Healthpeak Properties Inc (PEAK) 2018 Q2 法說會逐字稿

Good day, and welcome to the HCP, Inc. Second Quarter 2018 Financial Results 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 Second Quarter Financial Results Conference Call.

Today's conference 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 our 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 these forward-looking statements.

Certain non-GAAP financial measures will be discussed on this call. In an exhibit of the 8-K we furnished with the SEC today, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G. The exhibit is also available on our website at hcpi.com.

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

Thanks, Andrew, and good morning, everyone. With me today are Pete Scott, our CFO; and Scott Brinker, our CIO. Also here and available to the Q&A portion of the call are Tom Klaritch, our COO; and Troy McHenry, our General Counsel.

This was a busy and productive few months for HCP. We delivered overall operating results in line with our expectations. We completed the majority of our senior housing operator transitions. We closed or placed under contract $1.5 billion of non-core asset dispositions, plus closed on our U.K. joint venture with Cindat, which resulted in $402 million in proceeds. We continue to reduce our leverage and repaid $1 billion of debt.

We signed 324,000 square feet of leases related to our assets under development. We entered into a $605 million MOB joint venture with Morgan Stanley that added a strong presence in the Greenville market with a tenant that is the largest health care system in South Carolina. And we commenced development of Phase 4 of The Cove life science campus in South San Francisco and an expansion of our life science Hayden campus in Boston, increasing our total pipeline to $800 million. In short, our team made tremendous progress executing in all facets of our previously announced strategy.

With our transaction progress to date, we have now closed or are under contract on over 90% of the $2.2 billion of sales we identified back in November 2017. Operationally, our life science and medical office businesses are performing very well. We continue to see strong life science demand in all 3 of our markets, but in particular, San Francisco and Boston. As expected, our 90 -- or 81% on-campus medical office portfolio is producing stable growth.

Similar to last quarter, we've continued to navigate the headwinds within our senior housing business, with performance of our transition assets falling further than we expected. The good news is we have now completed the majority of our planned operator transition. Atria, Sunrise, Eclipse and Sonata are hard at work implementing targeted plans for operational improvement at these newly transitioned communities. Our expectation is these high-quality operators will drive outperformance for HCP, but it will be choppy and take some time to capture this upside.

With a stronger portfolio on the balance sheet, our team has begun to look for more opportunities to play offense, which is notable and a welcome change from the defensive posture we've maintained over the past few years.

From a development perspective, we continued to have tremendous leasing success at The Cove, where we now have 100% of Phase III leased. Our blended yield on cost at The Cove is expected to be in excess of 8%, well ahead of our original underwriting. We expect to continue to capitalize on this market momentum as we ramp up our leasing efforts on the $224 million first phase of Sierra Point and the $107 million Phase IV at The Cove, both in South San Francisco. More to come in the coming months.

The forward progress I just described will not be possible without a strong and cohesive team, and I'm very pleased with the way our senior leaders have come together around a common goal of positioning HCP for future growth. I'm also very pleased with the strong additions to our board, where last week, Lydia Kennard and Kent Griffin joined the other directors in Irvine for their first quarterly meeting. And today, we announced that Kathy Sandstrom was appointed to our board. Kathy spent over 2 decades at Heitman, and she was most recently Global Head of the firm's real estate securities business while also leading the firm's buy-side investment teams for REIT securities.

With the recent appointments of Lydia, Kent and Kathy, we are honored to have these highly talented individuals join our board, and we look forward to their future contributions.

With that, I'll turn it over to Pete to discuss our financial performance for the quarter and outlook for the remainder of the year. Pete

Thanks, Tom. Let's start with second quarter results. We reported FFO as adjusted of $0.47 per share, and our portfolio delivered 0.7% year-over-year same-store cash NOI growth, which was in line with our expectation.

Let me provide more details around our major segments. For medical office same-store cash NOI grew 2.5% over the prior year, driven by in-place lease escalators and operating expense savings. Demand fundamentals for outpatient medical office buildings continues to be strong. Year-to-date, we have achieved a retention rate of over 75% on renewal and a positive mark-to-market on rent of 2%.

Turning to life science. Second quarter same-store cash NOI grew 0.5% over the prior year, which, as we've discussed, was impacted by the mark-to-market of the Rigel lease. On a normalized basis, same-store cash NOI in life science would have been approximately 3.5%.

Tenant demand remains strong across our 3 core markets. Sequentially, occupancy moved 120 basis points higher, driven by lease commencement at some of our recently vacated spaces. Cash re-leasing spreads during the quarter was positive 24%, driven, in part, by sizable mark-to-market at our Hayward and South San Francisco portfolio.

Shifting to our life science development. At The Cove Phase III, we are now 100% leased, well ahead of expectations. We are excited to expand our relationship with Denali Therapeutics, who will take 153,000 square feet of space at Phase III. Denali is an existing tenant of HCP's and completed a successful IPO in December 2017.

In addition, we welcome Alector to our group of high-quality tenants. Alector, who will occupy 105,000 square feet of space at Phase III is a fast-growing biotech company focused on developing potential cures for both Alzheimer's and many forms of cancer.

On our other major developments in South San Francisco, we continue to see significant demand for Phase IV of The Cove and the first phase of Sierra Point. I expect to have more to report in the near term.

For our senior housing triple-net portfolio, same-store cash NOI grew 0.7% in the second quarter. This was in line with our expectation and takes into account the previously announced rent adjustment with Brookdale. On a normalized basis, same-store cash NOI in senior housing triple-net would have been approximately 2.5%.

For our SHOP portfolio, same-store cash NOI for the quarter was negative 4.4%. However, similar to last quarter, there was a significant disparity in the performance between our core portfolio and the assets we have transitioned or intend to sell. As a reminder, we have not excluded nor have we normalized for performance in our transition assets or assets we intend to sell. Scott will provide more color on our SHOP performance momentarily.

Before moving to the balance sheet, I would like to cover a change in our FAD presentation and policy. Going forward, we will exclude leasing commissions from FAD capital on development and redevelopment assets as well as vacant space at newly acquired properties.

Historically, these leasing commissions were not significant. However, as we have ramped up our development and redevelopment pipeline and we have been successful in leasing up space well before delivery, we thought it was important to be consistent with our peers and others in the industry.

Furthermore, these commissions were already captured in our estimated project cost and yield. Page 22 of our supplemental provides a summary of our FAD and non-FAD capital expenditures by segment and is reflective of our updated definitions.

Moving on to the balance sheet. We continue to take significant action to improve our credit profile. During the quarter, we generated $635 million of cash proceeds from asset sales. We used these proceeds to repay our revolver, reducing the balance to $545 million at quarter end.

Subsequent to quarter end, we used proceeds from our initial U.K. joint venture transaction and the Genentech purchase option exercise to redeem the remaining $700 million of our 5.375% 2021 bond. We will record a $44 million debt extinguishment charge in the third quarter. Year-to-date, we have repaid over $1 billion of debt, and our pro forma net debt-to-adjusted EBITDA currently stands at 6.3x.

Finally, I'll finish with our full year guidance. Starting with NAREIT FFO, we updated our guidance range primarily to reflect the debt extinguishment charge on our notes redemption. For our FFO as adjusted guidance, we are increasing the lower end by $0.02 per share, bringing our revised guidance range to $1.79 to $1.83, resulting in a $0.01 increase at the midpoint.

Our updated range is based on a number of moving parts, including the positive impact of owning certain sale assets longer than incorporated in our original guidance range and the accretive joint venture with Morgan Stanley, which we expect to close in August. These benefits are partially offset by weaker-than-expected performance in the transition of sale assets in our senior housing portfolio and an increase in LIBOR.

We are reaffirming our aggregate SPP guidance range of 0.25% to 1.75%. By segment, SHOP is currently trending towards the low end of our initial range, while life science, medical office and triple-net are trending toward the mid- to high-end of our ranges. Other additional details of our guidance, along with timing and pricing related to our capital recycling, can be found on Page 45 of our supplemental.

With that, I would like to turn the call over to Scott.

Thank you, Pete. The takeaway on the investment side of the business is execution and progress. This morning, we announced a $605 million joint venture with a fund that's managed by Morgan Stanley Real Estate. HCP will own a 51% interest, and Morgan Stanley will own the balance. We used relationships and creativity to source and structure an investment that's economically and strategically accretive.

To form the venture, HCP will contribute 9 MOBs valued at $320 million. Our sale cap rate is in the low-4s on trailing NOI. Today, those 9 buildings are 80% leased, and while we fully expect them to lease up, it will take time and capital to do so. Morgan Stanley will contribute equity that allows the venture to acquire an on-campus medical office portfolio, anchored by the Greenville Health System, or GHS. The acquisition was sourced by HCP, and the purchase price is $285 million. Our acquisition yield is roughly 6%, inclusive of joint venture fees.

Big picture, we like the market, tenant, the real estate and our capital partner, and I'll elaborate on each point. Greenville is a new market for HCP, allowing us to expand our platform and market reach. It's the largest MSA in the state, and a favorable business climate is driving continued growth.

Our anchor tenant is GHS. They're, by far, the leading health system in the state. They captured more than 50% share of the Greenville market, and they have an A credit rating. This is a new relationship for us, and one we expect will provide future opportunities.

The buildings themselves are 95% on-campus, which is a key metric when investing in medical office because location drives demand. 94% of the space is leased directly to GHS, who will sign new 10-year leases at closing.

Our capital partner, Morgan Stanley, since 2015, we've been 51-49 partners on a 1.2 million square-foot medical office portfolio in Houston. They've been great partners, and we're excited to grow the relationship. We also like the economics here. This deal drives immediate and sustained accretion, given the spread between the acquisition and disposition cap rates.

Turning to our life science platform. Industry fundamentals remain incredibly strong. We're taking advantage with $800 million of ground-up development underway, primarily in South San Francisco and Boston. The demand for space exceeds supply, so we're seeing great leasing momentum.

We're also executing previously announced transactions. In June, we closed down the sale of a 51% interest in our U.K. holdings to Cindat, an institutional investor based in China. They're well known to the team here, and it's another example of why our relationships are so important. Cindat plans to acquire the remaining 49% in 2019, allowing us to complete our strategic exit from the U.K.

We're also progressing the Brookdale sales. Year-to-date, we have sold $700 million of Brookdale assets, and another $500 million now under binding purchase contracts. We have a handful of additional assets in the marketplace, and with those, we'll have concluded the master transaction agreement that we announced last November.

Pete gave the senior housing results earlier, and I'll provide some color. In triple-net, rent cover for most of our operators improved last quarter. It was outweighed by declines from the Brookdale portfolio. Given the trends in occupancy, we expect the rent covers to decline further next quarter. We're very focused on the Brookdale portfolio in particular. These are good buildings with a strong track record, so we have high expectations for performance.

In SHOP, the core portfolio delivered 2.9% NOI growth last quarter. That's, of course, an excellent result in the current market, and there -- it will likely be the high point for the year, given the downward trend in occupancy. Whether the results are good or bad, we caution against reading too much into any 1 quarter. Simply, it's too short a time period to evaluate performance in senior housing. That's especially true for HCP because our sample size is so small.

In the transition portfolio, we've now closed 3 quarters of the transfers, and most of the remainder will occur this month. Occupancy at these properties is in the low-80s today versus the low-90s just 18 months ago. So clearly, there's upside to be recaptured.

Our new partners are hard at work, but realistically, it takes time to build a new team of culture, implement systems and rebuild the local reputation. We also need to dig out of a big decline in occupancy over the past few quarters just to get back to level. So in the next few quarters, we'll see negative year-over-year transition results.

The upswing has the potential to be dramatic, but the timing of year-over-year growth is more likely to be in the second half of 2019 and into 2020 given the comparable periods. These transition assets are a case of 1 step back to take 2 steps forward, and we have a good precedent. 18 months ago, we transitioned 4 assets with 70% occupancy to Sonata, a focused operator with local expertise. Today, occupancy in those assets has improved to almost 90%.

And with that, operator, we can open the line for questions.

(Operator Instructions) The first question comes from Rich Anderson of Mizuho Securities.

On the Brookdale situation, Scott, did you say you expect to have the rest of the transitions done this month

Rich, we expect to have most of them to be done this month. We've got about 34 of the transitions already completed. We've got 8-or-so more scheduled for August, and then a small handful of it will likely transfer later in the year due to licensure delays.

And so the bigger picture question is, would you say you're on plan or ahead of plan in terms of getting all of it done, transition, sales, everything from the Brookdale process

100% on plan. We carefully chose the operating partners. We continue to feel extremely strong about, over time, their ability to turn these properties around. But as expected, the transition period is choppy, and our NOI this year is reflecting that. Occupancy is way down, not a surprise given the turnover of the properties at the leadership level. The good news is Atria, Sonata, Sunrise, they're now in most of these buildings, establishing the new team, the new culture, rebuilding the local reputation. But these things take time. So we continue to be very optimistic. It will recapture the big decline in occupancy, and it's been big. I mean, we're down nearly 1,000 basis points in occupancy over a year, Rich. I mean, now that our NOI decline is 15%. And frankly, it could get a little bit worse next quarter. We don't know for sure. It's a relatively small pool, so it's important to keep that in mind. We're only talking about $8 million-or-so of NOI per quarter, so these aren't huge numbers. But the percentages sure look ugly. But we are optimistic we'll recapture that. We've got a good precedent. Atria has done this a lot. We're redeveloping some assets. So at some point -- and it may take a little time. This could easily stretch into late '19 and 2020 just because of the big decline in occupancy. It takes a while to get back to level. But once we do, I think you're going to see some pretty attractive growth in those assets.

Okay. And my second question, maybe for Tom. One of the themes that came out of your peers' calls was that they think that senior housing should get a valuation similar to conventional multifamily. So the question is, do you feel that way, being a multifamily guy in your past And second, have you thought at all about marketing assets to sort of multifamily-esque type investors to the extent we can maybe draw some comparisons between how these assets should be valued I'm curious if that's a strategy that you've thought of.

Rich, good question. Obviously, I've experienced both sectors pretty dramatically. I do have some thoughts on this. I think there are some pretty big differences between the 2 sectors, just fundamentally. Senior housing obviously is more complicated, with the care component. It's got some -- there's always some potential liability that comes with that, that does not exist in Senior Housing (sic) [Apartments" />. They're operated by management companies under RIDEA structures and with that, often times, with long-term contracts. The operating margins are way different, call it, 30% senior housing, 70% multifamily. So the volatility within that is different. I think about the 30-day month-to-month lease that you have in senior housing vs multifamily, where typically, it's a year and you get a certain amount of turnover, but you can have pricing systems that factor that in and establish lease terms that fit neatly into the rental structure as far as timing of year in multifamily. And the other thing that strikes me is licensing. When one goes to transition or sell assets, you go through a whole licensing drill in senior housing that you don't in multifamily. So at the same time, just to balance it out, the demographic growth in senior housing should produce a big upside. We're going to bump along for a while here. But on the other side of this thing, there should be some real upside. And that lowers the cap rate on senior housing, on that component. And then the needs based, AL and memory care, are less impacted by the business cycle. So there are some pros and cons. But in my calculus, having experienced both fairly extensively, when we look at cap rates and IRRs, they take all this into account, I'm not surprised if the market is pricing Senior Housing at a higher yield, given these different risk factors despite the expected future growth. So to me, it makes sense where it's priced. I think there's an overriding factor I would mention though, and Brinker mentioned this on the last call, one of the things he likes about senior housing -- and he's been doing it for a decade and a half, since he was young is just -- he's still young, but it’s an inefficient market, senior housing is inefficient. And that means if you do it well, you've got a lot of upside that you can go capture. So that's my answer to the first question. I did see, of course, you'd ask those questions and the other 2, so I thought I'd give it some thought and give you an answer that had consider that. The second part is marketing asset to multifamily. Not -- certainly not assisted, probably not IL, it's a different business. It's an entirely different business in my view. The 55-plus, yes, you could team up. I think, well, you won't see us in the 55-plus business anytime soon. That is much more akin to the systems, pricing systems and the type of business multifamily does, and the things they do, they do better than we do in senior housing. It's just a different business. They've been doing it for a long time. So I don't see independent or assisted or memory care drifting into multifamily, that would be my view. But 55-plus, I could see multifamily taking that on, probably not a very good fit for us because we don't have that infrastructure.

The next question is from Juan Sanabria of Bank of America Merrill Lynch.

Just on the MOB side, I was hoping you guys could give your thoughts on the CMS HOP derate that was maybe a bit below expectations. And just generally, if you can comment on how you think about risk related to some of the mergers and new initiatives, like the CVSs and the Aetnas of the world, who are putting out there that may disrupt primary care physicians in the U.S.

Tom Klaritch, will you take that

Sure. Juan, when you look at the proposed rule for Medicare that recently came out, the tenants that will be most impacted from that are really going to be hospital outpatient departments that are in off-campus buildings. If they have a higher Medicare percentage of payers then -- of patients, then that will also impact them. You know it's interesting, too, because of the historical service mix of for-profits versus not-for-profits, the for-profits actually are in a better position than the not-for-profit. So if you look at our portfolio, we're 81% on-campus. So on-campus facilities aren't impacted by the rule. Our Medicare mix is lower than the national average at 16%, and we're 60% for-profit. So we're probably in one of the better positions when you think of this rule. As far as the mergers of like Walmart, Humana and CVS, we consider those, as you said, more of a primary care impact. You look at the retail health clinics and the urgent care centers, I see that as more of an impact to them. So it's more of a provider side competition. Again, if you look at our portfolio, we're 81% on-campus, and we actually have a much higher mix of specialists in our portfolio. If you look at the national average of physicians, primary care doctors make up about 33%. If you look at our portfolio, it's only 19%. So again, I think we're pretty well insulated from that also.

That 19% is of what, sorry

19% primary care physicians versus 33% on average. So what that points to is we have a much higher percentage of specialists in our portfolio.

Okay. And then I was just hoping, maybe for Scott Brinker, on seniors housing, any updated thoughts on just nationally, maybe not related to your RIDEA portfolio specifically, but how you're thinking about when fundamentals of trough clearly starts to peak, I'm not sure if the deliveries are kind of peaking now. If you can just kind of frame the starts, deliveries and then the actual lease time that these things will weigh on the market and when things may begin to turn on a national basis.

Yes. I'm happy to take that. What I can tell you we take a -- we're spending an enormous amount of time looking at that exact question for our specific properties, but we also step back and try to think about it at the national level too even though it doesn't have a direct impact, it really is a local business. But I'll try to answer your question. The good news is starts have declined 2 quarters in a row. Its starts are down, particularly in our markets, but that's also true nationwide. Of course, the offset is that it takes 18 to 24 months for these projects to actually complete from start to finish, generally speaking. And that means that for the next 12 to 18 months, most likely, that there will still be an imbalance of new supply being delivered that's in excess of the demand that exist. So what we like is that absorption remains strong. It's in the 2% to 2.5% per year. We think that number only increases going forward. But more likely than not, the dramatic growth in that percentage is probably still a couple of years out. So I don't think things could get worse. I also don't think they get dramatically better for the next 12 to 18 months, but we're clearly heading in the right direction.

The next question is from Chad Vanacore of Stifel.

So just thinking about your new tenants in senior housing, how many of those represent new relationships And then what are your expectations for growth with those new relationships

Chad, it's Scott. It's a mix. Atria is taking on the lion's share of the Brookdale transitions, and they're just an existing operator, although it wasn't in scale. So now it's in scale, and we'd like to do more with them. We think very highly of their team, great track record. Sunrise is the second largest on the transition list. They're taking on 6 of the properties. We have a very large portfolio in Sunrise today, 48 properties, and we would like to grow with them as well. They do a fantastic job in their core business of memory care and assisted living. Many of the others are actually new, where we're very small relationships that we're trying to grow. That includes Sonata, where we had a really great experience within Florida. They successfully turned around some Brookdale properties for us in the past, and we'd like to do more with them, particularly in the state of Florida. And then there are a handful that this team is familiar with that we don't work with today, that could be great candidates to transition properties to whether it's this existing group of Brookdale assets or what we do in the future. So we're very optimistic about what's possible with the senior housing business. We're remaking it in a pretty dramatic way, both the properties we own, the operators that we do business with, the way deals get structured, and the way we align incentives. So we're still fairly early, but we're -- we like the direction that we're moving.

Okay. And then just for clarification on your MOB JV with Morgan Stanley. Can you walk through how it exists today And then where it gets to you You're adding 1.2 million of square foot to equal 2 million-or-so. And then in your statement, you say you -- the total portfolio is going to get that 3.2 million square feet and 33 properties, can you just walk through that

Sure. So the JVs are separate. The one we've formed with Morgan Stanley in 2015 is isolated to a Houston portfolio that's leased to Memorial Hermann, the top health system in Houston. This new joint venture, in which we're contributing 9 assets and then Morgan Stanley contributing equity, so that new venture can in turn acquire a portfolio of Greenville Health System MOBs. So about 2 million square feet in total, and it will be separate from that existing joint venture. A number of the terms are similar, but they are indeed separate ventures.

The next question is from Jordan Sadler of KeyBanc Capital Markets.

I wanted to follow-up on that last question regarding the JV assets. Can you sort of describe or characterize the new assets -- or sorry, the assets that are being contributed to the new joint venture I know the occupancy is a bit low, but maybe just give us a sense for -- and certainly well below your average. Why these are good candidates for this

Sure, Jordan. It's Scott again. There are a couple of reasons. One is, the existing venture with Morgan Stanley is completely concentrated in Houston, and the tenant is Memorial Hermann. And about half of the properties that we're contributing here are also in Houston with Memorial Hermann, so it just felt, geographically, from a relationship standpoint, like a portfolio that would fit together pretty well even though they are separate ventures. And then the other asset that we're contributing are older properties that we think have the high likelihood of leasing up, but it is going to take a little bit of time to do so, and a lot of capital just because they're older buildings and typical TIs and leasing commissions that are associated with lease up. We thought it would be appropriate here to reduce our risk by 50%. We still capture half of that upside. We maintain a market presence and a market position and the footprint, we just reduced our risk profile by 50%.

Okay, that's helpful. And then on triple-net versus RIDEA, you guys have done quite a bit on the transitioning of assets. And I think transitioning assets from the triple-net structure to the RIDEA structure has been all the rage. I'm wondering if you guys are having incremental discussions along those lines within your portfolio. I know Capital Senior, on their conference call, mentioned that they're having some type of discussion regarding your relationship with them. I know that's now your aspiration but just curious if you could lend any insight.

Jordan, I can try to cover that, and Tom may want to add a couple of comments as well. It's an important topic. So the triple-net portfolio for HCP is actually extremely high-quality. So that's been validated by a number of sell-side research analysts. We certainly think that's the case as well. That's true from a real estate standpoint as well as operators. And when you look at the payment coverage today, it's around 1.1x. But after a management fee, it's about 20 basis points higher is for the management fee. And we do have a couple of leases that are below 1.0x cover. That's about $50 million of annual rent. It's below 1.0x. But it's important to think maybe more carefully about the composition of that $50 million. Half of it is in Sunrise, where the rent that we receive really already reflects the underlying EBITDAR at the property. So there's really no risk whatsoever on those assets. And the other half of that $50 million that's below 1.0x are a combination of very strong credits. We have a fair amount of lease term left, and that includes Capital Senior Living, corporate guarantee, 2 years left on 1 lease and 8 or 9 years left on the other lease. And we're always willing to have discussions with our tenant. That's an ongoing conversation. We like to have win-win relationships, but we also understand that these leases are, in many cases, an asset to HCP. So any conversation needs to acknowledge the way -- and not just on real estate, but we have this lease in place for at least a period of time. And it may well be that 2 years from now or 8 years from now, the supplydemand picture in the senior housing sector looks a lot different. So we need to keep that in mind as well as we think about things we would or wouldn't do right now. Tom, anything you'd add

I think you've captured it. I would mention, Jordan, that we will likely transition some of the Sunrise add rent assets to SHOP. I think we've mentioned that the last couple of quarters, so that should not be new. That's just to clean that structure out, so it's open to that. But as far as the triple-net arrangements that we have in general, holding those based on the term of the lease, the credit, the coverage is something that we feel is typically favorable. And if we do have some but we think that there's a better play for the long-term benefit, we'll consider those on a case-by-case basis. As far as Capital Senior, we did see their remarks and understand those. There is nothing eminent in anything that's been discussed there. I think there's the number of assets that they've mentioned, just for the record for our investors, I think they've almost doubled the number of assets, just by mistake, probably made a mistake. But our exposure to them is quite a bit smaller than what it might have sounded like if you're listening to their call. No big deal, but I thought I'd mention it.

Okay. That's helpful. Can I just ask you one more In terms of your dollars that you look forward on the investment front allocation here, you're obviously ramping development on the life science side, and that seems to be a pretty good use of capital. One, with rents escalating, what are those new yields looking like as you do new underwriting on Cove IV and Hayden And then two, is that where we should expect you to continue to put dollars going forward

I'll start with the first part of that, and I'm going to turn it to either Peter, Tom on the life science -- Tom Klaritch on the life science stuff. Let me take a minute on that from a big picture's capital allocation perspective -- and Scott, I'll speak to it. You and I talk about it all the time, but you can add as well. We do think life science is quite strong. There has been very favorable demand. We have a sizable development pipeline. It's in the vicinity of $800 million, but we're looking to spend $300 million to $400 million per year on that. So we're not ramping it up to a new level that starts to create undue risk. But we have had such favorable results in leasing. And there's so much continued demand coming out of -- in some of those markets that we do expect to continue that and growing that business in life science by way of development. And we do have 1 million square foot -- buildable square foot, I should say, a landbank so a nice set of development pipeline in life science. We feel good about that. MOBs, we will continue to expand in MOBs. We're going to be selective in what we acquire. It will very much typically be on-campus or anchored if it's on off-campus. We're going to continue with that strategy. The JV that we did is a good example of something that was accretive, allowed us to exit or reduce concentration in Houston, and then add another top 10 market in Greenville. So we like those types of plays. And then senior housing, there, if you did flip to Page 19 of our supplement, you would see a list of different noncore sale transactions that would center around senior housing, mezz debt and the U.K., all the stuff we told you that we were going to take some actions on, all noncore stuff as we clean up the senior housing portfolio and exit the U.K. and mezz debt. So when I think about where you'll see us place money as we go forward, those would be the 3 markets. As it pertains to the life science and how we're thinking about that, I'll turn it to either Pete or Tom. Pete, you want to start

I did, yes. Pete here. Good question, Jordan. We obviously like the risk-adjusted returns on the pipeline developments that we're getting right now in our -- at Hayden. We're underwriting to an expected low- to mid-7% yield on cost there at The Cove, which I know you specifically asked about. That project, we've seen rent increase pretty significantly since we started Phase I through now, just starting Phase IV. On a blended basis, we're probably on the low-8s across all the project, and we're actually going to do much better than that on Phases III and IV because a lot of the infrastructure was done in the first couple of phases. In our Sierra Point, which we don't have any to report on now, but we're getting a lot of interest there, too, and it's tracking with the rental increases generally in South San Francisco. So when you think about those types of yields and putting capital to work, we think it's a very strong risk-adjusted return for us.

The next question is from Tayo Okusanya of Jefferies.

Quick question just around the JV. Again, the acquisition of the portfolio from Greenville, you guys are talking about a 6% yield. I think the seller is talking about a cap rate that's meaningfully lower. I'm just trying to reconcile the difference. I know part of it is the [JVCs" /> that you guys expect to get. But what else is kind of -- what else am I kind of missing in there

Tayo, it's Scott. Let me try to clarify for you the -- roughly 6% in our earnings release is inclusive of the fees that we're earning to manage the joint venture and to originate the deal. The actual property level cap rate that we're acquiring the portfolio portion in mid-5s, about 5.6% on a forward NOI. We are going to put some capital into the buildings, plus or minus $15 million. That will likely happen sooner than later. So we just consider that part of our investment basis, which brings the initial cap rate down to about 5.4%, but we're still around 6%, inclusive of the joint venture fees.

And the one you face on the 1-year forward NOI, are you making any assumptions about meaningful lease up in the portfolio as well

No. We entered into -- we'll enter into new leases with Greenville at closing for 95% of the space, nearly. So this one's pretty easy to underwrite fortunately.

And overall, that -- the portfolio is in the 99% or slightly above that leased status right now. So not a lot of upside from a leasing perspective.

The next question is from Vikram Malhotra of Morgan Stanley.

I just wanted to go back to the triple-net exposure ex Brookdale. The -- Scott, on the one hand, you indicated maybe a longer trough. It's -- 12 to 18 months can still -- may be challenging. If we look across several of the other leases, they're all pretty close to 1x covered with obviously varying expiration. But I'm just wondering, how do you think about sort of addressing some of these Would you convert them to RIDEA, buying them out and maybe replacing them -- replacing the operator It seems like if you're correct and things remain challenging, this could very well then -- you could have a -- they could be below 1x coverage in the next 3 quarters Can you just address some of them more specifically, kind of what your plans are

Yes, Vikram, I don't want to discuss particular operators and our plans with them. I can tell you that we're highly engaged with all of our partners on the status of their business and strategy on how the properties are performing and what we're going to do with the relationships. And the good news is we've got several years in most cases to figure this out, so there's no urgent need. There is zero risk of rents not being paid. That's an important point. The takeaway is that there's strong credit standing behind these leases, and in many cases, if it's below 1.0, it's only slightly below 1.0. But there are any number of things that we could do. Some of the properties under triple-net lease don't get as much CapEx as they need and just need to be refreshed. So we can do that under a triple-net lease, we can do that under RIDEA, we can do that with a new operator. And in a lot of cases, Capital Senior Living is an example. We've got a lot of very high-performing properties and a few that are doing so well. And it may be the case that you'd make the decision to sell those handful of properties that are driving down the whole pool, and you're left with the very high-performing portfolio of assets. So we've got a lot of options and a couple of years to figure it out, and we're going to do the thing that's we think best for our shareholders over time.

Okay. That's helpful. And you're speaking to sort of senior housing, can you -- now that you've spent sort of more time maybe looking through the portfolio and what you want to do, can you talk about sort of maybe -- like building out systems, maybe hiring more people in the sense of trying to create a platform that would enable you to manage these assets in a more data -- using more data, like you probably did at your prior company

Vik, I made the comment earlier, we're remaking the senior housing business. That includes the portfolio, that includes the operating partners and we're making massive progress on the team and the systems that are going to be necessary to drive performance. So we feel great about the progress that we're making and the team that we've got in place. So I'm super excited to be here. It's a dynamic place. We're working our butts off to get this turned around as quickly as we can.

Okay. But I guess, I'm just trying to clarify, do you -- so you need to sort of build out the systems that you like or is it all incremental Do you need to maybe hire more people Is this a 1-year build-out Like how -- over what time frame would you think you'd kind of build all the elements, specifically talking about just systems and processes that you would like to overlay

Yes, Vik, it's in process, for sure. So we're making rapid progress. Tom and the team that came in almost 2 years ago gave me a huge head start. They brought in some really talented people. We're in the process of putting those systems in place. So all the progress that's been made in the last 2 years, in the last 6 months is enormous. And over the next 12 months, we're going to make even more enormous progress. I wouldn't note that we're done at that point. I think we're always going to be striving to get better. I think it's one thing that I like about senior housing is that there is an enormous opportunity to improve upon it. It's such a new product. There's going to be enormous demand for it, and all the things that happened so efficiently and well in other real estate sectors that I think we can learn from, that's all there to be captured for HCP. And that's true for all the senior housing REITs, it's not just HCP. So we're excited about the improvements that could be made here as well.

Okay. Can you just clarify one last thing On the life sciences side, you mentioned that you're tracking towards the midpoint of guidance. Obviously, you've had good traction on The Cove. I'm not looking for specific numbers or guidance for next year but just trying to get a sense of the trajectory for same-store NOI growth. How should we think about -- can you just give us some big picture puts and takes as we start to think about next year for life sciences

Yes. It's a good question, Vikram. It's Pete here. Maybe just sticking with 2018 for a second. We do expect some ramp up in occupancy from the first half to the second half, which will help our numbers for this year as we've signed some leases. They just haven't commenced yet. So it's more just a timing thing, and we feel good about where we're falling out. I've said that in my prepared remarks about where we're falling out relative to our range this year for 2018. We did have that Rigel roll down this year, which did impact our numbers, and we've talked about that quite a bit at length. On a normalized basis, we would have been in the mid-3s without that. I would say that not going into specifics for 2019 and 2020, but we have looked at our lease maturities, and we feel like we're pretty far below market right now on average. And so we could see a pretty nice runway for the next couple of years. I don't want to give specific numbers, but I would say it would be as good as the normalized growth rates that we're experiencing this year ex the Rigel mark-to-market, perhaps maybe even better than that.

So essentially, you're saying it's a combo of the bumps and mark-to-market just given where occupancy is

Yes. I think occupancy will probably -- we're in the mid-90s now, and it could tick up a little bit beyond that. But it really will be driven mostly by the mark-to-market on the lease maturities.

And we also -- we get some upside as these developments have been coming online where the leasing has been stronger than we had anticipated, so that's going to flow through as well.

Yes. It will certainly flow through our earnings. It's just a matter of when they make their way through to our same-store pool.

Yes. [I would be thinking about] the bottom line impact.

The next question is from Steve Sakwa of Evercore ISI.

When you look at Page 13, and you sort of look at the pie chart of your distribution, I realize some of those areas are going to be changing. But what do you think the mix -- the optimal mix is for you guys as you look forward between, say, SHOP and senior housing, triple-net, life science, medical office

Yes, sure. Steve, this is Tom again. I would -- let's talk aspirationally over the next few years, and these numbers, of course, are not exact. But I would think that we are focused on all 3 segments somewhat equally. So medical office, life science and senior housing, so, call it, 13, 13, 13 over time, the 3 private pay real estate segments of health care. And when we think about senior housing, I do think you'll see a continued movement from some of the triple-net sort of makes sense to SHOP over time, like in the Sunrise transition that we've spoken to. From a hospital perspective, it's pretty small. We have high coverage. You'd probably see at least some of that in our portfolio over for the foreseeable future. You're going to see the U.K., of course, as we've spoken to, that will likely disappear. And then in the end, the consolidated JVs, that's a smaller component. So that's how we see the pie chart looking if you were to look out 3, 4, or 5 years from now.

Okay. And I know you guys have spent a lot of time in these transition assets, and I appreciate the comments and the length of time that it may take. Can you just kind of help us think through sort of some of the steps that the operators take, kind of in the early maybe quarter or 2 to stabilize things And I realize it sounded like things could get a little worse before they get better. But just sort of what are the sort of steps that unfold as you transition these assets And what do we look for

Steve, it's Scott. I'll try to take that. I mean, one thing to keep in mind is this, we made the announcement about these transitions way back in November 2017, and here we are in early August. So it's been 8 or 9 months. Now some of the transitions have occurred a couple of months ago. But at a minimum, there is a 3- to 4-month lag, in some cases, 8 or 9 months between the announcement and when the actual transfer of the license took place. And until that license transfers, there is nothing that the new operator can really do inside of the property. So there's a long period in between where the local team and staff is sort of in no man's land, and that is an uncomfortable place to be in. If you can imagine putting yourself in those shoes, where you're uncertain about what's going to happen next. And needless to say, that's not a positive thing for morale and the culture. Over time, it goes way up, contract labor goes way up. It's hard to find the right staff to lead the building. And then once the transfer happens, there is a pretty high likelihood that the leadership team is going to be changed, and we've seen that with about half of the properties that have transitioned to date, with the leadership teams that's changed out. And over time, we think that would be the right decision, but in the interim, your building -- your community doesn't have a leadership team. And it's hard to market the property and fill the staff, train the staff, build the local referral relationship. So it generally is a 3- to 9-month process to hit the low end 9 at the outside time line to really implement that new team, build that new culture so that you're in a position where you can really start rebuilding occupancy. And we're right in the middle of that. Some of these properties transitioned in March, some are transitioning still in August. And that's why I say, in terms of a year-over-year comp, it's more likely that the growth rate will be late '19, 2020 before it turns positive. Although sequentially, we're going to start seeing some improvement later this year. We're starting to see some early signs already on the Atria transitions that happened in March. Now that we're a 90 to 120 days after the fact, the leadership teams are in place, the deferred maintenance from the -- at the property has been cleaned up, the inquiries are trending higher, and now it's time to convert that into sales momentum and occupancy improvement.

I would add, Steve, that when the transition occurs -- I had an opportunity to sit with John Moore and Chris Winkle, alongside those teams, and they are highly professional in how they approach the transition. It's a 5-page checklist that they go through of all the different steps as to how they go at it. Quite impressive. They've done a lot of it. One of the struggles that any replacement operator will have is what they inherit when they receive a property, what kind of condition is it in, the staff and the condition, deferred maintenance, et cetera, a variety of different things. So as they pick these up, it's not uncommon especially when we had a longer delay period due to the timing of the announcement of the Brookdale transaction, which had a whole bunch of different facets to it, such as required an earlier announcement, more time is difficult in that situation. And by the time, the replacement operator comes in, there's more work to do. So it's not terribly surprising that they had drifted further down than we had hoped. But at the same time, as that replacement operator picks it up and they recover that last occupancy and clean it up, to Scott's point, there should be some pretty strong upside. The timing of it though is difficult to determine.

The next question is from Michael Carroll of RBC Capital Markets.

Scott, can I just offer that last comments you've made What can you do to recapture that occupancy What does the manager have to do I mean, do they offer significant discounts on the rents Do they reduce the rent over all Or is it just more of them trying to focus on operations a little bit harder

Michael, we're not seeing major discounting or incentives, at least relative to last year. So that's not what's driving the decline. It's really the occupancy-related. And when the margin is 25%, 30%, there's a pretty big multiplier effect for every basis point of occupancy that you lose, and that's what's flowing through our numbers. I mentioned earlier, these are good assets. It's why we chose to maintain them rather than sell. And we sold $2 billion of assets. We could have easily put these in that pool. We chose not to because we think they have a lot of opportunity over time. These are properties that were 90% occupied in January of 2017, and today, they're about 80%. So this is a local business. So we can talk about national supply and demand and what's happening with new starts, but what really matters is who is your leadership team, what are the relationships in the market, what kind of care is being delivered at the property and rebuilding that local reputation so that we go from 80% to 90% instead of 90% to 80%. So we're confident it's going to happen. We are putting some capital into some of these buildings. Triple-net leases, in particular, one reason we don't love that structure sometimes is that there isn't always a great alignment of interest in that the tenant may not be investing into the property as much as they need to. A lot of these assets are 20 years old, very good locations, but they haven't had the level of capital that's really required to compete with all the new supply. And that's true of attracting the right staff as well. And we need to make sure that our 20-year-old properties at least have the ability to compete effectively, then maybe at a slightly lower price point, and that's okay. I think there's a big market for that. But we, at least, have the path, that initial visual test. And a lot of these properties weren’t doing it. So that's one reason we're doing some redevelopments. And even the ones that we're not redeveloping, we're going to put a little bit of capital into because, Atria, Sunrise, they will do a great job for us, but we need to give them a physical plan that is competitive.

And then what are you seeing in the market place right now I guess, the performance difference between Class A and Class B senior housing assets, I mean, has the higher-quality stuff performed better so far And do you think that will change given the new product coming in Is that going to impact that space a little bit more

Yes. It's hard to generalize. I would just go back to the comments that we've been making that this is a local business. And there are a number of markets across the country where the supplydemand imbalance is -- actually, demandsupply imbalance. And we have a couple of those markets. But we also have several where there's just too much new supply even though demand is growing. And that's really what's driving this, more so than older versus newer properties, unless it's an old property that hasn't been reinvested in. And those are definitely struggling. And I think you are starting to see the quality of the operations whether it's Atria or Sunrise, that is making a bigger difference today. It's not just physical plan, but the quality of the care that's being delivered, the services offered and the value delivered, the quality and training of the staff. Those things are incrementally more important. And I think that will increasingly be the case, and it's one reason that we're considering these operator transitions as part of the senior housing business plan that's really going to turn it around.

The next question is from Smedes Rose of Citi.

I just wanted to ask you, with your latest additions to the board, which, I think, takes it up to 9 members now, are you kind of done in the near term with the board composition Or would you expect any additional changes in the near term

Smedes, it's Tom. Yes, that -- adding Kathy Sandstrom brought the board to 9, as you mentioned. We do have 2 directors that have turned 75. As you may be aware, this past February, we put in place an age 75 restriction, subject to a waiver, if there is a really good reason to extend somebody for a year, we can consider that. So as we look forward, I do think we will be bringing on another board member over the next, call it, 9, 12 months-or-so. And over some period of time, we'll be dealing with a little bit more refreshment, but we're getting awfully close to being completed with the refreshment process and feel very good about the board that we've put together.

Okay. And then as you look to change your composition to this, the 13, 13, 13 that you mentioned and have mentioned before, is the JV strategy something that you would continue to pursue as a way -- where you kind of contribute assets that you have versus, I mean, you raise new capital per se And then can you just talk about what are sort of the exit strategy with some of these joint ventures

Yes. Good questions. The ventures that we've entered into, generally, there is not necessarily any kind of an imminent exit strategy, still longer lived ventures by intent, and we pay attention to the venture partners as to what they're seeking to achieve, pay attention to the leverage that they want, the hold period, et cetera. As to the 13, 13, 13, I would say that is aspirational over time. It depends on circumstances as it plays out and what opportunities we identify. As far as the JV strategy and would we take that on programmatically, it's a question that I've had before, the answer is no. We're not going to take on a programmatic JV strategy. Each JV that we would consider would have to be strategic in nature. There would have to be a good reason to do the JV. We have to take into account a number of factors, including what the opportunities are, our cost of capital and potential partners and what they're seeking to achieve. And if there's a good match and it does create a win-win for us and our partner and it creates a solid strategic outcome for us, then we would consider a JV. But as far as a programmatic JV program, that's not our plan.

The next question comes from Lukas Hartwich of Green Street Advisors.

So I'm just curious, what was the impetus for the new JV Was that something that was opportunistic or was that something you've been considering for a while

Tom, do you want to take that

Sure. This is Tom Klaritch. We've been looking at various new market entries for a while now, and Greenville's been on our radar. We have had discussions with the Greenville Health System over the years. We like the market. The MSA is the largest in the state. They have solid demographics there. We really like the health system and their management team. They've done a good job in the past number of years managing the portfolio, and they recently completed an affiliation with Palmetto Health, which is the largest provider in the Midstate area. So they really created the largest health system affiliation in the state with about 33% market share. We think there's opportunities working with them to grow over time, and it's just a nice new market for us.

And then just to clarify, Tom, you've been working on this particular transaction for a period of time. So the impetus to it is, just back to his basic question was...

It was to expand into a new market with a good health system and overall, improve our portfolio metrics.

Great. And then just a quick follow-up. I know it's small, but the sequential improvement in the SHOP performance, was that related to better operating results Or was it just a shift that entered the pool change, the number of assets So is it operating performance or was this just a change in the pool

Lukas, yes, it was more a change in the pool. Yes, we went from 69 to 55 assets. So a lot of those are the properties that are being sold to Apollo.

The next question is from John Kim of BMO Capital Markets.

Yes. I just wanted to follow up on that question. Was that contemplated in your guidance for the year, that the pool would change, and therefore, the same-store looks -- was a little better than what you achieved

Yes. John, it's Pete here. Yes. No, that was contemplated in our guidance. And then the one thing I would just point out with regards to the second half is the pool could change further between now and the end of the year. There are some moving pieces. There's a lot of moving pieces, but there are still some assets in there that we're marketing for sale right now, which could come out between now and the end of the year, and they are underperforming assets. And then we'll continue to evaluate that we have a redevelopment plan for many of these assets, and over time, that will impact the same-store pool as well.

So that's 0 to minus 4% full year guidance is on a pool of assets lower than 55 and the full year performance of that portfolio, is that correct

Correct.

Okay. I think Scott Brinker mentioned on the 6% cap rate inclusive of the JV fees, and it was lower than that exit fees. But I think you mentioned origination fee is part of that I just want to make sure I heard that correctly. And if so, why include a onetime fee in the cap rate quote

Well, they're paid over time. So the fees that are being paid, there's an asset management fee because we are the managing member of the venture and asset managing it, and the acquisition fee is being paid over time. So that's the reason we quoted it that way.

Okay. And then finally, on your development in life sciences, can you discuss where pre-leasing levels are for the entire development portfolio and where this compares to the first quarter

Yes. It's Pete here, John. I can take a stab at that. The big movement, so far, just from last quarter to this quarter is when we had the call last quarter, we were 100% committed on The Cove Phase III. We've now executed all of those leases on those LOIs. So we've essentially gone on a pretty big campus there from 0% leased last quarter to 100% leased now. And the goal is between this quarter and the next couple of quarters to have more to report on Phase IV as well as on Sierra Point. But at this point in time, we don't have actual leases signed, but we have a lot of interest in those.

So what is the pre-leasing level of the $511 million of development

Yes. So the pre-leasing levels now, just on the aggregate on those, is over 50%. But that's split between 3 projects right now, which we've got our Ridgeview project, The Cove Phase III and then our Sorrento Summit project, those are all 100% leased at this point in time. And then The Cove Phase IV and Sierra Point Phase I, we don't have any leases signed at this point in time. So it's really quite binary. We've got the projects we've been working on for a while now are 100%, and then the balance is at 0. But we expect that 0% to come up on those other projects pretty quickly.

The next question is from Daniel Bernstein with Capital One.

The question is from Sarah Tan of JPMorgan.

This is Mike Mueller. For the same-store pool in senior housing, the 22 transitions or sale properties that were in that, that generated the 15% -- minus 15% comp. Can you give a sense as to how many of those 22 will actually be transitioned in cap versus sold

Yes. We haven't decided exactly, Michael. There are a number that are actively being marketed, and it was dependent in part on the prices that we received. So we'll have a better sense for that next quarter and certainly, by year-end. But it's one of many reasons that there is a lot of moving pieces in the pool count. We're trying to be as transparent as we can about those moving pieces in the results from each different component, but it's hard to say today how many of the 22 will be held versus sold.

Got it. And then how many are being in the process of being transitioned that you're keeping, but they just happen to be outside of the same-store pool Are there other properties

Mike, yes, there are. What I would say is of the assets we are transitioning, there are a few -- there's actually more than a few. It's in our supplemental where you can see assets that are not in the same-store pool but are getting transitioned on Page 15. And you get to 15, we're adding triple-net to SHOP conversions. There are 15 of them.

Got it, okay. So it's basically, some portion of that 22 plus another 15

Correct.

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

Thank you, operator, and thanks to all of you for your time today and your continued interest in HCP. And we look forward to either seeing or talking to you all soon. Bye-bye.

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