Healthpeak Properties Inc (PEAK) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Third Quarter 2014 HCP Earnings Conference Call. My name is Ashley and I'll be your coordinator today.

(Operator Instructions)

As a reminder, this conference call is being recorded. I'd now like to turn the presentation over to your host for today's conference, John Lu, Senior Vice President. You may go ahead, sir.

Thank you, Ashley. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations 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 to 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 items are defined in our supplemental information package. I will now turn the call over to our CEO, Lauralee Martin.

Thank you, John. Good morning and welcome to HCP's 2014 Third Quarter Earnings Conference Call. Joining me this morning are Paul Gallagher, Chief Investment Officer, Tim Schoen, Chief Financial Officer, and John Lu, Investor Relations. It is now one year since I joined HCP as CEO. As I evaluate what we have accomplished, I'm very proud to highlight four major areas of success.

First, our diversified core portfolio continues to produce solid recurring growth, demonstrated by this quarter's and year-to-date same-store increase of 3.2%. Second, our acquisition teams have executed on $2 billion of accretive investments to date, providing attractive risk-adjusted returns and accelerating our earnings growth in both 2014 and 2015; an accomplishment particularly remarkable in today's highly competitive acquisition marketplace.

Third, we addressed several potential future earnings speed bumps, including converting legacy Emeritus above-market leases to a RIDEA structure on an economic breakeven basis and the elimination or extension of over 40% of the operator purchase options that previously encumbered our real estate portfolios. Finally, we continue to be a global leader in sustainability in the healthcare sector, achieving greater rankings and better scores year after year. Now, let me turn the call over to Tim.

Thank you, Lauralee. Let me start with our third quarter results. Our same property portfolio generated 3.2% cash NOI growth compared to the third quarter last year. The results benefited from contractual rent increases and 150 basis point occupancy gains in both our existing RIDEA senior housing and life science portfolios, offset in part by lower performance in our medical office sector.

Paul will discuss our results by segment in a few minutes. For the quarter, we reported FFO of $0.82 per share, which included a $0.07 per share net benefit from the Brookdale transaction that consisted of an $0.08 per share gain resulting from the creation of a new 49 property RIDEA senior housing portfolio, as described in today's earnings release, partially offset by $0.01 per share of transaction and closing costs.

Excluding the $0.07 per share favorable transaction-related items, FFO as adjusted for the quarter was $0.75 per share and FAD was $0.65 per share. Our third quarter 2013 results included a $0.05 per share gain from the par payoff of our UK Barchester debt investment. Absent this gain, FAD per share increased 4.8% year-over-year.

Next, our investment transactions and balance sheet: during the third quarter, we closed on $834 million of investments that consisted of first, $588 million representing our 49% ownership in the $1.2 billion entry fee CCRC portfolio as part of the Brookdale transaction; second, $179 million to acquire and develop three medical office buildings; and third, $67 million of investments in construction and other capital improvements.

Subsequent to quarter end, in October, we acquired three additional care homes in the UK for $20 million, expanding our triple net lease portfolio, operated by Maria Mallaband, to a total of 23 assets. Yesterday, we announced a GBP395 million or $630 million UK debt investment secured by a care home portfolio. We will fund $580 million at closing expected later this month.

Our debt investment earns an annual effective yield of 8.2% and is immediately accretive to our annual FFO and FAD run rate by $0.03 per share, based on the Company's current leverage profile. Combined, these accretive acquisitions bring our year-to-date completed and committed investments to $2 billion, which provide a blended year one cash yield of 7.8% and will meaningfully add to our earnings growth next year.

Turning to financing activities and our balance sheet, in August, we raised $800 million of 3.875% senior unsecured notes due in 2024. Proceeds were used to pay down our Q2 revolver balance and fund Q3 acquisitions. Our balance sheet continues to be strong, as highlighted by our credit metrics at the end of the third quarter, including 40.6% financial leverage, in line with our long-term target, with 98% of our debt financed on a fixed rate basis, a 6.1% secured debt ratio, 5.2 times net debt to EBITDA, and $2 billion of immediate liquidity from our revolver and cash on hand.

On the debt maturities front, looking ahead through the end of 2015, we have $700 million of scheduled maturities at a blended interest rate of 6.2%, representing accretive refinancing opportunities in the current interest rate environment. Finally, our 2014 guidance, we are tightening our projected full-year cash same property performance growth to a range between 3% to 3.5%, which is slightly below our last forecast, primarily due to lower performance in our medical office and Sunrise portfolios.

We are increasing our 2014 NAREIT FFO guidance by $0.02 per share to a range between $3.03 and $3.09 per share. The increase is driven by a $0.02 accretive benefit from our investment activities mentioned earlier and $0.01 higher income from Brookdale transaction-related items, partially offset by $0.01 due to lower forecasted same-store performance.

We are raising our 2014 FFO as adjusted guidance by $0.01 per share to a range between $2.98 and $3.04 per share, driven by our investment activity but excluding transaction-related items that had a net positive benefit of $0.05 per share for the year. We are raising our 2014 FAD guidance by $0.02 per share to a range between $2.52 and $2.58 per share, driven by our accretive investment activities that also include increased contribution from non-refundable cash entrance fees related to our CCRC joint venture portfolio. With that, I will now turn the call over to Paul. Paul?

Thank you, Tim. As announced yesterday in our press release, HCP has provided a commitment to Formation Capital to finance approximately $630 million for the acquisition of NHP, a company that owns 273 nursing and care homes, including 226 homes operated by a HC-One, the third largest operator of nursing and residential care homes in the United Kingdom.

The financing, with a five-year term and all-in blended pricing to achieve an 8.2% yield to maturity, includes GBP362.5 million to fund a portion of the acquisition consideration and GBP32 million to fund future capital improvements. The NHP portfolio, located primarily in northern England and Scotland, has a current occupancy of 88% and sufficient in place EBITDAR to produce a fixed charge coverage of 1.5 times.

The transaction provides HCP with an attractive risk-adjusted return at 11.4% EBITDAR yield to the last dollar invested and allows us to expand our relationship with Formation Capital, while providing optionality in a right of first offer to provide financing for any additional properties the borrower may acquire. HCP's year-to-date committed investments totaled $2 billion upon closing the NHP transaction, which is expected later this month.

Now, let me review the portfolio's third quarter performance. Senior housing: occupancy for our senior housing platform was 87.2%, down 10 basis points from the prior quarter, but up 10 basis points from the prior year, driven by our same property RIDEA portfolio where occupancy has increased 150 basis points and same property NOI growth is nearly 6% year-to-date.

Same property cash flow coverage for the portfolio was 1.12 times, a decline of 1 basis point from the prior quarter. Same property performance increased 3.9%, driven by contractual rent steps and the strong performance of our same property RIDEA portfolio. We continue to closely monitor new construction in our markets. Our RIDEA same property portfolio has a large concentration of independent living units in Houston, a market that has seen increased development.

Our Houston RIDEA properties are performing well with a 280 basis point year-over-year and 170 basis point sequential increase in occupancy. We attribute the strong performance to revenue-generating capital investments we made in 2013 and 2014 of $10 million to upgrade the assets. We are in the process of finalizing our capital plans for 2015 with Brookdale for our entire RIDEA portfolio and anticipate spending in excess of $35 million in 2015 in revenue-enhancing CapEx that includes refreshes, unit conversions, and upgrades.

As of September 30, 2014, we have $133 million in construction loans outstanding related to seven senior housing developments and a $50 million joint venture with Formation Capital. Post-acute/skilled nursing: HCR's normalized fixed charge coverage for the trailing 12 months ended September 30, 2014 is 1.10 times, down two basis points from June 30, 2014's coverage of 1.12 times discussed on the last call.

Normalized coverage excludes the impact of $30 million in insurance reserves related to prior period liability claims. Including these reserves, the reported September 30, 2014 coverage is 1.05 times. HCR continued to achieve increased managed care census in the third quarter versus prior year, driven by its quality outcomes as a preferred post-acute provider.

However, total census and mix decreased slightly, impacted by continued industry-wide challenges, including fewer hospital admissions, shorter average patient length of stay, and the increased shift to Medicare Advantage plans. Additionally, HCR's hospice and home care business continued to deliver near double-digit growth year-to-date, driven by significant census gains.

While we expect the shift toward Medicare Advantage to continue, HCR should benefit positively from the 2% increase in Medicare and the 1.4% hospice rate increase that become effective October 1, along with forecasted improvements in hospital admissions on a year-over-year basis. Additionally, HCR expects to maintain strong cost controls, including the launch of a second round of cost reductions effective in the fourth quarter.

HCR continues to invest in this business and ended the quarter with $137 million of cash on hand. Same property performance for our post-acute/skilled nursing portfolio was 3.4% for the quarter, driven by contractual rent steps. Hospitals: same property performance increased 2.8% due to rent steps and increased ad rent at our HCA Medical City Dallas hospital. Cash flow coverage declined 12 basis points from the prior quarter to 5.32 times.

Medical office buildings: same property performance was impacted by the vacancy of a multi-location tenant, resulting in an increase of just 0.3%. Although same property performance was off this quarter, we expect full-year same property performance to be 2%. Occupancy for our total medical office portfolio increased 10 basis points from the prior quarter to 90.8%.

During the quarter, tenants representing 587,000 square feet took occupancy. The average term for new and renewal leases was 67 months and the retention rate was 77%. Excluding 435,000 square feet of month-to-month leases, we have 670,000 square feet of scheduled expirations for the balance of 2014. We have executed leases to address 46% of these expirations.

Additionally, we've executed 500,000 square feet of leases for vacant space and 2015 expirations that have yet to commence. On October 17, 2014, we executed a 15-year lease with UC Davis for the entire 92,000 square foot redevelopment project in Folsom, California. In August, we commenced construction on a $29 million medical office building, with projected return on cost of 8.8%.

The MOB will be on the campus of Sky Ridge Medical Center in Denver, Colorado, which is owned and operated by HCA and will complement our two existing MOBs on the same campus, which are 96% occupied. We have pre-leased 31% of the 118,000 square foot building to HCA with strong interest in the remaining square footage. The Sky Ridge development represents the second development project in as many quarters that will source through our long-term relationships with hospital operators.

During the quarter, we acquired two medical office buildings, totaling 465,000 square feet, for $150 million, including a 436,000 square foot MOB, located in Philadelphia's University City Science Center that is 98% leased to two credit tenants: the University of Pennsylvania and Children's Hospital Philadelphia. Life science: same property performance grew 4% in the quarter, driven by rent steps and an increase in occupancy of 150 basis points from the prior year to 93.6%.

Overall occupancy for the life science segment is 93.7% and represents an all-time high. During the quarter, tenants representing 565,000 square feet took occupancy with the average lease term of 98 months. Leasing for the quarter totaled 387,000 square feet, bringing year-to-date total leasing to over 1 million square feet, including three renewals that address 50% of our 2015 expirations.

Scheduled expirations for the balance of 2014 are 102,000 square feet, of which 45% has already been leased to new tenants. Additionally, we have executed 244,000 square feet of new leases that have yet to commence. During the quarter, we completed a second phase of redevelopment on the $24 million, 77,000 square foot Carmichael Facility in Durham, North Carolina that is 100% leased to Duke University.

Life science development consists of 115,000 square feet in San Diego that is 100% leased and 30,000 square feet related to our Cambridge, Massachusetts redevelopment project that is 91% leased. We continued to see strong demand for lab space, particularly in the Bay Area where rents are rising as immediately available inventory and lease concessions shrink. This is evidenced by our successful leasing of a 30,000 square foot building in South San Francisco subsequent to quarter-end.

HCP will spend $12.8 million to reposition the outdated vacant building to a first-class lab facility. The project will be completed in Q2 2015 and deliver a total stabilized return on cost of 7%. With that, I'd like to turn it over to Lauralee.

Thanks, Paul. Our diversified portfolio today is well-balanced between long-term triple-net leases and operating businesses. As a result, we are positioned to deliver continued strong internal growth from both contractual rent increases and participation in market growth. Let me share some perspectives on our portfolio in the following four categories.

First, 31% of our portfolio representing 333 post-acute and senior housing properties is master leased to HCR ManorCare, a triple-net lease with attractive rental increases. While trailing 12-month coverage has not improved, HCR continues to meet their lease obligations, invest in our facilities and their business, and maintain a healthy liquidity position. As we move into 2015, following an extended period of negative headwinds, positive trends just discussed by Paul appear to be coming.

Our relationship with Paul Ormond and is management team is positive and open. We continue to work with HCR in a number of areas to improve lease coverage, such as supporting their exit from underperforming property and providing expansion capital for their highly successful Arden Court concept. The next 32% of our portfolio is comprised of triple-net leases across senior housing, post-acute, and hospital, with an average remaining lease term of 11 years.

This pool of assets provides contractual predictable rent growth with increased safety in stronger coverage as evidenced by our heat map. Third, now moving to the operating business front, we own and operate 22 million square feet in our medical office and life science platforms, which accounts for 27% of our NOI. Anchored in the land and entitlement-constrained Bay Area, our life science business continues to benefit from favorable market fundamentals.

Our recent leasing success has led to our all-time high occupancy and is expected to produce even stronger same-store growth next year, driven by scheduled rent commencements. Additionally, we have strategically located land in both the Bay Area and San Diego representing attractive development opportunities. Our medical office portfolio is 94% hospital-affiliated, giving us diverse relationships with over 200 hospital systems.

This year through September, with our increased acquisition teams and focus on hospital relationships, we have invested $210 million and have underway two development projects totaling $50 million. This amount, accomplished in nine months this year, represents 70% of the total medical office investments made in the prior six years and we cumulatively invested only $370 million.

Initial cap rates on this year's acquisitions are over 7% and development yields exceed 8%. Finally, the Brookdale transaction this quarter reconstituted a significant portion of our senior housing portfolio, increasing our RIDEA senior housing operating business to 10% of our portfolio. These communities have meaningful growth potential over the next few years, given their current occupancy in the low to mid 80%.

As Paul mentioned, we are working with Brookdale to invest capital to accelerate the upside. In addition to the strong, well-balanced portfolio we have in place, our transaction pipeline continues to be robust. As Tim described earlier, our acquisition financing commitment to Formation Capital helped bring our year-to-date accretive investments to a total of $2 billion, encompassing four property sectors, using a variety of [invest] vehicles, including triple-net leases, RIDEA, roundup development, and debt investment; 75% of which were sourced from relationships.

Our UK portfolio now totals $1 billion, having assembled a critical mass of debt and real estate investments, anchored by significant relationships with three premier home care home operators: Four Seasons Health Care, Maria Mallaband, and HC-One. We are pleased to announce that in January, we will be opening a London office, led by Andrea Auteri, who will be joining us as Senior Vice President of Acquisitions to help us manage and build on our active deal pipeline in the UK.

Andrea comes to us after having spent over a decade at Goldman Sachs, where his responsibilities included coverage of the UK and European financial sponsors and healthcare operator landscape. Operator, we are now ready to open the call for questions.

(Operator Instructions)

Emmanuel Korchman of Citigroup.

Good morning. Lauralee, if we look at your comments on ManorCare, EBITDAR there declined again. You talk about attractive rental increases, which is good for HCP, but bad for the coverages, and then you also talk about positive trends coming. Those sort of all work together and against each other, but then you also mentioned exiting from underperforming assets.

Would those be exits from assets that HCP owns? How do you think about that in terms of lost NOI and also, what's the magnitude of assets that are underperforming that if they lose, then the coverage will go up?

The one asset that I mentioned was an asset that we owned. They've also exited a couple of assets that we don't own. Typically, the profile of those assets is they're a drag on their operations, which means clearly, they're not contributing to coverage or a positive impact to our portfolio. So we would work with them as we see those opportunities and they've been able to exit those and achieve good exit prices on them.

But you're saying that they would exit the operations or you would sell the asset and they would exit the operations?

Both.

Okay. Paul, on the Philadelphia MOB, maybe I missed this, but what was the pricing, maybe the lease structure there? Was that a competitive situation or did you get that off-market?

It was a competitive situation. It's a building that's multi-tenant, primarily leased to the two tenants that I talked about and I think Lauralee talked about prices for our MOBs being in the 7%-type range. So it's certainly within the ballpark there.

A final one, on the UK deal, with growth from HC-One, Four Seasons, and Care Management, is there any type of preferred relationship there or a right of first bid on new assets that they do?

On the HC-One NHP portfolio that we bought with Formation, we do have a right of first offer for new financings with that relationship, yes. In the Maria Mallaband situation, we have the ability to do new development financing for them. They've got a couple projects that they are in the process of looking at right now, so we do have that capability.

Thanks.

Josh Raskin of Barclays.

Hi, thanks. Question just on ManorCare, just in terms of the volumes, we've seen a pickup in hospital admits and discharges and I'm wondering are you starting to see any of that improvement at the operator level for ManorCare?

ManorCare continues to take market share. It's just that, as it's moved from Medicare to Medicare Advantage, the length of stay is down, so they're turning the admissions in order to keep the occupancy levels. So yes, benefit of more coming in, but so far, an offset through the shift in mix.

Admissions are up, Josh.

Okay, so admits are up. So those are actually turned positive, the length of stay is pressuring the overall census, then?

And that market share has been something that's happened in the past couple of quarters. So they've been able to achieve that, but that shift mix is the Medicare Advantage with the shorter length of stay is impacting overall census.

Okay, understood. Just on the MOB, with the multi-site tenant lost, what happened there? Did you say that overall occupancy was up including that tenant loss?

Yes. So we had a situation where the tenant ended up going dark on us. It's nice asset, it's Southern California, and very desirable space. We're in the process of [actualing] it and those things happen occasionally. So we're looking for new tenants for the space.

Okay, so this wasn't M&A or anything, this was just a bad luck tenant.

Yes.

On the CCRC JV, how should we think about, taking a step back, what's a reasonable expectation in terms of the pace of capital deployment, where you see the pipeline? What would you guys consider a success in terms of dollars invested over the next year, two years, three years, however you think about it?

I think we targeted with Brookdale to do, over the next two or three years, a couple hundred million dollars in that particular joint venture and I think that's their expectations as well.

Okay. So give it $100 million a year or so, that would be a baseline?

Yes, it might be lumpy, but that might be a good run rate.

Okay, perfect.

Juan Sanabria of Bank of America.

I was just hoping you'd give us a better sense of overall CapEx spend. You flagged a different couple opportunities. Some of it sounded more strategic or offensive in nature, what we should be thinking on a go-forward run rate maybe over the next 12 months for maintenance in one bucket and redevelopment or revenue-enhancing CapEx in the other?

In terms of the overall pipeline for this year, I'll give you the full bucket, Juan. About $283 million is the total CapEx budget for this year. In terms of the maintenance CapEx, and I'll break it out, it's about $71 million for a forecast for this year. That's a little bit higher than my previous guidance, but that's the result of some leasing success that we've had in our life science portfolio that Paul mentioned, where the occupancy is at an all-time high.

The rest of it is really due to increases in our development portfolio, both in South San Francisco, really in our life science portfolio, and then, as Paul mentioned, the MOB development project. Call it $210 million in growth CapEx and $71 million in recurring maintenance CapEx.

On that growth CapEx, do you think that grows from here or is that a good number to think that you could do on a run rate basis?

It's a pretty decent run rate basis. It depends on some projects that we may bring out of the ground in the life science area at some point in time, but it's a pretty good run rate. It's a little higher than last year, but I'd say $250 million, $275 million is a good run rate year in and year out over an extended period of time.

Okay, great. On the HC-One formation stuff, are those assets that you would like to own long-term if you had the ability? Is there any right that you have to buy those assets if Formation decides to liquidate their position down the track?

Yes, I think one of the things that's real interesting here is that portfolio, going back to 2006, 2007, was financed with GBP1.3 billion of debt and the capital structure never really worked. It was a default scenario. Interest hasn't been paid on the debt in over two years. The money's been funneled back into CapEx into the particular properties just to keep them running.

So that's one of the reasons why we went in there in a debt position and we see an opportunity with our capital plan and working with the HC-One folks and Dr. Chai Patel, getting these assets turned around. As they, in fact, spend the capital, get them repositioned, and get operations back up and running well, we see an opportunity to be able to convert, possibly, some of our debt position into sale leaseback and we have a right first offer for any future financings on those particular assets.

Okay. Just on the CCRC, what you see as the market pricing? Any range you could provide on a cap rate basis and how we should be thinking about that? Are you seeing increased competition for those types of assets?

I don't know about increased competition. We're starting to see some opportunities out there in the marketplace and I think it's really going to be function, from a cap rate standpoint, as to where you're at with the particular asset. If you look at the assets that we did in joint venture with Brookdale, they had an occupancy play as they leased those things up and as a result, we were able to get a very favorable cap rate.

I would think that if you're in a more stabilized situation, cap rates might be a little lower than where we were able to acquire the assets at, but we do see an increased deal flow in that particular space.

A nice premium to straight, triple-net lease senior housing, 150, 200 basis points.

Right.

Great. Thanks, guys.

Vikram Malhotra of Morgan Stanley.

This is Landon Park on for Vikram. Turning to the life science portfolio, can you talk about what you're expecting for the next couple of years, with your rent rolls in that portfolio?

Yes, we've got a fairly muted roll there, Landon, over the next couple of years, but I would expect those to roll pretty much at market. We've got expirations of 325,000 square feet in 2015, about 393,000 square feet in 2016, and I would expect those to be roll at or near market.

Okay. What about on the potential of leasing up the remaining vacancy in that portfolio?

There's really not a lot of vacancy in the portfolio. We're up to about, as Paul mentioned, just short of 94%. So we've had a lot of leasing success there driven by the Bay Area. I think that, given the demand that we see in those coastal land and entitlement-constrained markets, we like the growth profile there as leases roll and where our assets are located in core life science markets.

Okay. Just one more question, just on the new London office that you guys are opening. I'm not sure what the costs are that are associated with that, but what kind of deal volume are you underwriting to justify the new operations over there?

With what we have right now, we've got $1 billion in our platform, which is a good base to be running from. Quite frankly, we've got a very robust pipeline over there of opportunities. So we saw the need to have boots on the ground and to be active in the marketplace.

One of the attractions to Andrea is that he's been in the space on the other side of the house, clearly knows what the opportunities are there and saw the HCP platform as a way he could execute them. Again, we think that's a good positive in terms of the decision.

Are you able to share any more details just on your pipeline there? Maybe how it splits up between properties and debt or just any details at all?

We've got a robust pipeline.

All right. Thank you.

Daniel Bernstein of Stifel Nicolaus.

Good morning. I want to go back to HCR. Given what we saw in the cap rate paid by [Mega for Aviv] and just general cap rate compression in the space, is there opportunity to dispose of some underperforming assets in that portfolio? Another way to ask this would be, looking at the lease coverage there, is there a bottom 5% or 10 or 20 assets that are really an issue at HCR that if you got rid of those, the lease coverage would be a lot better? Just a general question I have on HCR.

I think both us and HCR constantly monitor the portfolio and look for various different opportunities to take advantage of just that sort of thing. Quite frankly, with the asset that was disposed that we owned, was not covering rent and for that matter, was not covering operating expenses. They were able to get a very attractive price for those types of assets.

To the extent we're able to monetize and reinvest those proceeds to provide some relief to the operating Company, then we'll entertain those sorts of things, and we think that's a win/win for both the OpCo and the PropCo on a long-term basis.

That's exactly why I asked the question, to be win/win. Also, historically, I think some non-cash true ups or prior quarter true ups have sometimes been included in the EBITDAR and lease coverage numbers. Was there anything unusual in the quarter besides what you talked about broadly impacting the lease coverage in the quarter?

No. Nothing.

You picked up development on the life science side and MOB side. Are you looking at senior housing opportunities at this point as well? Maybe just generally, where would you be comfortable bringing, say, I don't know what metric you want to use, but CIP to gross assets to at some point? Do you want to bring development up significantly from here, as well as total investments?

We've actually had our development construction loan program up and running for a couple of years now and some of those assets are beginning to fill up and we're going to be able to take advantage of our right to buy those assets and to retain the ownership there. I would have expected that the returns for new construction would have started to get squeezed at this point in time, but we still see opportunity out there at still quite significant premiums to where current cap rates are for stabilized assets.

Even though the volume of construction has increased, we still see those returns as being good on a risk-adjusted basis. I think from the standpoint we're fairly selective and we want to do good quality assets, we've had trouble finding good sites to be able to put our capital in play. But yes, we would still consider doing development in the senior housing space on a selective basis.

Development, Dan, is a fairly small part of our portfolio. It's 2% to 3% today, but, as Paul mentioned to you, they have attractive, risk-adjusted returns, particularly when you take into account the fact that ours are typically 1/3 to 1/2 pre-leased when we bring those out of the ground.

Sounds good. That's all for me. I'll hop off. Thanks a lot.

Michael Knott of Green Street Advisors.

Hi, good morning. It's Kevin Tyler here for Michael. Thanks for the color on use and you talked about the reinvestment there driving occupancy gains. As you look across the portfolio, I was curious what other markets you might be focused on for allocating the balance of that $35 million that you mentioned with Brookdale. And then a side question, do you find that the independent properties may have a longer runway for this CapEx, then say, an assisted property in a similar location?

I don't know about longer runway, but the way we're looking at allocating the capital really comes across a couple different areas: those that are in desperate need of a refresh, simply because they haven't had capital spent on them and then there's the repositioning where you're converting units, say, from independent to assisted and assisted to memory care and things of that nature and the final bucket is really expansions of existing space.

What we've been able to do and what's been nice about the transition and the integration that we're doing with Brookdale is they've been very focused on jump-starting the CapEx spend on our RIDEA assets. Despite the fact that they've been going through an integration with their Emeritus portfolio, we will be able to start spending money on those assets, whether it's any one of the three buckets, to get that portfolio up and running and repositioned.

Okay, that's helpful, thanks. As you look out at your acquisitions on the senior housing side, what's your appetite today for RIDEA versus triple-net? Are there other opportunities in the current portfolio that you have where you have an eye on restructuring like you did with Brookdale, moving from triple-net to RIDEA?

We've always been a risk-adjusted investor and to the extent we see opportunities out there, whether it's through occupancy, repositioning assets, rate, change in operations to an operator that can provide more and different services to a particular facility, we will be investors in a RIDEA to the extent that we get paid for the risk associated with that transaction. So to the extent we find those opportunities, like we did with our CCRC joint venture, where there was a good occupancy play, then we'll deploy our capital there.

If you look at our heat map, you can see that we have very little in our portfolio that isn't performing now at a very high level with coverage. So we think we're in very good shape.

Great. Okay, thanks. Last one for me, on the life science side, you've perform pretty well, but the majority of your assets are on the West Coast. I was curious your appetite for other expansion beyond the West Coast and maybe moving into some of the East Coast clusters?

Yes. First of all, John Bergschneider and his team have done a great job on our portfolio on the West Coast and the development opportunities that we've had with Duke that they've developed. But we would absolutely look to expand in the core markets in Boston, the Washington DC area, continued expansion in the North Carolina markets and then continue to develop our relationship with the University of Utah up in Salt Lake. But short answer is, we'd continue to look at opportunities in the core markets.

Okay, thank you.

Rich Anderson of Mizuho Securities.

Thanks. I just had a technical question, on the accounting for the RIDEA lease termination, I guess you would call it, to convert into RIDEA structure, the $23 million of purchase options, why would that be viewed as a deduct? Were they out of market in terms of -- why would that be a deduct?

Because that's our consideration to them. You have to think about it as almost like a lease termination fee, Rich, that's a consideration -- the total consideration is what we wanted to get to terminate those leases, offset by our desire to get out of the purchase options.

I see, so the $23 million is effectively an implied termination fee you're paying them.

Exactly.

The $129 million, if I'm using the right number, $131 million is the implied termination they're paying you?

Right, right. Exactly. Then you're left with a number of about $108 million, getting into technical accounting, then you have to offset some of the intangibles that are on the balance sheet to come up with a net gain.

Okay. Then the cash payments, I think it was $54 million, when does that start getting recognized?

Actually, we'll get two payments this year on a quarterly basis on the lease termination fee and then the debt is outstanding as of the close. The lease termination fees are recognized on a FAD basis, Rich, because we get the dollars in over time. It's carved out for FFO at closing.

Okay. So, what would it be for the remainder of this year?

For the lease termination?

Yes, the $54 million.

It's broken down into two. It's $34 million in lease termination fees and $20 million in interest. So if you break that down on quarterly, the $34 million over three years, that'll break down the lease termination fee on a pro rata basis.

Okay. Got you. Thanks for that technical feedback. That's all I have.

(Operator Instructions)

John Roberts of Hilliard Lyons Capital.

Thank you. Good morning. I've got a question on the income statement here. The operating and other line looks like it has gone up considerably more of this quarter versus the associated revenue. I was wondering if there's something in there that bumped that number.

Yes, John, that was the -- I was just talking to Rich about that's the RIDEA restructure that we did. That's what bumped it up in the quarter.

Okay. How much was that?

It was a net gain of about $38 million.

Okay. All right, thanks.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to Lauralee Martin, President and CEO, for further remarks.

Thank you all very much for joining the call this morning and I expect we're going to see many of you shortly in person and we can talk a lot more. Thank you very much.

See you in Atlanta.

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