Healthpeak Properties Inc (PEAK) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the second-quarter 2014 HCP earnings conference call. My name is Amanda and I will be your coordinator today. At this time, all participants are in a listen-only mode.

(Operator Instructions)

Now, I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, Sir.

Thank you, Amanda Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operation of our tenants. These statements are made as of today's date and reflect the Company's good faith beliefs and best judgment based on current information.

These statements are subject the risks, uncertainties, and assumptions that are described in our press releases and SEC filings, including our annual report on Form 10-K for the year ended 2013. Forward-looking statements are not guarantees of future performance.

Actual results and financial condition may differ materially from those indicated in these forward-looking statements. Future events could render the forward-looking statements untrue, and the Company expressly disclaims any obligation to update earlier statements as a result of new information.

Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these measures to the comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC today and are available on our website at www.hcpi.com.

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

Thank you, John, and welcome to HCP's 2014 second-quarter earnings conference call. Joining me this morning are Paul Gallagher, Chief Investment Officer; Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations.

The continued solid performance in our core portfolio, which Tim and Paul will take you through in a minute, is the result of our strong asset management capabilities and long-term investment disciplines that focus on immediate earnings accretion and continuing future growth. We at HCP congratulate Andy Smith and the Brookdale and Emeritus teams for closing their transformational merger last Thursday.

With the closing of the merger, we anticipate that HCP's transaction will close on August 29th. This transaction will bring improved lease coverage, a stronger credit operator, and the elimination of purchase options in a competitive reinvestment marketplace, particularly for private pay senior housing assets.

In addition, we are well positioned to benefit from the future growth of our CCRC and RIDEA joint ventures, and would remain a strategic capital source to Brookdale by partnering with them, recognizing their desire to participate in the benefits of real estate ownership they helped create as a premier operating company.

Our increased investment activities this quarter demonstrate we are making solid progress on the expansion of our deal sourcing capabilities. We continue to pursue opportunistic return investments while also delivering mid-size transactions with attractive economics.

Year to date, we have closed investments totaling $507 million and have an additional $600 million committed and in the closing process. These investments are across our diversified segments and include $892 million in senior living, $115 million in medical office buildings, and $100 million in life science. Tim and Paul will be covering these transaction details shortly.

These investments demonstrate we are maintained our investment discipline, which sometimes is difficult to do in today's interest rate environment. As part of our risk reward discussion, we believe quality and/or strategic real estate delivers stronger returns through different economic cycles.

On the international front, we first entered the UK healthcare real estate market in mid 2012 as the lead investor in the junior debt for Terra Firma's acquisition of Four Seasons Health Care. Last year, we made another debt investment in Barchester which generated significant profit for us.

We have now successfully added our first equity investment in a triple net lease with Maria Mallaband, a top 10 for-profit operator of care homes in the UK, at an attractive 7.6% lease yield. Maria Mallaband is also an experienced developer and we look forward to growing our relationship through future acquisitions and development opportunities.

Similar to our early debt investments, this transaction has attracted market attention resulting in an active pipeline of investment opportunities in Europe. In summary, we are on track to deliver quality accretive investment growth this year, despite the currently competitively priced marketplace. Let me now turn the call over to Tim to cover our financial results.

Thank you, Lauralee. There are four topics I will cover today. Results for the second quarter, investment transactions and balance sheet, Brookdale transaction updates, and finally, our increased full-year 2014 earnings guidance.

Let me start with our second-quarter results. For the quarter, we reported FFO of $0.73 per share, which included transaction costs of $0.02 per share related to our Brookdale transaction and portfolio acquisition in the UK. Excluding these costs, FFO as adjusted for the quarter was $0.75 per share and FAD was $0.63 per share.

Cash NOI from our same property portfolio increased 2.4% year over year. The growth was driven by contractual rent increases, offset in part by the timing of Tenet hospital add rents recognized earlier in Q1 this year and lower performance from our Sunrise portfolio.

Year to date through June, our same property portfolio generated a 3.3% cash NOI growth rate compared to the first half of 2013. Paul will discuss our results by segment in a few minutes.

Turning to our investment transactions and balance sheet. We were active across our property segments during the quarter completing total investments of $360 million, lead by $304 million of acquisitions in development where we achieved a blended initial cash yield of 7%.

Our second-quarter investment transactions consisted of first, a GBP76 million, or $127 million, acquisition of a 20-property care home portfolio in a sale lease back transaction with Maria Mallaband. The going in cash lease yield during the initial year is 7.6%, and we have fixed the exchange rate by hedging 75% of contractual rent through December 2015.

Second, acquisitions of five assets representing $158 million to expand our senior housing, life science, and medical office portfolios at a blended year-one cap rate of 6.3%, plus we committed to a $19 million new development of an on campus MOB at a projected return on cost of 8.7%. Third, $56 million of investments in development in other capital improvements.

Our credit profile and strong balance sheet continued to improve, as demonstrated by several key credit metrics at the end of the second quarter. 38.9% financial leverage remained below our long-term target of 40%, with 96% financed on a fixed rate basis. 6% secured debt ratio, down from 6.8% at year end 2013, 4.8 times net debt to EBITDA, and $1.7 billion of immediate liquidity from our revolver and cash balances.

We have no scheduled debt maturities for the remainder of 2014. Looking ahead into 2015, debt maturities total $720 million at a blended interest rate of 6.3%, representing attractive refinancing opportunities given the current interest rate environment.

Next, an update on our pending Brookdale transaction. The completion of Brookdale's merger with Emeritus last week represents a significant milestone with respect to our pending transaction with Brookdale.

We now anticipate our transaction will close by the end of this month, which, as a reminder, is comprised of the creation of a sector leading $1.2 billion entrance fee CCRC joint venture, and the lease amendments related to the legacy 202 Emeritus communities that reflect lower future rents from Brookdale valued at $207 million.

In exchange, Brookdale cancelled 49 existing purchase options worth $153 million, and will make cash payments to HCP totaling $54 million for a total amount equal to $207 million. Because the transaction contains multiple moving pieces, we have provided additional disclosure on page 32 in our supplemental package this quarter. We hope it will be a useful reference to help you update your financial models.

Now, let me take a minute to walk you through the details on a few significant items impacting our 2014 forecast that results from the 49 property portfolio being converted to a RIDEA structure. The imputed value of $129 million in favor of HCP to terminate the above market leases, less the $23 million cost to cancel 19 purchase options, will be recorded as $106 million of income to HCP upon closing.

The benefit of $106 million is partially offset by a non-cash charge of $70 million relating to the existing straight-line rent and other intangible assets. Accordingly, this transaction results in a one-time net gain of $36 million, or $0.08 per share, anticipated in the third quarter. This favorable item will be reflected as part of our GAAP net income and NAREIT FFO, but excluded from our FFO as adjusted and FAD metrics to provide a comparable run rate.

Finally, our increased 2014 earnings guidance. Our current full-year guidance now assumes that the Brookdale transaction closing at the end of August, and does not include the impact of any future acquisitions. Our existing portfolio continues to perform in line with forecast, with projected full-year cash same property performance growth unchanged at 3% to 4%.

We are increasing our 2014 NAREIT FFO forecast by $0.05 per share to range between $3.01 and $3.07 per share. The increase is driven by a $0.01 accretive benefit from acquisitions closed during Q2, plus the $0.04 net benefit from transaction related items that consist of the $0.08 net gain anticipated in Q3 from the closing of Brookdale's transaction described earlier, partially offset by $0.04 of transaction costs in connection with the Brookdale and UK portfolio transactions.

Excluding the net positive $0.04 per share impact from transaction related items, we are raising our 2014 FFO as adjusted guidance $0.01 per share to a range of $2.97 and $3.03 per share, driven by the accretive acquisitions in Q2 mentioned earlier. We are raising our 2014 FAD guidance by $0.03 per share to range between $2.50 and $2.56 per share, driven by $0.01 per share recurring benefit from our second-quarter investment activities mentioned in FFO, plus $0.02 per share from the pending transaction with Brookdale, including the new entrance VCCRC joint venture platform, which, as a reminder, is expected to generate 8% projected cash yield during the first year.

With that, I'll now turn the call over to Paul. Paul?

Thank you, Tim. Now, let me review the portfolio's second-quarter performance.

Senior housing. Occupancy for our senior housing platform was 86.8%, unchanged from the prior quarter, and 50 basis points higher than the prior year, driven by our RIDEA portfolio where occupancy has increased 120 basis points and year-to-date same property growth is 4.2%.

Same property cash flow coverage for the portfolio was 1.10 times, a decline of 1 basis point from the prior quarter. Same property performance increased 2.8%, driven by contractual rent steps, partially offset by a decline in the performance of our Sunrise portfolio and timing of certain prior-year expenses in the RIDEA portfolio. Same property growth is expected to ramp back up to 4% levels in the second half of the year.

On June 6, 2014 we acquired 20 care home facilities from Maria Mallaband for GBP75.8 million, or $127 million, at an attractive lease yield of 7.6%. The majority private pay facilities are located throughout the United Kingdom and represent our first direct equity investment in the UK.

The leases will have an initial term of 15 years and provide for initial annual rent of GBP5.8 million, or $9.7 million. The contractual rents will increase annually by the retail price index, subject to a floor of 2% and a cap of 4.5%. The facilities are leased to Maria Mallaband Care Group, a premier provider, with operations across the UK, Northern Ireland, and the Channel Islands.

In June 2014, we expanded our relationship with Oakmont Senior Living by acquiring two assisted living and memory care facilities in California in a sale leaseback transaction for $88 million, providing a first-year lease yield of 6%. The facilities are triple net leased for 15 years and are cross defaulted with an existing master lease.

Post-acute skilled nursing. HCR's normalized fixed charge coverage for the trailing 12 months ended June 30, 2014 is 1.12 times, down 2 basis points from March 31, 2014's coverage of 1.14 times discussed on the last call.

Normalized coverages exclude the impact of $24 million in insurance reserves accrued in June, and $6 million recorded last December related to prior period liability claims. Including these reserves, the as reported June 30, 2014 coverage is 1.06 times.

HCR increased total census across all business lines in the second quarter relative to prior-year levels, and management continued to exhibit strong controls of operating expenses. Additionally, their hospice and home care businesses continued to deliver double-digit, year-over-year growth, driven by significant census gains.

However, the positive impact of these achievements was offset by industry-wide challenges, including fewer hospital admissions, shorter average patient length of stay, and the increasing preference for Medicare Advantage plans.

We expect HCR's coverage to improve in the latter half of 2014 due to the disposition of two underperforming properties in the West Virginia market, the continued focus on cost savings opportunities, and the confirmed 2% increase in Medicare reimbursement rates that takes effect October 1 and represents the second consecutive rate increase not offset by sequestration or other therapy provider cuts.

HCR continues to invest approximately $100 million per year to maintain, upgrade, and expand the facilities in HCP's portfolio, and ended the quarter with $151 million of cash on hand, up from $142 million at year end. Same property performance for our post-acute skilled nursing portfolio was 3.4% for the quarter, driven by contractual rent steps on the HCR portfolio.

Hospitals. Same property performance decreased 5.3% due to the modification and extension of our three acute care hospital leases with Tenet Healthcare that, as Tim mentioned, changed the timing of rent recognition over the first half of the year.

However, it will have no impact on the full-year same property performance, which is expected to grow by 2.5% over 2013. Cash flow coverage declined 1 basis point from the prior quarter to 5.43 times.

Medical office buildings. Same-property performance increased 2.2% driven by rent steps. Occupancy for our total medical office portfolio declined 30 basis points from the prior quarter to 90.7%, and includes two properties acquired in May that are 82% occupied.

During the quarter, tenants representing 580,000 square feet took occupancy. The average term for new and renewal leases was 52 months and a retention rate of 76%.

We have 1.1 million square feet of scheduled expirations for the balance of 2014, excluding 532,000 square feet of month-to-month leases. We have executed a total of 500,000 square feet of leases that has yet to commence and have an active leasing pipeline of 1.2 million square feet.

In May 2014, we acquired two medical office buildings totaling 148,000 square feet for $26 million, yielding 7.7%. The properties are located in the historic Coconut Grove neighborhood of Miami on the campus of HCA's Mercy Hospital.

During the quarter, we commenced work on capital improvements in excess of $2 million designed to improve occupancy, which is currently at 82%. In June, we executed development agreements and commenced construction on a $19 million medical office building with a projected return on cost of 8.7%.

The MOB will be on the campus of a new hospital being developed by Memorial Hermann, the premier hospital operator in the Houston area, and will complement an existing MOB on the same campus, which is 100% occupied. We have pre-leased 36% of the 98,000 square foot building with strong interest in the remaining square footage.

Life science. Same-property performance grew 2.5% in the quarter driven by rent steps. Occupancy for our life science portfolio increased 60 basis points from the prior quarter to 92.3%, driven by new leases in the Bay Area.

For the quarter, tenants representing 111,000 square feet took occupancy with an average lease terms of 50 months. Leasing remained strong. During the quarter, we executed three leases for a total of 129,000 square feet in our Redwood City life science campus.

The leases include two five-year leases for a total of 49,000 square feet, and an 80,000 square foot 10-year expansion and extension of an existing life science tenant. This quarter's leasing combined with leases signed in the first quarter addresses 93% of the 160,000 square foot expiration mentioned on our last call, and results in a 70% increase in rents by converting office space to lab space.

In April 2014, we executed a 26,000 square foot seven-year lease for a total of 85,000 square feet when combined with leases executed in March, which fully leases our 915,000 square foot South San Francisco Oyster Point life science campus. Scheduled expirations for the balance of 2014 are 196,000 square feet, of which 30% has already been leased to new tenants.

Additionally, we've executed 300,000 square feet of new leases expected to commence within the next eight months, which should bring our year-end occupancy to over 94%, representing the highest occupancy since we acquired the portfolio in 2007.

During the quarter, we acquired a 92,000 square foot life science building for $44 million with a going-in yield of 6.3%. The building is 90% leased and represents an expansion of our existing Torrey Pines Science Park campus, and is adjacent to 500,000 square feet of HCP life science buildings. Life science development pipeline consists of two projects totaling 230,000 square feet that are 100% pre-leased, and one 78,000 square foot project that is 63% leased.

Sustainability. In June, we received the second highest ranking in the US Real Estate industry for environmental performance by the 2014 Newsweek green rankings. With that, I'd like to turn it over to Lauralee.

Thank you, Paul. Just a few brief comments on HCR Manor Care before I open the call for questions. We were disappointed that industry-wide litigation in skill care continues to impact professional liability reserves of even the best operators like HCR.

We remain confident in HCR's management team and continue to believe that the majority of market headwinds are behind them. They continued to take market share as a result of their quality healthcare outcomes. They are achieving double-digit growth in hospice and home health.

Although this ancillary business income principally emanates from their facility operations, the income is reported at the corporate level, not at the facility level. Our master lease is supported by HCR's corporate guarantee, and as such, we report both corporate fixed charge coverage and facility lease coverage.

HCR also continues to maintain a strong liquidity position ending the quarter with $151 million of cash and $95 million available under its bank line. With the 2% Medicare reimbursement rate increase confirmed by CMS last week, and the full benefit from their cost reductions coming in the second half, we expect improving financial performance.

I am pleased to welcome Jim Hoffmann to our Board of Directors. Jim is a former partner and Senior Vice President of Wellington Management Company, where he served as the firm's Senior Global REIT Analyst and Portfolio Manager. I am looking forward to Tim's advice and counsel on our Board given his 30-plus years in real estate investment, both domestic and international.

In conclusion, we had a solid second quarter and I thank the HCP professionals for their contributions to our success. Operator, we would now like to open the call for questions.

(Operator Instructions)

Our first question comes from Nick Yulico with UBS.

Oh, thanks, several questions. First, on the UK, can you talk a little bit about how you sourced that investment, and whether it was actually a broker was used or you just used your relationships? And then also it looks like there might be about 40 properties or so left at the operator, and whether or not the operator owns that real estate or who owns that real estate?

Yes, as Lauralee mentioned, we've been in the UK market since July of 2012 and done two fairly high profile transactions and we've created a good reputation over there. We've talked to a lot of folks. We've got a very good strong pipeline out there.

We sourced that deal just by being over in the marketplace. There was representation on the other side, so the other assets that they own are not typically care homes, they've got more specialized uses at this point in time and a lot of those are leased already.

And what was the coverage on that portfolio?

It's about a 1.5 times coverage.

That's an EBITDAR coverage?

That's an EBITDARM coverage. One-sixth EBITDARM coverage.

Okay, thanks. And then just going back to Manor Care. In the trailing 12 months, EBITDAR that was reported in the supplemental this quarter went down from the one that was in the last supplemental by about $11 million.

Can you explain what was going on there? And then also, just I want to be clear about, I think you mentioned something about insurance reserves in June and whether or not that would be in the facility EBITDAR going forward or only in the fixed charge coverage metric?

The GL/PL charge is at the facility level. Just to give you a little color on HCR. As I mentioned and as Lauralee mentioned, they've experienced some very strong reimbursement headwinds and sequestration. In October of this year, they will benefit from the first time two years of year-over-year rate increases.

Additionally, in October this year, they will have the full benefit of the cost reductions that they implemented in the fourth quarter last year. And in April 2015, the impact of sequestration will be eliminated. We expect to see coverages improve fourth-quarter 2014 results and further improvement in the second and third quarters of 2015.

Okay, and then sorry, what was the reason for the drop in the EBITDAR this quarter versus last quarter? The annualized level?

We continue to have a shift into the managed Medicare which is impacting some of the cost features, reimbursement features. But offsetting that, they continue to take market share. But at the moment, that's a bigger impact.

Okay.

And that's been an ongoing theme for quite a few quarters.

Okay, got it. And then just, lastly, Lauralee, how are you viewing the investment market today? If you look, you did several of the US deals at a 6.63%, I think you said was the blended cap rate in the US, and we've now seen some big portfolios, Griffin today, and HCT trade at cap rates that were somewhere in the 6% to 6.5% range.

Do you think that people have gotten more aggressive on pricing of individual assets? Or is it just that there's some value being ascribed to bigger portfolios today?

Well, I think we've seen a dynamic that the bigger portfolios get aggressively big, mainly because someone else has done the aggregation work and there is a real hunger for yield in assets. So there's no question that sellers are seeing a good market to sell and are taking advantage of that.

I guess a comment to make on ours. We've seen our pipelines increase with the $1.1 billion that we either have closed or closing, we're converting that nicely. We expect to do that throughout the balance of the year.

I think some of the characteristics of the medium-sized transactions that you've seen us do have some value add characteristics to them, such as what we're doing with MOBs or the life science. Also, where they are strategic to other assets that we have or are very important to operator relationships, particularly to hospitals.

And that allows us to be able to negotiate something that is good for both parties, and therefore, we've been able to still achieve nice spreads on assets.

Yes, I would add that while we have done a couple of transactions in that low 6% range, one was with an existing relationship, but we've also done transactions that yielded higher returns. We've got a 7.7% cap rate on our MOB asset that we purchased, we've got a 7.6% cap rate on our UK portfolio, and we have an 8% cap rate on our CCRC joint venture that we've done with Brookdale. So, we've been able to take advantage of some of the relationships we have in the marketplace.

Just one last question over in the UK, HC-One has been in the press last several months as being up for sale, and at one point, you guys are mentioning as possibly being involved, I think, on the debt side. Is there any update you can give there as to whether that could still be a possible debt investment? Thanks, that's all I had.

No.

We don't comment on market rumors.

Thank you. Our next question comes from Josh Raskin with Barclays.

Hello, thanks, good morning. Wanted to follow up on the Manor Care question. Just specifically around their SNF census and I'm just curious if they are starting to show any growth there? I guess we're looking at bed count down 4% and the occupancy was down 150 basis points, so just curious what's going on with their SNF census, specifically?

We started to see just a little bit of growth on just the pure SNF side.

Second quarter 2014 exceeded prior year. Obviously, Josh, I know you follow the hospitals well. There's been lower admissions and that's really affected HCR Manor Care, given the fact that 90% of their admissions come through the hospital.

So they have in the second half of last year and the early part of this year had that affect in the first half, but have you seen recently the admissions have been up in the hospital, so HCR should benefit from that in the second half of this year.

And you think there might just be a timing lag between seeing a little bit better admission trends and then maybe discharges come a little bit after that? Is that sort of the idea?

Yes, it typically lags, and then obviously with the final CMS ruling that came out, as Lauralee mentioned in her comments, that came out on Friday, that's created some, the first tailwinds in quite some time for that business.

Got you. I think Jack has a quick follow up, too. Jack?

Yes, thanks guys. Just maybe back to Paul on the cost savings initiatives that HCR Manor Care is putting into effect.

So if I adjust out the $24 million you talked about in June, and just using some of the data from the Q, I was a little surprised it looked like the operating expense as a percentage of revenue increased year over year. So I was wondering are those initiatives done or are they showing up somewhere else?

No, they still have two more quarters to have that flow through so that you get a true run rate on those.

Got it. Were they all completed in the fourth quarter, though, just because this was first half over first half?

No, they were initiated in the first quarter and it took them a couple quarters to implement them completely.

And the reason for the initiation, Josh, is obviously the lower hospital volume. So Paul and his team were adjusting to the reduced admissions, so that was happened in the latter half of 2013, beginning of 2014.

Okay, thanks.

Our next question comes from Emmanuel Korchman with Citi.

Thanks for taking the questions. It sounds like competition in the UK is ramping up and it sounds like that's the topic of choice this quarter. Can you talk about competition there and what sets you aside, or what made you maybe win the deal that we just spoke about versus others?

First of all, we do not have a dedicated team very focused on that that came out of really our track record with our debt, so they come with a lot of credibility and very deep relationships there. So working that is the way that you stay ahead of it.

I think, again, the marketplace understands that we're a viable source. We've proven it, understand their business, and we think that there's opportunities. I wouldn't say that the UK is anymore competitive than any other market.

Are you surprised to see the large caps all speaking out at once or do you think it happens to sound that way at the moment?

No, I would expect that all transactions we all get to see, and as a result, we talk about them.

Got you. That's it for me, thank you.

Our next question comes from Todd Stender with Wells Fargo.

Hello, thanks. Paul, I think you gave an EBITDARM coverage for the UK portfolio. Is that forward or is that a trailing number?

That's a forward number.

Do you have an EBITDAR coverage on a trailing basis?

Yes, 1.3 times.

Okay, and is that under, is that UK portfolio held under one master lease?

It's a series of master lease all crossed up.

Okay, thanks. And we've heard in the past, Tim, I know you've given some color on HCR Manor Care's CapEx dollars that they've put into the portfolio. Do you have any updated numbers for this year or maybe what their obligation is, just a reminder?

You know, they continue to invest between $100 million and $110 million in that portfolio, call it 60% to 65% of it is maintenance CapEx and about a third is growth CapEx, Todd. So and in terms of your coverage on the Maria Mallaband portfolio, I had given you actually the EBITDAR coverage rate which is 1.3 times, not a trailing EBITDARM, so just so we're clear.

Okay.

You got it.

Thank you, Tim. And just lastly, just looking at the medical office building portfolio, looks like rents renewed just shy of 4% lower. Can you break that out just to really show what the on-campus space release versus off campus, just seeing if that tells us anything?

Most of our portfolio, 93% of our portfolio is on campus or affiliated, so that's not a useful breakdown. I think the way to think about that is those are legacy leases that are rolling off the height of the market.

I think you should think about our MOB portfolio over the long run to be at market or between 1% to 2% positive mark-to-market over time, so I think it's just a timing issue, Todd.

Okay, thank you.

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

Hey, everybody. Lauralee, just curious if you would expand a little bit more on your appetite for additional international expansion? And I think you mentioned you don't have a team on the ground there.

Just curious how you think about next steps or what the follow on might be?

Well, it's a market that we're very close to, yet you're correct that it's not on the ground, but it's a dedicated team here that makes a lot of trips and keeps the relationships very open. So as we have a platform, it justifies thinking about costs to actually put them on the ground and before that we were debt, so it didn't make sense. Now that we are in an ownership position and expanding our activity, we'll be evaluating that.

Is the UK the only place on the other side of the Atlantic that you're looking or is it a broader scope than that?

We've looked across Europe, particularly the developed markets. They all have somewhat similar dynamics in terms of their healthcare reimbursement dynamics and a growing interest in the private pay dynamics, so yes, we're looking at those.

And then I know you've talked about wanting to expand your operator relationships to drive external growth, and obviously, there's the Brookdale transaction you can point to. Is there anything that we could expect with Manor Care in terms of any opportunities there to deploy capital?

We have previously stated, and I would keep the same remarks, that we're supportive of Manor Care and if Grows assists them to be more financially successful, we are a strong backer of them to do that. But we need to find opportunities that make sense for both of us economically for that to happen.

Okay. And then last one for me, I know you're all very mindful of CapEx, particularly in senior housing as it relates to triple net versus RIDEA. Just curious if your view of a CapEx adjusted same-store NOI growth between those two segments, how that's shaping up, either this year so far or maybe even looking forward the next year or two?

Well, I think, listen, we've -- I'll take our RIDEA portfolio as an example, Michael. We've grown about 7.5% last year and we're forecasted to grow about 5% in that portfolio. On a CapEx adjusted basis, those probably grow between 4% and 5%.

Now, keep in mind, those were non-stabilized portfolios, so those are the reasons, that's the reason they're in a RIDEA portfolio. But it's above average growth for our portfolios compared to the 3% to 3.5% we get in our triple-net leases.

Okay, thanks.

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

Hello. Good morning, guys. Just hoping you could speak a little bit more about potentially helping Manor Care grow if it improves their business?

What kind of opportunities would that be? Would it be redeveloping existing properties or helping them finance acquisitions of new assets?

I think when we look across Manor Care we look at all of the various different options, whether that would be financing new developments or new acquisitions, whether it would be providing expansion of existing facilities on available land, addition by subtraction like they did selling two particular assets. So I think we're kind of open to all avenues to help them grow.

And is there, from a portfolio perspective, a max that you'd feel comfortable getting to in terms of total exposure to Manor Care where you could grow from here? If you could just help us think about that?

I think we're going to look at it on a risk-adjusted basis and see what it does to the health of the Company, and to the extent it solves a long-term problem, I think that we would be willing to take our exposure up.

Okay. And you made earlier comments at the beginning of the call about an additional $600 million of committed capital for deals in the second half. I'm hoping you could speak a little bit about pricing expectations there, ballpark cap rates in geographic location, and just the asset type that that $600 million encompasses?

Yes, that $600 million, Juan, represents the previously announced Brookdale CCRC joint venture where we own 49% of a $1.2 billion portfolio.

Okay.

And pricing expectations, as I've mentioned in my script, is an 8% cap rate.

Okay, great.

And then, just so you know, just so we're clear, there's no other acquisitions in our guidance. But that $600 million is the Brookdale CCRC joint venture.

Okay, great. And wondering if you could comment at all on your views on changes potentially in the observation days and hospitals' regulations and audits there that may or may not help the SNFs over time? And what you guys are thinking and potential impacts for coverage levels, et cetera?

I think that remains to be seen.

Thanks.

Yes.

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

Thanks. Can you guys give us a little bit more color about the UK portfolio? I know in the press release it indicated that the assets are throughout the UK.

Is there any concentration? How old are the assets? And these mostly private pay?

Mostly private pay, a little over 60% private pay, which is something that we like. They are located middle part of the country, some around London, and I believe we have one in Ireland. These are typically newer facilities, purpose built, and very nice and attractive assets.

About 60% is residential, about 40% is nursing care.

Okay. And then did MMCG, did they build most of these assets? How big of a developing platform do they have and do you expect that that could be a meaningful investment opportunity for you?

They built four of these, but they have a pretty active pipeline where they've got several facilities right now that they are either developing or have identified land to be able to develop.

Okay. And then what other opportunities do you see in the UK? Do you expect that you'll focus on the care homes or is there other property types that interest you in that market?

We've looked primarily in the hospital and the care home sector, and because of what's happening with the banking system over there and lack of liquidity, a lot of these operators are in need of capital. So we see a lot of opportunity, there's going to be the potential for some consolidation down the road and development of new product.

Do you think most of your I guess investments in care homes will they be acquisitions or will they be more developments?

Don't know.

All done on a risk-adjusted basis.

Do you see more opportunities in any I guess segment or is it just you're still looking at everything?

I think there's a good opportunity to acquire and consolidate among various different operators. It's actually much more fragmented than the United States.

Great, thanks.

Our next question comes from Rich Anderson with Mizuho Securities.

Thanks, good morning. So, when I think about the UK, it's suddenly everybody's topic du jour. I'm just curious, what has happened there to suddenly have all of you in the last couple of years become very interested that area? And what do you think the next market is out there after the UK that pencils out pretty well at this point?

Well, I think in the UK, you saw a dynamic in the early 2000s where a lot of portfolios were debt financed at very high levels and you saw property prices get reset. And a lot of that debt is either coming due or has come due, and the operators have had a lack of liquidity because the banks have not been available to provide capital, and its created an opportunity.

And we look at markets where there's dislocation and to the extent you have other markets that have similar type dynamics, we take a look at that as well.

And is that Germany next, or France, or where is that next market do you think where you're looking to be a leader?

We're looking across the landscape.

Okay. Question on HCR bigger picture. One of the beautiful things about the Brookdale-Emeritus deal for you guys is we are not talking about Emeritus' coverage any more. So, I'm curious if you've given any thought to applying some of the logic that you applied to the Emeritus now Brookdale transaction in addressing low codes and coverages and applying that here at HCR Manor Care, so that we don't spend so much time talking about coverage in future conference calls?

Well, I think that Brookdale transaction really was a tremendous opportunity for us to be part of the Brookdale-Emeritus merger. And really do two things, which we accomplished, it was is to address what you pointed out, but also to have a growth platform going forward.

HCR has not indicated any issues with our rent. We stay supportive of them. And as we've mentioned several times, they've had a lot of headwinds but it seems like maybe they are slowing down. And with a little bit of tailwinds, with now better reimbursement market, they can improve their financial performance.

Okay. And then last question, and I think it has to be said, Jay Flaherty, part of a much bigger audience or a organization now with the news today. I'm curious, is this management team at HCP in place or what is the risk that he could start hiring people away? What would you say the commitment is to the people at HCP so that the team stays intact, if there are some outside forces when that becomes available to happen?

Well, all employees are employees of will, but HCP is a tremendous place to work. Coming into it, the pride of the people and the business and the portfolio is extraordinary.

Their ability to enhance their careers and continue the success of the past is nothing but up. And we take our market risk with people as everybody else does, but we think we're in a good spot.

We had a core management team below the CEO that has been together for a very long time. We have good, well executing P&L leaders that know their business extremely well. We can source deals, we can asset manage deals, and we have delivered consistent results over the years, despite the fact that we have a transition in CEO.

Well, you chiming in helps that a lot, I appreciate that. Thank you very much.

Our next question comes from Tayo Oksunaya with Jefferies.

Yes, good afternoon. HCR Manor Care, again, I know we've talked about this a lot. Again, this idea of coverage improving going forward after we've been talking about it for several quarters now, and then 2Q, you have the annualized rent bump that I believe happened in April.

Just curious, again, even after the rent bump you still feel confident that coverages will improve over the next two to three quarters?

Yes.

What did coverage look like in 2Q itself after the rent bump? Rest of the 1Q numbers reported in the supplemental?

Well, that was the normalized 1.12 times number that Paul gave.

Normalized, okay 12 months okay, that's helpful.

The rent bump is about 1 basis point a quarter, so if that helps.

The rent bump is about 1 basis point a quarter, okay. And then for the SNF portfolio, the coverage declined from 1.7 times to 1.61 times. Again, is that primarily all Manor Care or was that something across all your SNF operators that drilled that down?

No, there was some add rents with respect to some expansions in our covenant care portfolio that had some impact on the rest of the portfolio. It was nothing major.

So it's still predominantly all Manor Care that caused that pull down in Q2?

No, it was not Manor Care.

So it was not Manor Care? It was many of your other operators?

Yes.

Okay, that's helpful. And the last one, Lauralee, the addition of Jim Hoffmann, I'm glad you acknowledged that on the call. Again, when you just take a look at Jim's background and what you're trying to achieve going forward, where exactly are you expecting to contribute most towards the Company as he kind of gets up to speed as a Board member at HCP?

Well, he has a tremendous reputation and background in investments. We take an awful lot of our Board, a lot of deals to our Board because of their size, and to have someone interpret those investments with more of a REIT look potentially than just a general real estate investment approach just brings us more balance and more robustness.

So we just think it's a good stimulus as we get into the dialogue of keeping investment disciplines and where the greatest investment return opportunities are.

Great, thank you.

Our next question comes from Rob Mains with Stifel.

Yes, thanks. Just got a couple odds and ends. Tim, the $36 million gain that you described on the Brookdale conversion, will that be hanging out next quarter in other income?

That will actually end up in the, it will be in revenues actually.

Okay.

Because it's a termination of a lease. Okay, and then what kind of run rate should we expect for straight line rents on the other side of that? The other side of that, for the second half of this year it's about $8 million a quarter.

Okay, thanks.

For the next quarter.

And the transaction costs in this quarter, they're hanging out in G&A?

Yes.

Okay, and did I hear correctly the coverage numbers that you gave, the consolidated HCR Manor Care coverages, those did not include prior-period reserve adjustments?

That's right.

Okay, I think that's a good move to have those out. And then my final question, Tim, did I hear you say that the care homes 60% residential, 40% nursing?

Yes.

And the nursing is NHS?

A small piece NHS, a lot of that is local authority.

Got it.

But remember, Rob, 62% is private pay.

Right, understood. Thanks.

We have a follow up from Emmanuel Korchman with Citi.

Yes, just on Manor Care, what is the lease bump next year? Is it 3.5% or back down to 3%? I can't remember whether we're off the high?

I believe it's the last year --

Michael, it' 3.5%.

-- I believe it's the last year 3.5%.

So you still have another sizeable bump?

This should be I think the last 3.5% bump we have.

In 2015 will be the last 3.5%?

I'm sorry, we have two more 3.5% bumps.

Right. And I guess if you think about that above average bump for the next two years and you think about the Emeritus-Brookdale, that wasn't something that got all negotiated when the deal got announced. You had be working with Emeritus for a long period of time, even prior to the Brookdale merger, to try to come to some restructuring of the leases.

I guess why shouldn't we think that the same --

We were not in any type of restructuring discussions with Emeritus prior to that merger. That was not the case.

So you had never any conversations whatsoever about potentially --

No, we had not discussed any type of restructuring with Emeritus.

Now remember, those are triple-net leases with a corporate guarantee, so there was no restructuring discussions.

I guess you said then, you're saying HCR Manor Care has no issues with the current or the forecasted bumps in their lease at all?

They have made no indication about their inability to pay rent.

Listen, I think Lauralee said it. They've had a very difficult operating environment the last two years. Coming out in April of this year in 2014 is the first year that they're out from underneath sequestration.

They've got 2% reimbursement increases that are now announced in October. And if you look at the underlying fundamentals of that business, obviously Medicare Advantage has been difficult for them, but hospital census has been down, so --

And what happens is --

We've recently seen some hospital census come up and we've also, if you deconstruct that portfolio, 75% of it is post acute, about 10% of that is assisted living, both of those are going to grow at 3% to 5%. And then you look at their home healthcare and hospice business, which is growing double digits, which is about 15% of that business. So there's, for the first time in quite some time, they've got tailwinds.

And remember, we're trailing 12 months reporting here, so all this is kind of old news. You won't see the full year benefit of that sequestration going away until April of 2015, so it's going to take some time in order for that to roll through on a complete trailing 12-month basis.

Right. Okay, thank you.

Our next question comes from Michael Mueller with JPMorgan.

Hello, thanks. Tim, was just wondering, the $32 million lease termination fee tied to the Brookdale transactions, how and when does that start hitting the income statement?

That will hit in the third quarter. And it's $36 million.

Oh, so that is the $36 million is the lease term from before?

It will be in closing, Michael, we're anticipating that to be the end of August, and the $36 million will hit from a GAAP perspective in the third quarter.

Got it. That was it, thank you.

All right.

This concludes our Q&A session. I'd like to turn the call back to Lauralee Martin, President and CEO, for closing remarks.

Thank you very much and thank you, everyone, for joining the call. Again, just in conclusion, we had a very solid second quarter and we're on track to deliver quality accretive investment growth this year, and we look forward to meeting with you on our next conference call. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.