Healthpeak Properties Inc (PEAK) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 HCP earnings conference call. My name is Brian, and I will be your coordinator today.

(Operator Instructions)

As a reminder, this call may be recorded. 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, Brian. Today's conference call will contain certain forward-looking statements, including those about our guidance and financial position, 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 2014.

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 the call to our CEO, Lauralee Martin.

Thank you, John, and welcome to HCP's 2015 second-quarter earnings call. Joining me this morning are Tim Schoen, Chief Financial Officer, and John Lu, Investor Relations. Our dedicated HCP team delivered a solid, productive quarter across many fronts. Our investment activity continues at a strong pace, with $1.9 billion of acquisitions and developments so far this year, already matching the total achieved in 2014. Our cash same-store growth outlook continues to strengthen, allowing us to raise guidance for the year, which Tim will cover in a few minutes.

HCR ManorCare's normalized year-to-date EBITDAR results are 2.6% above prior year, and ahead of their budget. Their normalized fixed charge coverage was 1.11 times for the trailing 12 months ending June 30, representing a 3 basis point improvement, but more indicative is the run rate discharge coverage, which for the second quarter was 1.18 times. Both coverage ratios exclude any benefit from the pending asset sales.

The asset sales are progressing ahead of expectations, driven by robust interest from a large group of buyers. We have 46 out of 50 properties under letters of intent, and we expect to generate total proceeds between $300 million and $350 million, which represents the higher end of our original guidance range. The sales will close in multiple tranches, with the first sale completed last Friday and three-fourths of the total proceeds expected during the balance of this year.

In addition to the pending HCR asset sales, we are taking advantage of attractive market pricing to recycle capital to fund our completed investments. Tim will discuss our balance sheet details in a few minutes. And proudly, we continue to demonstrate our leadership and commitment to sustainability. Newsweek's 2015 US 500 Green rankings rated HCP second in the entire REIT industry, and placed us among their top 10% of the 500 largest publicly-traded US companies.

With that overview, let me highlight our investment transactions. We closed on $1.4 billion of acquisitions during the quarter, bringing our total year-to-date investments to $1.9 billion across our diversified sectors, with an attractive blended cash yield of 6.7%. Beginning with senior housing, we closed the acquisition of 35 private pay senior housing communities with Chartwell ahead of schedule for $847 million, with a year-one projected cash yield of 6.6%.

This transaction expanded our Brookdale partnership through a 90/10 RIDEA joint venture. Importantly, Brookdale has operated these communities since 2011, thus avoiding any impact from operator transition, and allowing us to accelerate our capital investment plans to facilitate rate and occupancy improvements. The portfolio is currently 89% occupied, with the majority well-located in top 31 MSAs.

In April, we exercised our purchase option under a development loan to acquire an assisted living and memory care facility in Germantown, Tennessee for $72 million, monetizing our participation in the developer's profit. Newly-constructed and stabilized at 91% occupancy, this investment yields 6.9% on our invested capital, and will continue to be managed by Brookdale in a RIDEA joint venture. Continuing the robust external growth momentum we discussed at our Investor Day, our medical office platform closed on $386 million of on-campus medical office buildings during the quarter, in two transactions.

In April, we closed the previously-announced acquisition of 833 Chestnut in Philadelphia for $161 million. We significantly expanded both our footprint and relationships in the Philadelphia market, increasing our MOB investments to over 1.1 million square feet. The majority of the 833 Chestnut building is leased to a new HCP relationship, Thomas Jefferson University Hospital, which is adjacent to our building, and ranks second in the attractive Philadelphia Metro area. Driven by an active leasing pipeline, we quickly increased occupancy from 85% at closing to 92% today, and as a result, expect to exceed the 6.6% initial acquisition yield.

In June, we acquired a portfolio of 11 on-campus MOBs, totaling 1.2 million square feet from Memorial Hermann in a sale leaseback transaction for $225 million, which expanded our relationship with the A-rated investment grade hospital system, having the largest market share in Houston at 24%. The portfolio was purchased at an initial 5.7% economic triple net lease rate, with 2% annual escalators during the 10-year initial lease term. The tenant is responsible for all leasing costs, vacancy, and all capital expenditures during the term. As a result of the transaction, HCP has become Memorial Hermann's largest MOB provider, increasing our relationship to 1.6 million square feet on six hospital campuses, including the two development projects currently underway.

In our life science portfolio, we continued 2015 with yet another consecutive quarter of positive leasing volume, anchored with notable transactions in both the South San Francisco Bay area and San Diego. We continue to capitalize on the strong life science demand in South San Francisco, where we are in active discussions with several prospects for the first phase of The Cove, the newest generation of life science development. We anticipate being able to announce some exciting news in the very near future.

In the post acute sector, we increased and extended our Tandem debt investment to October 2018, with a blended yield -- a blended coupon of 11.5%. And lastly, on the international front, we expanded our relationship with Maria Mallaband with two private pay focused care homes, that we acquired for $42 million. The care homes are under 15-year triple net leases, with an initial 6.75% lease yield and RPI-based escalators. These are recently developed, high end properties located in Manchester, with current occupancy of 97%, and projected EBITDAR coverage of 1.3 times.

In April, we converted $263 million, representing one-third of our total HC-One debt investment into real estate ownership of 36 care homes under a long-term triple net lease at 7.25% initial lease yield, and projected EBITDAR coverage of 1.4 times. With that overview, I'll turn the call over to Tim to discuss our financial results for the quarter and increased 2015 guidance.

Thank you, Lauralee. Following an active quarter, led by $1.4 billion in acquisitions, we are raising guidance on all fronts, including cash, same property performance, FFO, and FAD, which I will discuss shortly. Let me start with our second-quarter results.

FFO as adjusted for the quarter was $0.79 per share, and FAD was $0.69 per share, representing year-over-year growth rates of 5% and 10% respectively. The increases were driven by accretive external growth during the last 12 months, a gain from monetizing our senior housing development project in Germantown, Tennessee, offset in part by reduced rent from the HCR ManorCare portfolio effective April 1. NAREIT FFO for the quarter was $0.65 per share, which included several items representing a net impact of $0.14 per share as follows: First, previously-announced charges of $0.11 per share for the non-cash impairment on our Four Seasons debt, and severance related to the departure of our Chief Investment Officer. Second, $0.05 per share of acquisition costs in connection with our investment transactions that Lauralee just discussed. Third, a positive offset of $0.02 per share, representing a non-cash gain from foreign currency remeasurement.

Turning to our portfolio performance. Our overall cash same-property performance declined 0.7% compared to the second quarter last year, as a result of the amended HCR ManorCare lease. Excluding HCR, the remaining 70% of our same-store portfolio generated strong growth of 3.9%, led by our life science and senior housing segments, which increased 6.7% and 4.9% respectively. Our life science performance was driven by robust leasing, with same-store occupancy reaching its fourth consecutive all-time high at quarter end, at 98.1%, representing a 600 basis point increase over last year. On the senior housing front, our solid same-store performance was attributable to contractual rent steps, enhanced by strong results from our independent living RIDEA 1 communities, generating year-over-year growth of 9.2% this quarter, driven by higher rates, occupancy, and margins.

Looking at our total RIDEA platform, after closing the Chartwell acquisition at quarter end, RIDEA investments managed by Brookdale now represent 13% of our cash NOI. It is important to note that three of our four RIDEA portfolios are expected to perform at or above expectation in 2015, including our same-store independent living properties, CCRC joint venture communities, and the recently-acquired Chartwell portfolio. The remaining RIDEA portfolio, representing 3% of our cash NOIs, was transitioned from Emeritus to Brookdale a year ago.

Its performance is slightly behind expectations, where occupancy growth is slower than initial forecasts coming out of the flu season. Performance is expected to improve, as Brookdale is in the process of completing the final and most impactful stage of the integration of these assets. We are concurrently accelerating capital investments to refresh and upgrade selected communities to further enhance performance. These updated RIDEA projections are already reflected in our 2015 guidance, that I will cover in a minute.

Moving on to our financing transactions and balance sheet, during the quarter we raised $750 million of 10 year bonds at a 4% coupon, to fund a portion of our completed investments. As part of renewing our shelf registration, we also put in place an ATM equity program with capacity of $750 million over the next three years. We have not issued any common stock under the ATM. Our balance sheet continues to be in excellent shape. At quarter end, we had $1.1 billion of liquidity from our revolver and cash on hand, and no scheduled debt maturities for the balance of the year. Our fixed charge coverage remains steady at 4.0 times, and secured debt ratio continues to be at historic lows, at just under 5%.

Financial leverage and net debt to EBITDA increased to 45% and 6.0 times respectively, as we closed on investments at the end of the second quarter, using bond proceeds and capacity under our revolver. We expect to recycle capital with proceeds from planned asset sales in the second half of the year, to improve our liquidity and leverage profile. Inclusive of the HCR ManorCare asset sales that Lauralee discussed, we expect to generate up to $700 million of proceeds from capital recycling activities at attractive yields in the low 6% range, which capital will be used to finance our completed acquisitions, reduce leverage, and clear the US dollar borrowings on our revolver. Accordingly, as we move through the next couple of quarters, we are forecasting leverage to improve to the low 40% range and net debt to EBITDA to the mid-5 times range, without the benefit of any external equity.

Finally, our increased 2015 guidance. Outside HCR, the majority of our same-property portfolio continues to perform above forecast, and is expected to grow between 3.25% and 4.25% for the year, driven by our life science and senior housing RIDEA 1 performance. As a result, we are raising our 2015 cash same-property performance for the entire portfolio by 25 basis points to 0.5% at the midpoint, inclusive of the amended HCR lease.

We are raising 2015 NAREIT FFO to range from $1.97 to $2.03 per share, which is $0.05 per share higher than our previous guidance updated in June. The increase is primarily driven by the benefit of our second-quarter acquisitions closing earlier than planned, and funding these acquisitions using the revolver until we complete the planned capital recycling activities I just discussed. We are raising 2015 FFO as adjusted by $0.05 per share to a range between $3.14 and $3.20 per share, which excludes impairments, severance, transaction-related charges, and foreign currency remeasurement gains for the year.

Lastly, we are raising our 2015 FAD guidance to a range of $2.68 to $2.74 per share, up $0.02 from our last guidance, and at the midpoint, represents year-over-year growth of 5.4%, even after reflecting the HCR lease amendment for three quarters of the year. With that, Brian, can you open the call for questions?

(Operator Instructions)

Our first question comes from the line of Vikram Malhotra with Morgan Stanley. Your line is now open.

Thank you. Could you maybe just elaborate a bit more on comments about your Brookdale assets, and how the growth there may be a bit different from the weakness Brookdale is seeing?

Yes, Vikram, it's Tim. Let me take that. Our Brookdale portfolio was roughly about 24% of the Company. Half of that is triple net leases with obviously a strong credit-worthy counterparty, and the other half is our RIDEA exposure. And as we mentioned, three out of the four of those RIDEA portfolios are performing at or ahead of plan, and that's because three of those portfolios have no transition issues. Those are being operated by Brookdale today.

And then the remaining one is a RIDEA 2 portfolio, that is obviously undergoing the transition from Emeritus to Brookdale. And when I think about it, it's actually similar to what we saw in RIDEA 1, where we transitioned from Horizon Bay to Brookdale, and there were some operating declines in the first 9 to 12 months. But it's also similar in the RIDEA 1 portfolio, in the fact that we transitioned and upgraded the operations. The portfolio was non-stabilized and had lower margins, and we were investing capital to improve the asset's competitive advantage in the marketplace.

And then finally, obviously Emeritus or I'm sorry, Brookdale, is actually in the final stages of their transition. They've got nearly all of their EDs in place. They're only seeking two EDs in 49 of our communities. They're in the final stage of the integration, where they're focusing on their care assessment and labor and service alignment, and as I mentioned, we started to put CapEx into 20 of the 49 properties, to upgrade the performance of those assets. So I guess that a bit of a long answer, but really, it's the only RIDEA 2 portfolio that we've got any performance concerns with, which is roughly about 3% of our portfolio.

And could you remind us what the CapEx level is that you're putting in?

That's probably around, an average, around about 2,000 units across our RIDEA portfolio and probably 2,500 to 3,000 in RIDEA 2.

And that's this one time kind of revenue-enhancing CapEx or does that also include this ongoing maintenance?

Includes both. But it does have refurbishment, some change in use, and upgrade of common areas and dining, and common areas in the facility, is the way I'd say it.

Just a quick numbers clarification. If we look at the operating portfolio on a same-store basis, and granted, it's obviously just reflective of 20 assets, but if we look at your occupancy increase, which was about 180 basis points, and then your RevPAR increase, it seems like if you look at those two in itself, same-store revenue should be kind of in the high 4s but your reported number is different, it's lower. Do you know why that's the case?

I'll let John take that.

Vikram, it's John. You're right, RIDEA 1, it's 20 properties independent living in the same store population for the quarter, up 9.2%. There was some noise with the geography between revenue and expense lines. The headline is that the top line is about a 5% growth, driven by both occupancy and rate increases. You got those numbers correct. And the rest of the -- that's about a 5% increase, and of the 9%, and the remaining 4% comes from higher margins, expense savings, mostly on the utility side. So just about a little bit of characterization between revenues and expenses for the quarter, about $800,000.

Okay. So just saying, whatever is reported on the total revenue line, in terms of same-store revenue, there's been some shift from there into expenses?

Yes, it's just some minor characterization between revenue and contra expenses. Again, the way I'll think about it is the 5% top line growth, that drives the 9% same store for the quarter.

Okay. So then, but if I just take the reported numbers on revenue, it's about in the high 2s and expenses are down 1.5% or 2%, but you're saying that the overall result is about 9% increase.

Again, it's a characterization between revenue and expenses. It's about $800,000, Vikram, in a quarter.

Okay. Thank you.

Thank you. Our next question comes from the line of Nick Yulico with UBS. Your line is now open.

Tim, going back to your comments about, I guess the capital plans for the next year, sounds like you talked about $700 million of asset sales. You said, I think, a low 6 yield. Was that inclusive of the high 7 cap rates you're getting on the HCR ManorCare sales?

Yes, as Lauralee mentioned, about 75% of that will happen this year. The simple answer is yes, it is inclusive of that, Nick. But it also includes some of our non-stabilized assets that we're disposing of, and recycling the capital to have a lower yield on it.

Okay. Got it. And then as well, you talked about hitting sort of more comfortable I guess leverage targets in the next year, without having to do equity. How are you thinking about when you might do equity, after having just put together the new ATM program?

Yes, listen, I think the capital recycling, the way I would think about the leverage is, we're able to close an acquisition early ahead of our capital recycling plans, and we'll do that in the second half of the year, get down into the low 40% range upon the completion of the HCR sales in the first quarter of next year. That, combined with operating cash flow, gets us back towards the historical levels. You heard me talk about it in the last couple of calls, because we've had some things on the horizon, in terms of capital recycling. In terms of as we look at new opportunities going forward, we'll judge that against our cost of capital, as we look to expand the portfolio.

Okay. And then just going -- turning over to HCR ManorCare, any update you can provide on how that process is going with the Department of Justice complaint?

Yes, I'll take that one. I would say first of all, there's been limited activity in the Department of Justice civil complaint. HCR ManorCare did file a motion to dismiss the complaint on July 7, and the Department of Justice reply is scheduled to be filed sometime in mid-August. And as a result of that, we would anticipate that basically a trial would be set sometime in mid-September. There's been no discovery conducted to date. It's way too early to make any assessments regarding the merits or the outcome of the litigation. We still think this is going to be a pretty long process.

And thanks. As far as when you're saying a trial, maybe being --

I should call it a hearing. Technically it's a hearing.

What I was going to ask whether there was any indication at this point whether the parties might be heading towards a resolve, resolution of this, without going to trial, some sort of settlement.

I think it's way too early in the process.

Okay. Fair enough. Just one last question on the guidance. I guess the FAD guidance went up, I think $0.02. The FFO adjusted went up $0.05. What's the difference there?

Yes, the difference is obviously the acquisitions are more accretive on a GAAP basis, so FFO goes up more. That, combined with the fact that we've done a fair amount of leasing in the portfolio, so we've got some FAD CapEx to spend in the second half of the year as we put those leases in place. That's really the delta.

Okay. Thanks everyone.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Your line is now open.

Thank you. Good morning. Could you give us a little bit more color on the Memorial Hermann opportunity, and the merit of what looks like a 5.7 going-in cap rate on a triple net deal?

Yes, yes. I guess let me start on a macro level, and I'll drill down to the real estate. Jordan, this transaction's a pretty unique opportunity to expand HCP's relationship with, one, an A-rated hospital system, and two, the largest not-for-profit system in Southeast Texas. Memorial Hermann has 13 hospitals, and has the largest market share in Houston, as Lauralee mentioned. And they're uniquely positioned to serve the fifth largest MSA in the country.

Following the portfolio acquisition, HCP will now have buildings on six of Memorial Hermann's campuses. We'll have a total of 14 buildings, including two that are under development, we'll be their largest third party landlord. The recent acquisition that Lauralee mentioned is a 5.7 -- I want to stress this, economic cap rate. We did say it is on a triple net basis. But I think it's important to note that triple net structure of the lease eliminates the risk of leasing, tenant improvements, and any CapEx costs, and provides a relatively attractive risk-adjusted return, given that it's an A rated counterparty.

If people get the chance, the quality of these assets are highlighted on page 12 of our supplemental today, so give you a chance to take a look at it. In short, the transaction represents an opportunity to expand a long-term relationship and align our interests with a number-one hospital system in one of the largest metropolitan areas of the country. I think that's the type of transaction we should be doing.

And what would you expect in terms of return on the development, and will they be added to a master lease or how --

Those developments were previously announced by us and are in the mid to high 8s. So they're development loans. We have those that really built this relationship, that positioned us in order to have the opportunity to monetize these assets.

As they look at expanding on their campuses. Lauralee mentioned the returns, mid to high 8s, those come with anywhere between a third and a half pre-leased, when we look at putting those transactions -- putting those buildings -- starting to go vertical on those buildings. Anywhere from really 25% to 40% pre-leased.

On campus.

On campus.

Thank you. And then it sounds like you guys are pretty excited about the traffic you're seeing at The Cove. Can you maybe just characterize it, and what you're seeing there?

Yes, we're seeing single floor users. We're seeing multi-floor users. Both of those buildings, it's about 253,000 feet, and that was designed to be a multi-tenant building. But we're seeing anything from three to four floor users, which will take an entire building to single floor, and I would expect that we'll probably end up with three to four tenants there, at or above the rents that we looked at in pro forma.

Okay. Thank you.

Thank you. Our next question comes from the line of Juan Sanabria with Bank of America. Your line is now open.

Good afternoon, at this point. I was just hoping you could speak to sort of the current trends into August now on ManorCare and Four Seasons and how you see both of those situations evolving?

We discussed HCR and we continue to be pleased that they're ahead of their budget. Just some more details on the stats for them. They continue to see their admissions go up, so their admissions were up 3% in the second quarter. That was higher than their first quarter, at 2.7%. So that, I think, reinforces the fact that they are a quality care provider that can give outcomes to hospital systems and to payors, which is definitely the trend in where healthcare is going.

So we're pleased with what's going on there. Obviously we'll continue to improve the coverage of that portfolio both at the facility and fixed charge coverage. The numbers that we've talked about for both of those at the completion of the asset sales will be about a 1.3 on fixed charge coverage, and trending up to a 1.07, 1.08 at the facility level, puts us all the way back at where we were with HCR ManorCare in the third quarter of 2012. So we have definitely positioned ourselves to feel comfortable with our lease, and with where ManorCare is going.

Moving to Four Seasons, first of all, just to clarify, Four Seasons is current on our debt. In terms of the impairment, it was really driven by the fact that our debt is a registered security, and after Four Seasons had two disappointing quarters, the fourth quarter and the first quarter, we saw trades in that security that therefore drove our impairment. Relative to Four Seasons, the equity sponsor put equity in, in the fourth quarter. They are an asset-rich Company, having about 60% of their real estate owned, and they, like others in the UK, were highly impacted by the flu season which took occupancy down, which hit them strongly against their management decision to break themselves into three businesses, as part of the Terra Firma exit. So we'll be watching it closely. But again, we're current, and we'll watch this play out.

Lauralee, you've been at the helm almost two years I think when you initially started, I think there was a three-year contract. Can you give us any color on how the Board is looking at longer term your position or succession, for the CEO role?

I would say when the Board brought me in, it was all about building HCP's strength as a Company. Long-term positioning for continued success, and that's what we're doing. The team is solid. We're working through our problems, and it's really demonstrated by this quarter's results, which we are incredibly proud of.

Thanks.

Thank you. Our next question comes from the line of Smedes Rose of Citibank. Your line is now open.

I just wanted to ask you kind of bigger picture. Is there any change in the way that you're thinking about RIDEA investments, in terms of representing a larger percentage of your overall NOI? Given maybe changes in the operating environment, or would you expect it to remain, I guess, relatively small versus the other large healthcare REITs?

If you look at the RIDEA we've done, we've used it as an opportunity to capture what we think is outsize growth at the time we make those investments, and then long-term positioning with those assets. Everything's a risk-adjusted investment decision, and we'll continue to make those. There is a marked preference by operators to have RIDEA, so we are very conscious of that, and that becomes important when we pick who we want to do business with. So part of it will be market forces, but it will always depend on our investment returns and the rewards that we can get out of those.

If we can get the opportunity for outsize growth either through lease-up or upgrade an operator, those are two specific examples of where we would look to use the RIDEA structure.

That's it. Thank you.

Thank you. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is now open.

Can you discuss the Tandem loan? What was the rate on the incremental investment from HCP, and what was the rate on the senior mortgages that Tandem paid down with those proceeds?

The overall blended rate, we expanded the facility, the mezzanine facility there from $200 million to $256 million, roughly. The blended rate on that, Mike, is about 11.5%. It was an opportunity for -- we had an opportunity to refinance the senior at a lower rate, meaning some additional proceeds, and it represented an opportunity for us to keep the investment outstanding, and extend the maturity for another 18 months or so into 2018.

At the same time improve the overall capital structure for both Tandem, and quite honestly, the economic position for ourselves.

Okay. So they needed the extra proceeds to refinance their senior debt at a lower LTV? Is that what they needed the proceeds for?

Lower rate.

Lower rate as well.

Okay. And then with regards to the Memorial Hermann sale leaseback transaction, how is that deal sourced? Was that a marketed deal?

Yes, yes. Yes, they had engaged an advisor. We had talked to them on and off. It was actually a process that they had put into place a couple of times, actually, and we had continued to talk to them over the last several years. But they tried to market the portfolio a couple years ago, decided to pull it off and wait, and we continued to have conversations with them.

Is that becoming more of a trend of health systems being more willing to sell off their real estate, or is this more of a unique event?

I think it's a look at hospitals. We continue to see that hospital systems view their acute hospitals as core to their strategy. But as they do execute on their ambulatory strategies, they are pushing out more services into their MOBs. It gets them to lower-cost settings. It definitely builds the relationships, with their doctors and particularly if the MOBs are on campus.

So there is reasons, benefits to them now monetizing their MOBs. Part of it is their traditional capital sources are limiting what they can put into technology, or buying doctor practices, so this is a really effective way, we believe, for them to raise capital. But because hospitals are very much about control, who owns this real estate, long-term ownership of this real estate, owners of this real estate that understand their business and the need for a really effective relationship with their doctors, puts us in a stronger position than others. So the question, did this go to market, yes, but there was more than price that determined Memorial Hermann's decision.

Mike, if you think about the hospital system as they get larger and have a larger geographic footprint too, I mean, it's tougher to manage the real estate for them, and I think they want to look to their tactical real estate to see if they can monetize that and take some of the management intend sieve nature of the real estate away from their core operations of obviously providing quality healthcare.

Do you have more of these types of deals in your pipeline right now?

We're active across the MOB portfolio.

Through sale leasebacks with existing health systems?

Sale leaseback development opportunities, both, on both fronts.

Just outright ownership and market leases.

Great. Thank you.

Thank you. Our next question comes from the line of Daniel Bernstein with Stifel. Your line is now open.

So this morning's call with a health care REIT, they talked about increasing construction cost across the board, and I just wanted to hear your thoughts on that, particularly since you seem to be picking up some construction in life science. Also, have you seen any pullback in construction in the senior housing space as a result?

I think definitely the costs are going up, but that all gets built into the -- really the expected returns that we pro forma out. So if managed well, not an issue. I think there's still active development out there in the senior space. I think it's important to be selective in the markets that you choose to do that with, and who. But we're very comfortable with where we are at The Cove, and that whole process.

I think construction costs have gone up, particularly contractors are busy, are active, from a labor front. But on the commodities front, things are a little bit better. But again, looking at what we've got in our active development pipeline, those costs are pretty much fixed, and anything we would look to pull the trigger on going forward, we'd factor that in, as Lauralee mentioned, in terms of making sure we can get the market rate to support an adequate return on the cost.

Does it seem like market rates are -- construction costs may be going up, market rates are going up, so the IRRs of the development are about the same. Would that be a correct assumption?

Yes. Particularly in the life science markets, where you've got attractive supply/demand fundamentals and land and entitlement constrained markets, you continue to see market rates go up, irrespective of construction costs. But that's just a function of being located in core markets.

We're able to price the lab improvements at the time we see a lease. You can match those up pretty closely.

With regards to on-campus MOB opportunities, obviously that's a negotiation with the hospital system about how they want to improve those facilities, and that's a function of -- the costs are a function of the ultimate return on cost discussions.

Lots of good color. Thank you. In regards to Brookdale, I notice the lease coverage deteriorated a little bit. I assume that's some seasonality, some of the integration, and it may deteriorate a little further from seasonality and integration, when we come out in the third-quarter numbers. How are you thinking about the lease coverage there? What rights do you have? And do they have any -- more than one question. Do they have any purchase options left on those assets, and if you can give some details on that?

I think on the coverage you mentioned it ticked down a little bit. But nothing that we're concerned about. I think you'll continue to see some noise here through the summer months, but that will start to get traction. And again, those triple net leases, we've got a really strong credit-worthy counterparty on long-term leases, so I don't think we have any concerns about that in the near term. We don't have any significant purchase options on the portfolio. It's 1% to 2% of our annualized revenue over the next five or six years. So we do have some purchase ops on the portfolio, Dan, but it's nothing large.

Okay.

To answer your question there's none with Brookdale.

Okay. And then one last quick question. You may have said this before, and I you might have missed it, but did you talk at all about cap rates, I guess, generally for healthcare real estate? I've heard a little bit maybe that cap rates might have plateaued and MOBs might be backing up a little bit in senior housing. What are you seeing out there, and how do you think about the aggressiveness of your acquisitions relative to where you think cap rates are maybe going?

I think just for starters, the markets are still very capital liquid, and any time that happens, asset pricing, it's tough to make it go down. It's probably more likely to increase. And which is a little bit surprising, because across the board, everybody's cost of capital, and I'm saying, not just REITs, but the overall marketplace cost of capital's gone up. But that -- I think that will continue.

If you look at my description of our investments that I had in my formal comments, we're very focused on, we need to do accretive transactions, both on a FAD and an NAV basis, both sort of out-of-the-box and on the longer term. So we'll stay active, which we are, but we're also going to be selective. And we said this before, we don't judge by activity. We really judge by the investment returns that we give to our shareholders.

Dan, to give you an idea, back that up with some numbers. Over the last 18 months, we've acquired about $3.8 billion in assets, and we've done that at an average of about a 7.2% return. So we think that compares favorably to where assets are trading in the marketplace.

I appreciate all the color. Thank you. I'll hop off.

Our next question comes from the line of Michael Knott with Green Street Advisors. Your line is now open.

It's Kevin here with Michael. Tim, going back to Brookdale for a second, you said your RIDEA 1 has held up, because it's been operated by Brookdale for some time. But I believe in Brookdale's numbers, they reported last night, the legacy portfolio struggled as much as the legacy Emeritus assets. So could you help us reconcile the two, and I just wonder if there might be something else, quality, CapEx, or other factors that could be leading to your outperformance on RIDEA 1?

Yes. Well, let me -- as I just mentioned, there was a little bit of coverage deterioration, a basis point or so on the triple net leases, but nothing material. And with regards to RIDEA 1, we were up 180 basis points in occupancy. Sequentially we were up 20 basis points. Year-over-year, we were up 100 basis points. Sequentially, we were up 20 basis points. Rates, year-over-year were up 3.2%, sequentially they were up 1.2% on RIDEA 1. And then on our margins, year-over-year they were up 160 basis points. Sequentially they were down 50 basis points.

But across the board pretty solid performance, and I think that's a function of the fact that we have very little exposure to the assets that are being integrated from Emeritus to Brookdale from a RIDEA perspective. And even those, although the occupancy has deteriorated in our RIDEA 2 portfolio, about 110 basis points, NOI was actually up sequentially, and that's really a function of the cost savings and some of the synergies that Brookdale, one mentioned on their call, and two, we actually saw in our portfolio.

Okay. And then following on that, in senior housing, from a new supply perspective, are you seeing an impact to your portfolio, or where is it impacting it, and how should we think about some of the cautionary signals we're getting from NIC on that front?

We haven't seen a tremendous impact on the portfolio. As we look across, there's a couple markets, I've talked to you about in the past, that we watch. We're watching some markets in Texas, in Houston, some areas in Florida. By and large, we've been in pretty good shape relative to supply around our portfolio.

And relative to Brookdale, I think one of the things that we've done together very well is look at if there is going to be any new market activity, get way ahead of it with where we put our CapEx, and get in there early. Even Andy Smith and team this morning talked about, it's very much market by market, and I think that's the way you should think about it.

To Lauralee's point, our biggest exposures on RIDEA are Houston, Miami and Chicago. HCP's occupancy, Miami's 94%, the NICK average is 88%, just to give you an idea. Chicago we trail a little bit by about 150 basis points. In Houston, we're 91%, and the NIC average is 89%. Our assets are performing relative -- performing well, relative to the market.

Okay. And then shifting gears a bit. On the hospital front, we saw the Capella deal, and obviously Ardent with Ventas, but How should we think about your participation in that sector, and potentially adding to some of your legacy holdings moving forward?

Well, we will look at those transactions, but as I said earlier, we've seen that the strong hospital systems just won't give up their acute care hospitals. But they will start to now be thinking about partners, and monetizing their MOBs. So I think it's very much system by system, what their capital needs are, and how we think about those opportunities. So we'll look at it. But most of what we see is the most attractive are the MOB portfolios, definitely on-campus or very closely affiliated, and part of an important hospital system strategy.

Thanks for the thoughts.

Thank you. Our next question comes from the line of Tayo Okusanya with Jefferies. Your line is now open.

Good afternoon. Just a couple from me. Two of them are just capital related. Just given the way the stock is trading today, would you consider a share buyback program?

No, I don't think so, Tayo. That's not something we'd look at right now.

That's helpful. Second of all, just to get a better sense of where your financing costs are today, could you tell us if you were to issue 10-year today, probably about what rate that would be relative to the deal you did in May, and if that's basically impacting how you're underwriting acquisitions at this point?

To your latter question, the answer is yes. I think 10 year debt, you're in the low 4s. For unsecure senior debt.

It sound like a lot of --

Those are a little wider right now, but the 10-year Treasuries come in to about where we did our transaction, right about a 4% coupon. So it's in the low 4s, Tayo.

The low 4s. Okay. That hasn't kind of created any impact on cap rates yet, on any of the healthcare property types?

We talked a little about that at NAREIT. We think if obviously there's a tick-up in interest rates, that could affect pipelines, and be a little bit of a price discovery. Think about what we saw in May of 2013, when Bernanke introduced tapering into our lexicon, and we had a period of time there in the middle part of 2013, where pipelines slowed down. Obviously, if you get a change in interest rates, we think there will be a period of price discovery, and potentially some slow down. But obviously, interest rates in the last couple weeks have gone the other way.

Great, that's helpful. And just the one from me, a quick one. The other income line of $11 million this quarter, could you just tell us what was in there? It's a real big jump from 1Q when the number was under $2 million.

It's a good question, Tayo. It's actually that FX remeasurement that we talked about. It's just related to foreign exchange remeasurement. So there will be some volatility in that for about 10% of our equity ownership in real estate in the UK. That will bounce around a little bit. It will go through that line item.

How much of that was in the line item, that's the $0.02 you were talking about?

That's most of it, Tayo. Usually in that line item's $1 million plus.

That's $9 million to $10 million in the quarter in other income.

Thank you very much.

Thank you. Our next question comes from the line of Rich Anderson with Mizuho Securities. Your line is now open.

Thanks. Tim, did you say that the current guidance assumes the use of the revolver to fund the acquisitions thus far?

Yes, I said it did. It did assume the use of the revolver, and then we'll repay that with the capital recycling in the second half of the year. As I mentioned, Rich, we ended up closing the Chartwell acquisition a couple months early, so we utilized that, as we recycle capital here in the third and fourth quarter.

So what is the -- then the guidance assumes some sort of permanent financing in there, or does it assume the full year on the revolver?

I'll say it for the absence of doubt, we will continue to recycle capital in the second half of the year and repay those borrowings. Think about that as delevering and getting us back down into the low 40% range.

Okay. So if you were to put a permanent number on that financing, how much did it affect guidance, I guess, that's the question.

Oh, yes, if you recycle that capital, I would think that with the acquisitions, think about that on $0.03 on an FFO basis on a run rate, and $0.04 on an FAD basis.

To the downside, you mean?

No. Once we recycle the capital the benefit, of our current acquisitions, think about that as a --

I see. Okay. Okay. Got you. Thank you.

(multiple speakers) Once it's going aft, I think, which is with a stabilized capital structure, without the benefit of some temporary leverage what the run rate and benefit of our acquisitions would be.

Exactly. That's what I was thinking. As far as the 9.2% same store growth from senior housing this quarter, could you give us a normalized or sustainable run rate that you're seeing out of that portfolio on a go-forward basis?

Yes, I think that you would expect to see that in the mid single digits, above triple net escalators, but below obviously the 9% that we have achieved here in the quarter. You expect to see mid single digit growth rates on that portfolio.

Okay. And that starts this quarter?

Yes, we start to see that -- I think for the year, you should expect it to be in that 5% range.

Okay. You guys --

I'd say probably the 6% to 8% range for the year, Rich.

Including the 9.2% for this quarter?

Yes.

Okay. Do you guys have any elevated view on medical office today versus 3, 6, 12 months ago? Now you have the SCOTUS ruling and a lot of good secular things happening to that business. Anything different in your view? Any more interest in growing that space to a bigger percentage of your portfolio over time?

Listen, absolutely. I think if you look what we've done on growing that portfolio over the last couple years --

We're up 20% just recently. So yes, we love the business.

Whether it's Scottsdale Health in the Phoenix area, whether it's the Thomas Jefferson system in Philadelphia or the Memorial Hermann in Houston, I think aligning with the largest operator and the largest MSAs can only pay long-term benefits for our shareholders.

Great. And then last on Four Seasons, with a lot of moving parts there and breaking the Company up into three, is there a real estate option for you to pivot from debt to equity, and are you -- how serious would you be in looking at something like that for HCP?

Well, they are an asset-rich Company. I think we need to play out their strategy, and see how they work through this. But they are the largest operator in the UK marketplace, so very significant.

Okay. Fair enough. Thank you.

Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Your line is now open.

First, have there been any organizational adjustments or planned changes following Paul's departure?

Yes. Actually, this gives me an opportunity to publicly thank Paul for his 12 years of service, which I did not get to do with his departure. But to answer that, let me just sort of level set where HCP is, and as a result, how we think about talent and our needs. And for those of you that were able to join us at Investor Day, we clearly profiled our P&L leaders, but more specifically, if I look at the $1.9 billion of acquisitions we've done to date, those were investments that were generated and structured and underwritten by those P&L leaders.

And if I can brag on them for just a moment, so you start to get to know some of their names better, but in the senior housing space, Campbell Young, and remember we've been adding acquisition support as well into the team, so Darrin Smith and the rest of the senior housing team are the ones responsible for growing the Brookdale relationship, the Chartwell transaction, adding the MBK relationship, harvesting the Formation relationship development projects.

There's been a lot of questions on the medical office business, but Tom Klaritch and Glenn Preston and our medical office team in Nashville have grown that business over 20%, and you can really see their strategic focus. They targeted markets like a Philadelphia, where all of a sudden we're over 1 million square feet. They've targeted premier hospital systems like Memorial Hermann, who have entrusted us with their MOB portfolio.

And life science, you've got Jon Bergschneider and the life science team, but you can see that they're focused on developing and leasing and building that portfolio, where we're now in excess of 98% occupancy. And internationally, John Stasinos, Andrea Auteri, who is in London, Taylor Sakamoto, this is the international team that has converted the HC-One debt into sale leaseback, have added the relationship of Maria Mallaband, and have really positioned us with two premier operators to grow in the UK caring home process. We've done a lot with talent and empowering those teams.

In terms of our investment process, that process is really established and proven within HCP. The investment committee is now chaired by Tim Schoen. I know all of you have his confidence -- he has your confidence. So this is a very long way to say that I think the ship is sound and it's sailing quite confidently.

So, your specific question. We'll continue to add talent into our business teams, and what do I think about talent. We need talent that has operator confidence, talent that knows our industry specialities, talent that has market reputation and presence, which net-net means we can accelerate our access to investment opportunities and continue HCP's success.

Okay. So not specifically trying to replace Paul.

We're a big portfolio today with a lot of opportunities. I think this is a broad-based build the team in terms of how we can accomplish much more in the future.

Got it. Okay. And one other quick one. Going back to the ManorCare sales. Is anything closing in the third quarter?

Yes. As Lauralee mentioned, about 75% of it this year. I'd say Mike, $100 million, plus or minus, in the third quarter.

Okay. That was it. Thank you.

Thanks.

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Your line is now open.

I had a follow-up on the Tandem mez loan. Sounds like it's pretty expensive debt for them to borrow, just to reduce the rate on the senior debt. So are there specific cash flow drivers for the Company, that gives you confidence they will repay this loan within three years?

Well, listen, it covers very well at a 1.34 times. I think you need to look at the overall coupon. We were able to -- we didn't increase the debt stack. We got rid of some previously senior debt. That's why the coupon sort of blended down. But still, attractive for us to put in place at 11.5%. But they cover well at over 1.3 times, and we're comfortable with investment. They've continued to perform well and have actually over the last couple quarters have improved operations.

Okay. And then on Four Seasons, can you just clarify if you expect the principal and interest to be paid in full?

Yes, they're current on their debt, and we did our impairment as we talked about, relative to what had happened in terms of discounts on the trades. But we continue to feel confidence in our investment.

What happens from an accounting point of view? You reverse this impairment when the principal gets repaid, or this counts as a gain when it gets repaid? How does that work?

Listen, those have a fairly short fuse because it's a marketable security. But to the extent that you see the performance improve, or it looks like there's going to be an event, we would increase that back up to the par value, John.

Okay. Great. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to President and CEO, Lauralee Martin, for closing remarks.

Well, thank you very much everyone, for joining us this morning, and we look forward to reporting more excellent results next quarter. Thank you very much.

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