear.

Okay. And that's saying no other rent cuts other than which they negotiated with Brookdale already?

Correct.

Right.

Our next question comes from John Kim with BMO Capital Markets.

I had a question on your SHOP performance. This quarter, you took out 39 properties from your same-store pool. You didn't sell 39 properties during the quarter, so I'm just wondering are these representing the transitions assets.

So in our SHOP pool, let me just give some information on how that's changed. Obviously, last quarter, you've seen our supplemental, we had 122 assets in our SHOP pool. We had 83 this quarter. So the net impact there is really RIDEA II coming out as well as 5 assets that we are selling to Brookdale. So 54 are coming out. However, there are 15 that entered this quarter and they're through a variety of different operators. So some came out, which were really the assets that are held for sale, but then we had some come in this quarter. And we actually have a walk. If you see John, there's a walk that we have within our supplemental on the SPP page, this walks through our total portfolio down to what's in the same-store pool. It's Page 17.

Okay. So the transition assets will remain in the same-store pool going forward?

The transition assets are in the same-store pool, correct. Yes, we're going to actually keep those in the same-store pool through 2018, even as the transitions occur, which I know those kind of an optional item. But we felt that to strip those out of our SPP pool would just cause more confusion, so we're going them leave it in.

Thanks for doing that. And so the 3% of the 8% decline was related, I think, Pete, you mentioned, to assets entering the same-store pool prior to stabilization. What does that represent exactly? I mean, does that mean they're just slower to lease up, but you've held them -- they were completed more than 12 months ago?

So the degradation there is due to an acquisition that we did in the third quarter of 2016. Those properties were added in the fourth quarter. These are -- they're with -- Senior Lifestyle is the operator, and the properties are located in the Baltimore DC market, 7 properties. They got off to a bumpy start. Senior Lifestyle had lost its -- a COO, and then lost a second COO. So there was a little bit of a lack of guidance for the individual communities. But the performance has stabilized, and we expect improved performance in 2018. We've invested over $5 million into renovating the communities on -- that's substantially complete. We are planning grand reopenings in the next few months. We've hired additional salespeople at 4 of the 7 communities to help them improve the lead conversion and drive occupancy, and Senior Lifestyle has added a regional resource that is solely dedicated to our communities. So we expect these factors to improve the performance over the course of 2018.

And then finally on Page 50, in your guidance, you mentioned 6 of the Brookdale assets will be sold at a 7.4% yield, and that's different from the 6.5% that you previously quoted. I'm assuming cash flow is not going up over the last few months? Is this representing a change in the value of the assets?

No. The real distinction there, if you look, there are 2 triple-net assets that are included in that. When we came out with our guidance on pricing last quarter, it was based on EBITDAR, so those 2 triple-net assets have coverages below 1.0, so that's why when we look at the 2018, we're looking at it on a cash yield basis, which is EBITDAR for the SHOP assets, but it's the lease yield on the triple-net. But when you look to EBITDAR on the triple net, it's still at 6.5%.

But the SHOP would have declined to offset that?

We looked at that, but I would say, it's still largely in line with the 6.5%.

Our next question comes from Chad Vanacore with Stifel.

So I just want to swap back to the CapEx question. CapEx in the quarter was pretty well elevated, what did that CapEx go to? And then what's a good assumption for 2018?

Chad, it's Pete, I'll take that. So you're right, it was higher in the fourth quarter. It really primarily relates to just timing of the capital spend. Most of that increase is in life science and MOBs, and on the positive side, leasing actually drove a lot of increased lease commissions in December, bringing that number up. We also began some common area improvements within MOBs as well, as we look towards driving leasing results in 2018. So we saw a slight tick-up there. And then we did see some additional investment we put into our Sunrise assets also. So really, it's just a timing thing. When you look at what we're assuming for 2018, I would encourage you to just go to Page 50, and you can see that we've got all of our CapEx broken out towards the bottom end of that page.

All right, that's good. And then another thing is G&A as a percent of revenue was also elevated in the quarter. So what's good G&A forecast for 2018? I assume this quarter had a whole bunch of noise from some nonrecurring items.

Yes. I would say, from a G&A perspective, and we got that in our other items on Page 50, we're looking at $82 million to $87 million. That's really flat from where it was last year, so we don't see G&A going up. No you will have some noise, severances, and then Mike's severance will be a first quarter item that we'll deal with. It was not in 2017, but we did have some severance items in 2017 as well. But I would say, the $82 million to $87 million is our number, and that's basically flat from where it was last year.

All right. And then just one more. You had mentioned that you're expecting a seasonal drop in your SHOP portfolio in the first quarter. Are you modeling any improvements in occupancy in the back half of the year, in 3 and 4Q in 2018?

Yes. We have our normal seasonal adjustments which show that improvement in the occupancy.

Our next question comes from Michael Carroll with RBC Capital Markets.

Pete, can you talk a little bit about the planned dispositions that you guys highlighted last quarter? And will these dispositions, the timing or valuations of these deals be impacted at all by the difficult flu season we're going through right now?

Why don't I take the first part, and then Kendall wants to jump in on the second part as well. But as we look at -- and I outlined this in my prepared remarks, but as we think about the dispositions, generally, the Brookdale sales, those are under contract. We've actually closed on 1 already, and then we'll close on the balance at the end of this quarter. The RIDEA II JV that we say will close at the remaining piece there in Q2, really, the reason for the delay is just license transfers, it's an entity-level deal. So to get the licenses transferred over actually takes quite some time, especially in California. So that's really the reason why that transaction hasn't closed yet. U.K., we're looking at Q2, we're far along in that process, so we think that's a Q2 item. Genentech's pretty straightforward, that's just in July. And then on these Brookdale sales to third parties, we're in the middle of a process we've been running. It's a lot of assets, you have to get the various bidders through all of the assets, to tour them, and they're not all located in one area. So it does take a little bit of time to do that. But as we look at those assets, we provided budgets as well to all the prospective bidders, and we provided information on where we see things for 2018. So with regards to how we see pricing, we've laid out knowing that we provided that information where we see pricing right now, and that's at the $600 million to $700 million range on the Page 50 of our guidance.

Okay, great. And then I just wanted to confirm too, is there anything outside of these announced deals that HCP still like to sell? Or is it just typical cap recycling after this?

Yes. The fact is that this is what I would refer to as the end of the heavy blasting end of our repositioning. We've identified the assets that we felt were non-core and have spoken to the Street about them. I think the Street understands this well at this point. And any other transactions as far as sales -- I would put it this way, there is always a certain amount of annual pruning that takes place when you've got a big portfolio, so that goes on forever. But as far as like another bucket of non-core assets that we haven't spoken about, that is not the case.

The next question comes from Drew Babin with Robert W. Baird.

Quick question on the transaction market out there. Obviously, we have broad cap rate on your stock, especially kind of holding MOB and life science segments, and then be closer to 6 and saying that senior housing should be valued at a much higher cap rate than, I think you would argue, the private market should bidding to it. And I guess, can you give us some color on how the private market is underwriting deals in terms of unlevered IRR growth expectations or just kind of what are you hearing from that side of the fence?

Yes, we hear a lot. In fact, why don't I -- I'll turn it to Tom Klaritch first to talk MOB and life science, and then Kendall on the senior housing. They're both -- they're much dialed-in. Tom, why don't you start?

Yes. I think there's been a lot from private money driving toward MOBs. So even though some of the typical MOB buyers that -- diversified REITs and the pure plays have not done as much volume, we're seeing a lot of demand for space. Quite frankly, there's been a shortage of supply at this point. There was a couple of large deals in 2017 that everybody is aware of, the Duke deal, and that wasn't the only, and most recently, the Bentall Kennedy. Actually, 2018 has started off a little slower than last year. We wouldn't anticipate those giant deals. But there are some out there, and we're hearing that in the next couple of months, there will be some other deals coming to market. Right now, the only thing of size is a large, mostly off-campus portfolio in Chicago.

In life science?

In life science, again, there hasn't been a lot of marketed deals. Recently, there is a transaction in Boston that we're looking at. Other than that, it's been really what you've seen from us this past year. It's really value-add type plays, where we go in and buy an asset that's a little lower occupancy, like our 6000 Shoreline, below market rents. We were able, actually, at this point, to lease that asset up to a 100%, and captured some of the rent upside there. We also bought 2 assets in San Diego that we targeted for redevelopment right away, and we're well along on those. So that's kind of the plays we're seeing in life science right now.

Thanks. Kendall, on senior housing?

Yes. So the investment volume was down in the fourth quarter as compared to the third quarter and compared to last year. We have seen a recent pickup in activity, and this year, there's some larger deals out there. Cap rates are stable. We haven't seen any change in the cap rates. And while the REITs are -- have been on the sidelines a little bit on the acquisition activity, the private equity firms are very active. And we're also seeing some increased interest from some of the international buyers.

So would it be fair to say that, I guess, private equity investors are looking past the way of the supply and more focused on the long-term demographic trends?

I think that would be safe to say.

The next question comes from Todd Stender with Wells Fargo.

So just a clarification back to the Tandem loan. I think you had a buyer for that, and we're anticipating closing in Q4, just wanted to see what happened there.

Yes. At the time, when we had taken the original impairment, it was because the borrower had discontinued paying interest, and they were working with us to set up a discounted payoff arrangement. And at some point, it started to become clear that, that may not happen. And so that's why when we took the original impairment, it was a smaller amount. And then subsequently, as we realize that, that [DPO] wasn't going to happen, we had to start considering other alternatives in the market.

So is the cash flowing now? Are they current? Or what are you receiving now?

No, they're not cash flowing, they're not current, and that's why we're taking the actions that we're -- well, part of the reason we're taking the actions that we're taking.

And so how is it determined what the value would be at a $105 million, if it's not cash flowing? Is that based on a -- just underlying asset value, the collateral?

Yes. So we looked on a weighted average approach, and since the sale is a very viable alternative, and the fact that, that's our preferred alternative, as we stated. The weighted average is heavily weighted towards a sale, and that's what drove our carrying value to be mid-$90 million to $105 million.

I will tell you this, because I'm sure you're curious, given that we've had a few steps in this process, there is actually a fairly significant number of parties that are interested in the paper. So we're -- and we are deep into that process. So there will be more to come on that topic.

Our next question comes from Michael Mueller with JPMorgan.

Just a few quick ones here. First of all, on the same-store SHOP guidance for the year, 150 basis point occupancy reduction, is that an average for the year, or is that a year-end metric?

It's an average for a year. So year-over-year average comparison.

Okay. And then going back to that $5 million rent cut. When did that become effective?

It became effective on January 1.

January 1, okay. And last question, on Page 50, under non-FAD CapEx, the casualty-related capital, what exactly is that?

Yes. The casualty-related capital is mostly related to generators in Florida. We actually have an obligation to put generators within all of our senior housing assets, there are many of them in Florida that don't have that. So that's mostly what that's about.

You will recall that after that hurricane occurred, there were some seniors at, obviously, at other communities that died due to the heat, as the air-conditioning failed, and the state of Florida stepped in and wanted to ensure that doesn't happen again. So this is something that is going to be pertinent to all operators or owners of these types of assets in the state of Florida. So that -- again, that's that cost.

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

It's Michael Bilerman. It's a question, either Tom or Pete, just on the dividend. In your opening comments, you made a point to try to say that dividend is safe. Just 2 questions around that. If you just take your FAD math, you're going to drop down to $1.55 for the low end for the full year relative to $1.48 dividend, I mean, 96%, and recognizes you're still under, but it's not -- there's not a lot of room there. And -- but the other side, my assumption is your FFO is going to trend down over the course of the year. So that just given all of the timing of all the sales that are happening midyear, they're dilutive. And so your 4Q FFO, unless you tell me differently, is going to be lower than your first quarter FFO, which is going to put the payout ratio at even a higher levels. So am I missing something in that?

We actually have taken into account all of the dilution from the sales and are tolerated. And as we look forward, Michael, I mean, right now, we're in the low-90% payout ratio. And as I said in my prepared remarks, we're comfortable at that level. But we see that as we created this earnings base in 2018 to grow off of it and getting lower over time. We don't see it as getting higher as you go through. And -- so we're not seeing it the same way I think you're seeing it.

But I mean, if you just take, I mean, your range for the year is at $1.77 to $1.83, right? So $1.80 at the midpoint. All of the transaction activity is generally towards the middle part of the year, because you're paying that debt at much lower rates than you're selling assets, and it takes time for the CapEx investments. It's not a $0.45 a quarter FFO, right? Your FFO is going to be higher to start the year than where it ends, right?

Yes. But then as we get more into 2019 and beyond, we'll see continued growth in our segments as well, so you have to factor that in.

Yes, Michael, your point is right as well. We are going to have some same-store growth that does factor in throughout the year, but it's just that. And we have looked at it on a full year basis. But your point is correct. One of the thing that I would mention that I looked at is the quality of the portfolio, as we look at a dividend coverage in the low 90s percent, having sold the non-core assets that were not components of the portfolio that we wanted to hold long-term, a lot of that -- a lot of those assets we felt had a lot of risk around them. Now that we've cleaned that portfolio up, we think we have a much, much more stable portfolio as far as the cash flow generation. So despite the fact that what you're saying is true, I think it's partially offset by same-store growth throughout the quarter -- throughout the quarters, and a very stable portfolio. That's a fair point.

Right. Well, almost the math I was just doing was taking your $1.80 midpoint, you list all the FAD numbers on Slide 50, which is great, which should total $103.5 million, $0.22 a share, you tipped off $0.22 off the $1.80 and we're down at $1.58, that's 94%, and so fall into the range of 96%, and the high-end of the range is 92%, it's just simple math on your numbers. That's where the -- but it's going to trend worse as you get to the end of the year rather than better, so I was just trying to better understand the seasonality of your FFO, just given the capital markets activities that you are doing. Do you guys -- are you guys going to put out a quarterly sort of guidance range? Or not going to go there?

No. I think we'll just stick with the guidance the way that we've said it.

And then just removing the CCREs -- CCRCs and the unconsolidated you presented on Slide 54, what 2017 would've been, which is a 40 basis point benefit to '17 guidance. I mean, do you have a similar sort of analysis based on the guidance that you lay out for '18. Relative to that 1% total portfolio growth, what that would have been under your old methodology?

Yes, we did do that, and we would've actually had a slightly better outcome inclusive of the CCRCs based on our -- if they were included in the SHOP portfolio based on our projections. But at the same time, we still concluded that CCRCs do not belong in a SHOP portfolio for comparability purposes of peers. And the entrance fees just do not lend themselves well to being part of the SPP pool.

And do you have -- just last question. Just in terms of the senior housing triple-net portfolio, do you have a sense on -- in talking with your operators, sort of where those operations are headed and how similar or different they would be than your operating senior housing portfolio? And in fact, what I'm getting at is if you're operating portfolio is going down 4, and your net lease assets, their operations are going to go down the same level, that coverage level is going to start getting pretty tight, excluding the Brookdale reset that you just did. So I don't know if you have color in terms of the performance going forward of the triple-net portfolio relative to your operating assets.

There is some additional noise in the SHOP portfolio in and around the Brookdale transition. So that is affecting that range. I think that some of the same things that are facing the SHOP portfolio in terms of the flu and new supply are also facing our triple-net portfolio. I think generally, when you do look at our triple-net portfolio and see the high coverages on the Brookdale assets, and then you look at our others, Sunrise, Aegis, and HRA, I'd say, generally, I think that the quality and the markets of those assets is a little bit better than where we are in our SHOP portfolio. So you might see performance to be a little bit better there than in the SHOP overall.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Tom Herzog for any closing remarks.

Thank you, operator. So this concludes our call. Thank you all for taking the time to join us this morning, and we look forward to talking to you all soon.

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