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Edited Transcript of HCP earnings conference call or presentation 2-May-19 4:00pm GMT

Q1 2019 HCP Inc Earnings Call

Long Beach May 4, 2019 (Thomson StreetEvents) -- Edited Transcript of HCP Inc earnings conference call or presentation Thursday, May 2, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Johns

HCP, Inc. - VP of Finance & IR

* Peter A. Scott

HCP, Inc. - Executive VP & CFO

* Scott M. Brinker

HCP, Inc. - Executive VP & CIO

* Thomas M. Herzog

HCP, Inc. - President, CEO & Director

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Conference Call Participants

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* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Mei Wen Tan

JP Morgan Chase & Co, Research Division - Analyst

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Charles Anderson

SMBC Nikko Securities Inc., Research Division - Research Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good morning, and welcome to the HCP, Inc. First Quarter Conference Call. (Operator Instructions) As a note, this event is being recorded.

I would now like to turn the conference over to Andrew Johns, Vice President of Finance and Investor Relations. Please go ahead.

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Andrew Johns, HCP, Inc. - VP of Finance & IR [2]

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Thank you, and welcome to HCP's First Quarter Financial Results Conference Call. Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

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

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

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [3]

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Thanks, Andrew, and good morning, everyone. With me today are Pete Scott, our Chief Financial Officer; and Scott Brinker, our Chief Investment Officer. Also here and available for the Q&A portion of the call are Tom Klaritch, our Chief Development and Operating Officer; and Troy McHenry, our General Counsel.

Our first quarter results were in line with our expectations, and last night, we reaffirmed both our full year FFO as adjusted and total portfolio same-property cash NOI guidance. During the first 4 months of 2019, we were active on the investment front, with activities balanced across all 3 lines of business. Our capital allocation and investments have been driven primarily by our strong relationships with top-tier partners.

We are also in advanced discussions on additional acquisition opportunities but are not yet in a position to provide detail. However, we are confident in their completion and, as a result, have raised the necessary funding capacity with our recent forward ATM activity.

In life science, we closed on the previously announced acquisition of CambridgePark Drive in Boston and are on track to close this quarter on the acquisition of Sierra Point Towers in South San Francisco. These transactions expand our portfolio of high-quality life science assets, benefit from the strong sector fundamentals and offer attractive initial yields with potential for future upside through densification and development opportunities.

In medical office, we added 3 new projects to our HCA development program, bringing the total to approximately $100 million. This program allows HCA to meet demand at some of the most successful campuses while providing HCP new MOB investment opportunities that benefit from significant pre-leasing, with HCA as our strong anchor tenant.

And in senior housing, the transactions with Discovery and Oakmont create strategic SHOP relationships with 2 top-tier operators plus improve our portfolio with new Class A assets in strong markets. Scott has long-standing relationships with both of these operators and their advanced infrastructures, market expertise and long and successful track records make them excellent additions to our group of preferred operators.

In summary, we are pleased by the strong start we had to the year. Our earnings and same-store performance are on track. Our life science and MOB businesses are performing a bit better than expected. And while there continues to be softness in senior housing fundamentals, our senior housing performance was relatively in line with our expectations. We have locked in our 2019 acquisition goals and have an attractive acquisition pipeline. Our development projects are progressing ahead of expectations, and our balance sheet is tracking in line with our stated commitments.

Before I turn it to Pete, I'd like to acknowledge the contributions of 2 of our directors who retired from our Board last week at our annual meeting: Pete Rhein, a Director since our IPO 34 years ago; and Joe Sullivan who joined our Board in 2004. We are thankful for their many contributions to HCP. And I personally feel very fortunate to have benefited from their perspectives and sage advice, and will truly miss having them on our Board.

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

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [4]

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Thanks, Tom. Starting with our results. We are off to a strong start. For the first quarter 2019, we reported FFO as adjusted of $0.44 per share and blended same-store cash NOI growth of 3%.

Let me provide some details around our major segments. Starting with life science. The market backdrop is very favorable, and we are in the midst of a virtuous cycle. Capital funding for our tenants is strong, collaboration between biotech and pharma has increased exponentially, and we have a more highly functioning FDA that approved 59 drugs in 2018, up from the historical average of 33. This has led to increased tenant demand in our 3 high barrier-to-entry markets, resulting in all-time low vacancy rates and increasing rental rates.

As such, within our life science segment, which represents 25% of our same-store pool, we reported strong cash NOI growth of 6.5%. This was driven by a combination of positive factors, including 330 basis points of increased occupancy, a positive 21% lease mark-to-market and robust contractual rent escalators. We finished the quarter with portfolio-wide occupancy of 97%.

Leasing momentum remained strong throughout each of our core markets. In the quarter, we successfully executed over 300,000 square feet of leases and also signed LOIs totaling over 700,000 square feet, with many tenants looking to lock in their space requirement early in very tight markets. Within our life science developments, the strong market backdrop is resulting in leases getting signed oftentimes before steel is coming up from the ground.

Turning to medical office, which represents 35% of our same-store pool. Our market-leading on-campus focus has consistently resulted in high tenant retention rate and steady NOI growth. This was evident in the first quarter as we achieved a strong retention rate of 80% and cash NOI growth of 4.2%. Additionally, our Medical City Dallas campus contributed in excess of 100 basis points to our growth within the MOB segment.

Medical City Dallas is one of our trophy campuses. It consists of 2 million square feet of integrated health care real estate, with an additional 2 million square feet of expansion opportunities and currently generates over $38 million of NOI for HCP. We are fortunate to have such a strong partnership with HCA, and the structure of the lease allows each of us to mutually benefit from the success of the campus. And the rate of growth today is greater than it has ever been before. We have added a short video of Medical City Dallas to the featured properties on our website, and we strongly encourage you to view it so you can get a better understanding of this irreplaceable property within our medical office portfolio.

Moving now to senior housing. Performance was in line with our expectations, with cash NOI declining 0.7% in the first quarter. In senior housing triple-net, which represents 24% of our same-store pool, growth was positive 2.4%.

SHOP, which represents 10% of our same-store pool, declined by 7.7% but was in line as we expected a more challenging first half of the year. Our SHOP portfolio continues to be impacted by our transition portfolio as well as from a supply/demand imbalance due to new delivery. However, we are encouraged by the positive 29% sequential growth in our transition portfolio, albeit the first quarter is typically a seasonally high quarter for NOI.

Turning now to the balance sheet. Our repositioning efforts over the past couple of years have resulted in a much stronger credit profile and an improved cost of capital. In recognition of these achievements, during the first quarter, Moody's upgraded our credit rating to Baa1.

We ended the quarter with a net debt to adjusted EBITDA of 5.5x. We have ample liquidity to support our acquisition and development pipeline, with $1.7 billion of availability under our line of credit. We do expect our leverage metric to increase to the high 5x through the course of the year as we utilize the excess debt capacity created from the 2018 Shoreline transaction.

During the first quarter and through the early part of April, we tapped the ATM, raising approximately $160 million through forward sales agreement at a net issuance price above $31 per share. As Tom noted, we intend to use these proceeds to fund our acquisition pipeline.

Finishing now with our full year guidance. We are reaffirming our FFO as adjusted per share range of $1.70 to $1.76 and total portfolio cash NOI SPP of 1.25% to 2.75%. We have fully identified $900 million of acquisitions and are ahead of plan from a sources and uses perspective.

The initial cash cap rate across our acquisitions is approximately 5%, which is within our guidance range but at the lower end. The initial cap rate is reflective of the high-quality nature of the asset and the near-term growth opportunity as the properties stabilize. On a stabilized basis, we see the cash cap rate at approximately 6%.

With regards to future unidentified acquisitions, we are not updating guidance for the balance of the year, which is more customary. You can find additional details on our guidance on Page 44 of our supplemental.

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

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [5]

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Okay. Thank you, Pete. With a number of successful repositioning actions behind us, our cost of capital has improved and allowed us to start growing the company again. I'm excited to share details of our investment activity, all in line with our strategy to own high-quality life science, medical office and senior housing real estate in attractive markets.

In medical office, we're pleased to announce the commencement of 3 additional medical office developments with HCA, the world's leading for-profit hospital company. The aggregate spend will be roughly $70 million, and the sites are in core HCA markets, including Nashville, Kansas City and Ogden. HCA will occupy 50% to 70% of each building, which reduces lease-up risk and drives tenant demand for the balance of the space. Across the entire HCA pipeline, we still expect the blended stabilized yield on cost to be in the 7% to 7.5% range. The yields on this 3 are above the high end of that range.

First quarter was also active in life science. As previously announced, we closed the $71 million acquisition of 87 CambridgePark Drive in Boston. Our business plan to achieve a 6% stabilized yield in 2020 is on track and gives us even more confidence about the development opportunity on the adjacent land parcel that we acquired in February for up to $27 million.

Looking forward to the second quarter. We're on track to close the $245 million Sierra Point Towers acquisition. The towers are an exciting addition to what will become a 1 million square foot Class A life science campus at The Shore at Sierra Point. This campus will extend our market-leading position in South San Francisco, a life science hub, where demand continues to exceed supply.

On the development front, our total pipeline stands at $1.3 billion, which is fully funded within our plan. We are 100% pre-leased on all projects delivering in 2019 and 2020 and over 60% pre-leased for the entire pipeline when including our recent starts.

Let me highlight a few of the projects. First, at The Cove Phase III, in the second quarter, we expect to deliver all 324,000 square feet. The space is 100% leased. Second, at The Cove Phase IV, we remain on track for an early 2020 delivery. And again here, the space is 100% leased. Third, The Shore at Sierra Point Phases II and III, we commenced construction. And fourth, at 75 Hayden, we completed the new parking structure, allowing us to commence foundation and site work for the 214,000 square-foot development. The project remains on schedule, and we are seeing strong tenant demand. These projects will generate significant earnings and NAV accretion at stabilization.

Moving to senior housing. We're excited to announce acquisitions with Discovery and Oakmont, 2 regionally focused best-in-class companies who excel at both development and operations. These acquisitions are strategic to where we're taking our senior housing business, including a relationship-driven growth strategy, improved operator diversification and alignment, modern physical plants and higher-quality real estate.

The Discovery portfolio is weighted towards independent living and concentrated in high-growth markets in Florida, a state where Discovery has unmatched experience and expertise. The properties range in age from 6 years to just recently opened, with an average age of just 3 years. The properties offer extensive amenities and modern designs.

The purchase price was $445 million. We expect an initial yield in the low 4s, growing to the 6% range by year 3 as the lease-up properties stabilize. We expect the portfolio to produce strong NOI growth with very little CapEx for years to come, generating an attractive total return.

Discovery co-invested in the portfolio and agreed to a highly incentivized management agreement so there's outstanding alignment of interest. We're also providing up to $40 million of junior financing on 4 properties being developed by Discovery. We'll receive a mid-9s current return, along with purchase options at a 6.25% cap rate, creating a high-quality $300 million acquisition pipeline.

Importantly, these are purchase options, not obligations, and are exercisable one by one as each project achieves a predetermined occupancy threshold. 3 of the 4 projects are expansions of the campuses we just acquired and allow each campus to offer a full continuum, from independent living through to memory care.

We're also excited to announce the $113 million Oakmont acquisition. This 3-property portfolio is located in California, a state where Oakmont has a track record of unrivaled success. The assets are just 3 years old on average. The year 1 cap rate is in the mid-5s, which we consider attractive in light of the quality of the real estate and operating partner and the very low CapEx given the age of the assets. The mid-5s initial yield may prove to be conservative given the properties are 98% occupied today, well above our underwriting.

Roughly 5% of the purchase price consideration was in the form of DownREIT units issued at just under $31 per share, and we assumed $50 million of third-party debt. We also negotiated a highly incentivized management agreement, so this partnership has strong alignment. There's also a mutual desire to grow the relationship.

1Q was an active quarter for senior housing asset management. We continue to proactively tackle key challenges and transform the business from every angle. We're making rapid progress on our platform and infrastructure. Most importantly, the team is fully in place, and we have positive relationships with our operating partners.

We continue to move noncore properties out of the portfolio. In the first quarter, we sold 11 senior housing assets and 1 life science land parcel for $129 million, which is a blended 4.5% cap rate on sale. The asset sales allowed us to exit low-quality real estate and eliminate 3 small operator relationships. Historically, we had an operator barbell, characterized by overconcentration on one end and not enough critical mass on the other end. Eliminating that barbell is an important initiative, and that means either growing, exiting or downsizing each relationship. The announcements this quarter demonstrate our success tackling this initiative, and there's more to come. In addition, the noncore sale proceeds are being recycled into strategic assets and relationships.

We also proactively converted 35 Sunrise properties with roughly $60 million of annual NOI from triple-net leases to a RIDEA structure. These properties were in highly complex and cumbersome deal structures that we inherited more than a decade ago in the CNL acquisition. The conversion to RIDEA is a good outcome for HCP. In particular, we gain control of the real estate by eliminating the third-party tenants, and we now have a direct management contract with Sunrise.

In addition, these are good assets. Nearly 60% of the NOI comes from attractive submarkets in the Los Angeles, New York City and Washington, D.C. MSAs. And with current occupancy in the mid-80s, we think the portfolio has nice upside. 18 of the 35 properties converted in the first quarter, and we expect 14 more to convert in the next 60 days. Final 3 properties should convert by year-end, with the staggered closings driven by licensure.

Also, in the second quarter, we chose to convert 4 high-quality, high-performing assets operated by Oakmont from triple-net leases to a RIDEA structure. The assets are located in major California markets, including the Bay Area and Los Angeles, and produce $15 million of annual NOI. The 39 Sunrise and Oakmont conversion properties will enter full year SHOP SPP in 2021. Also, the conversions provided modest benefit to FFO, are roughly a push to FAD and were included in our 2019 guidance.

In closing, a key takeaway is that leading providers across all 3 lines of business are choosing to team up with HCP as their real estate partner to advance their business strategy. We believe this is a competitive advantage that cannot easily be replicated.

Now back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jordan Sadler with KeyBanc.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [2]

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First question, just Sunrise -- and I apologize, I have to pop on a little bit late, it's a busy day. The conversion, can you talk about the catalyst here? I know you'd spoken in the past as coverage had slipped on this, but I know there was a bit of a funky structure. So I'm curious if there was an event of default? And what sort of essentially catalyzed this transaction and then the staging of at least the 17 and then the next phase of conversions that are anticipated.

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [3]

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Jordan, it's Scott Brinker here. I would encourage you to listen to the call. We did cover the Sunrise conversion a bit. I'll go into more detail here as well. There definitely was not any events of default. This was an opportunistic, proactive choice by HCP to make this conversion. The total Sunrise triple-net portfolio was about 48 assets. We've agreed with Sunrise to convert 35 of those to RIDEA. About half of that is already converted, and the balance should convert by the end of this year. And these are good assets. They were in a very complex deal structure that we inherited more than 10 years ago in the CNL acquisition. They're in a triple-net reporting bucket, but they don't always function completely like triple-net leases in the traditional sense. They were subject to a very complex waterfall that openly determined how much rent HCP was paid, and that's why we've always said that reported rent coverage was not always completely indicative of Sunrise's ability to pay rent because, at the end of the day, the waterfall determined what rent was paid. And that's what we ended up booking as our earnings.

They're good assets. They're roughly 20 years old, but they're in good shape overall, and they're in good markets. More than half the NOI comes from really attractive MSAs in our view, like Los Angeles and New York and Washington, D.C. And maybe the most important thing in leading us to make this decision was that each of these properties had a third-party tenant. So it wasn't Sunrise, it was our counterparty. They have been a manager on these for 20 years. But although we own the real estate, we had a tenant -- a third-party tenant that was making the decisions about the real estate ultimately. And they have the contract with Sunrise, and that was a very cumbersome arrangement. So we eventually terminated all of those leases, and we now have entered into an aligned management contract with Sunrise, who we think is a really good operator. So that's the background. This was 100% our choice, opportunistic. This was not because the rents are underwater and we had no other choice.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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I get -- so that makes sense to me. The piece that I feel like I'm missing, it seems like a good economic decision, on your point is what caused you guys to be able to terminate the contract? You had the ability to terminate the contract at will with the underlying tenant or they breached the contract?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [5]

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No, there was no breach of the contract. I mean -- I think we should avoid any conversation about what the contract did or didn't allow. But we were able to reach a reasonable conclusion and outcome with the third-party tenants as well as Sunrise that allowed us to move forward.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Okay. And I guess then, just a follow-up on Discovery and then I'll hop back in the queue. I think -- I guess I'm struck by 2 things. One, I think, pretty big acceleration in your investment activity in the quarter, particularly around seniors housing. I'm not totally surprised but a little bit surprised because I thought you kind of were of the view that the recovery in seniors housing could be a little bit longer tailed. And I know you were focused on high-quality assets and so these look like they are, but I guess, I'm a little bit surprised. And then doubly, these are CCRCs, and I know your history with some CCRCs just as we've discussed over the years. So maybe, can you just frame up your view of the world a little bit here and what changed for you that these became attractive now and then your thinking on CCRCs potentially ahead of a recession.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [7]

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Jordan, it's Tom Herzog. I'll take that one. So that's a fairly in-depth question, so let me touch on it from a number of aspects. But first, let me just first clarify one thing. The continuum of care across independent, assisted and memory care, it doesn't have a SNF component, it doesn't have nonrefundable entrance fees and whatnot. These are definitely not CCRC assets. They're just the typical continuum of care, senior housing assets which are fairly common. So I'll just clarify that.

As to how we're thinking about the investment mix from a big-picture perspective, I think that's quite critical. As you know, I think as everybody knows, we established a strategy a little over 2 years ago with the clear intention of owning a high-quality portfolio on the 3 private pay businesses of MOB, life science and senior housing. We like our current mix, which is around 35% to 40% senior housing, with the balance split between life science and MOBs. I think going forward, this allocation probably ebbs and flows a bit depending on opportunities, but I think, over time, we'll maintain a similar balance. So no change in our game plan on that front.

As to our announcement yesterday of the senior housing acquisitions of Discovery and Oakmont, these investments represent a reallocation of dollars within senior housing rather than a reallocation of dollars within our portfolio to senior housing. So let me provide you some context on how I think about that. Over the last 5 quarters, we've sold $1.5 billion of senior housing assets and only yesterday did we announce a rebalance of our senior housing portfolio with these $550 million of high-quality acquisitions. And to be clear, we have some additional senior housing opportunities in the queue expected over the coming months. Still, our senior housing share of the portfolio will remain in that 35% to 40% level of allocation, and our disposition pipeline for the balance of the year is predominantly focused on senior housing assets. And importantly, our portfolio will be increasingly weighted toward modern assets in strong markets with some great new operators, which we think is critical.

Now I pivot to the life science and MOB businesses, in addition to the relationship-driven investments that you probably noted over the last couple of years, which are frequent, a large portion of our growth is going to come from the development and redevelopment given the lower cap rates in the current market in those 2 segments and our strong and uniquely positioned, really, development pipeline, which we're going to capture a lot of value from that. And then given this, with that pipeline, going forward, we may have opportunity to make some other strategic senior housing acquisitions beyond the simple recycling from noncore to core but by still staying fully within our targeted mix, with a target of 35% to 40% senior housing, which we think is appropriate given the business plan that we set forth. So despite the fact that you've just seen some transaction volume on that side, it is very much right in line with the plan that we've been working toward for the last 2-plus years.

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Operator [8]

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Our next question comes from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Going back to the Discovery acquisition. I'm hoping we could talk a little bit more about why you found the pricing attractive. I mean, if we look at it, it's about $360,000 a unit, which was on the high end of senior housing transactions in the market over the past year. And separately, you're buying at a low-4% yield to get to a 6% yield. Are you implicitly making assumption here that an exit cap rate would actually be lower than the 6%? Are you seeing anything that's suggesting just a lot of institutional capital coming to the sector that could be maybe pushing cap rates down for this type of asset over the next couple of years?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [10]

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Nick, it's Scott. I'll take that one. The price is awfully close to the replacement cost. We were building, through Discovery, 4 similar projects really as we speak so we've got a pretty good sense of what it would cost to build these today. And our purchase price is pretty much in line with what it costs to build this quality of construction in these markets. So that's always a good valuation metric as well. Just because the average price per unit across the sectors is, [we hope], $360,000, it may well be 20-year-old properties or in different locations, so I don't know that that's always as relevant.

And turning to the yield. We don't like to -- as a first preference, you think acquisitions that start out in the low-4s, but we think that at stabilization, this portfolio at a 6% cap rate is going to be awfully attractive, with strong growth thereafter. There's very little CapEx leakage. And I think that's always important when you think about a cap rate on a 20-year-old building, a 7 turns into a 5 pretty quickly. Whereas here, there's virtually no CapEx leakage. That's true with the Oakmont portfolio as well. And that's certainly important. We don't really think a whole lot about the exit cap because we wouldn't expect to hold these for an awful long time.

And the last piece is just we are doing 4 development projects with Discovery as well. Those will not be on our balance sheet. And as the developer and owner, we'll provide a little bit of junior financing and then have what we think are really attractive purchase options. We said 6.25% cap in the press release. Those could easily turn into high 6s, if not 7% cap rates because our purchase option is really in year 3, which, at that point, the projects aren't fully stabilized. And then at least 3 of the 4 cases, those development projects are actually expansions of the properties that we just bought. And as these campuses get bigger, there are greater economies of scale so that could actually benefit the margins at the existing properties as well as at the new build. So over time, we think this is going to be one that not only are we thrilled to own and showcase for investors but will ultimately provide attractive returns as well. And then, Tom, you want to add something?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [11]

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Yes. Nick, one other thing I would add is that we like the fact that we're able to capture these 2 deals while the sector is at a trough in the operating cycle. Given the moving pieces of our portfolio and our circumstances, we consider this a major plus. We have a -- as we've talked about, we're seeking to move to some higher-quality portfolio of assets within the senior housing portfolio, some really dynamic operators, which we think Richard and his team are. And considering where it's at in the market, we really thought this was an opportunity. So that was the other part.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Okay. That's helpful. Just one other question on the portfolio. I mean can you talk about the supply impact that the assets are facing? I think some of them are on the Gulf Coast to Florida, which has a fair amount of new supply underway. How do we get sort of comfortable with the supply dynamic in the markets that these assets are?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [13]

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Yes. That's a good question. So the 2 portfolios are a little bit different. And for sure, Florida is not a high-barrier market the way, say, California is. What we like about the Discovery portfolio is just the scale of the communities. Either today or post expansion, these are going to be 200- to 300-unit campuses that offer the full continuum, and that really is a differentiated product even in Florida, where it's easy to build 80 units, it's not very easy to build 300 units. And we think that will end up being the differentiator in the marketplace.

But there is some new supply, and it's one reason that a couple of the properties haven't leased up as quickly, especially in Naples and Fort Myers, but over time, we think those are good, high-growth, demographically attractive markets. And importantly, Discovery is based in Southwest Florida and has been operating in that marketplace for 25 years. So we feel like they know every market in that state better than just about anyone from a senior housing standpoint.

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Operator [14]

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Our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [15]

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You talked about being in advanced discussions on acquisitions. What's the size of the near-term pipeline? And how does it break down between the 3 segments?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [16]

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Nick, this is Herzog again. You talked to the potential pipeline beyond that which we've just announced. Is that correct?

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [17]

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Correct.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [18]

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I would put it this way, in broad strokes. As we're looking at some opportunities over the nearer term, it would be premature for us to signal that at this time. But I will tell you that as we move beyond that and you look at our overall mix, and I know I’m repeating myself a little bit, but I think you can assume that we stay relatively in line with what the mix that we have put together at the current date, which we do like. So as far as this short-term movement, you can always see a little bit of movement, but we're not deviating.

You got to remember, when you look at life science, there are some pretty significant deliveries coming in life science. Pete, Scott and the gang are looking at some other opportunities in life science. When you go to medical office, you've got Glenn Preston and Tom Klaritch that are working different deals. The HCA pipeline comes to mind. And that leaves us room, of course, to also be looking at how to improve our portfolio and operator mix for what we’d like to be the next generation of how we handle senior housing, not just from a portfolio perspective but as we're building the infrastructure, the team, et cetera, we think there's some real upside and opportunity for us there, and we're going to seek to capture it. But I don't see it causing us to get outside of the mix that we've previously communicated.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [19]

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And then just on the capital funding plan. You issued ATM equity in the quarter on a forward basis and the forward equity is still from late last year. How do you think about issuing additional equity in the near term, given where the balance sheet is today? And then your capital needs for the remainder of the year?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [20]

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Yes. Nick, it's Pete. So we did issue a little more under the ATM at the end of the first quarter as well as through April under a forward contract. Most of our forward contracts that we've issued already is in the high-500s. We'll settle a lot of those at the end of this quarter as we close Sierra Point Towers and the other acquisitions that we've talked about. And then we do have balance sheet capacity.

I did mention in my prepared remarks that we're at 5.5x right now. It can go up a little bit more into the high 5s, which we anticipate doing. So from a sources perspective, we feel quite good right now. To the extent that our acquisition pipeline grew beyond where it is today, then we could opportunistically access the equity markets. But for right now, we feel quite good about where we are from a sources perspective.

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Operator [21]

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

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [22]

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I just wanted to touch on the senior housing operating portfolio and the transition assets. I know, Scott, you previously mentioned that the operators were using a lot of contract labor. By simply streamlining that, you'll see a lot of improvement. Just specifically on the expense side, have all those initiatives been implemented already? And is that a good stabilized run rate? Or should we expect the margin on that transition portfolio to trend closer to the core portfolio over time?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [23]

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Michael, Scott here. I would say it's getting closer to a stabilized number, but there's still a fair amount of contract labor and overtime in the financial statements even for 1Q. So there's certainly still a lot of opportunity. Similarly, repair and maintenance, which was so elevated in 2018, started to normalize but it's still not at a level that we think is acceptable long term. So I would expect further improvement in that expense category as well. There still other things going through the financials that are impacting operating expenses this quarter, and I think that will continue for at least another quarter or 2 as well. Especially, corporate overhead and support is elevated. So we're not -- we're definitely not at a point where I would say that the expenses are at a normalized level, but they're getting closer. They're trending in the right direction.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Okay. And how long does it take to really streamline those expenses? And then, I guess, similarly on the revenue side, I mean, should we expect you to be able to stabilize that portfolio over the next 1 year or next 12 months? Or is it longer than that?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [25]

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Yes, Michael. I think one important thing to keep in mind is for the 38 assets that transitioned, only about half of those actually transitioned in the first half of 2018 and the balance transitioned in the second half of '18. So we do think it takes around 12 months to fully transition the properties and get back to a stabilized expense number. So the assets that transitioned early in the process are the ones that are showing the biggest improvement. And the ones that transitioned late in the process, meaning late in 2018, were still suffering from some of the transitory expenses. So by year-end 2019, entering into 2020, we think that portfolio starts to produce some nice results. But right now, we're still on the wrong side of the trough that we went through in 2018. We need to climb out of that. That probably starts in the later half of 2019 in terms of showing year-over-year growth.

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [26]

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Which has also been included in the guidance that we set forth for the year, just to be clear.

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Operator [27]

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Our next question comes from Rich Anderson with SMBC Nikko.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [28]

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So just kind of going through all the moving parts here. This is perhaps the last year of the transformation of the company in terms of the work that had to be done. But then, the question is how does that linger into perhaps next year. Not looking for 2020 guidance, of course, unless you're willing. But when I think of all the different things, you have $500 million of dispositions, generally expensive acquisition environment, value-add stuff like Discovery. You’ve got a fund development. You talked about raising leverage metrics a little bit, $900 million of acquisitions, a lot of big chunky stuff going on. Is it fair to say that perhaps a lot of the work gets done in '19 but the implications on per share growth are more of a transition in 2020?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [29]

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Let me start with that, and then I'm going to turn it to Pete. I'll talk big picture, and Pete can fill in. Rich, this is Tom Herzog again. Last year was kind of the final year of the transformation of the company, but there certainly some spillover that lingers. The $500 million of dispositions, of course, they're going to come in a little higher cap rate. Acquiring some assets at a bit lower cap rate on average is going to have some earn-in, which is also going to be good for 2020 and 2021. The -- so from an acquisition perspective, there's going to be some upside. The developments, we're going to see some earn-in on our developments.

We've got some debt that's coming due that we've long since spoken to. That's going to tweak the earnings back a bit. So I know you guys will have that in your models. And as we look forward though into 2020, we're going to see the numbers start to stabilize with some moving parts. But as we move out of 2020, those items fall away as well. But we do have a number of positives that are coming in that also will offset some of the remaining items that just naturally are going to fall through in the repositioning from a timing perspective. Pete, what can you add to that?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [30]

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Yes. I think you covered it pretty well. I would just say, obviously, the bond refinance this year has a bit of a headwind as you head into next year, but that's pretty well known, we think, Rich, at this point. Then the dispositions are higher-yielding assets, 6.5% to 7.5% cap rate blended through the year. We assumed a midyear assumption.

But as Tom just said, there's a lot of upside as well with the developments coming online. We've increased our disclosures on those. There's a nice ramp-up in 2020 and 2021 on those. We've got some nice lease escalators in place as well across our MOB and life science platforms. There's a really nice positive mark-to-market opportunity within life sciences. We saw that this quarter as well. We think that runway is here for the next couple of years as well. And then the future upside opportunity in the senior housing transition portfolio is one other thing I would mention. So we do have some headwinds, Rich, but we certainly have, I think, much more upside potential that offset those headwinds.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [31]

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Okay. Great. And then just a question I've been asking on other calls. Have you been noticing any movement, up or down, on cap rates in the medical office world? Or is it sort of stable given higher-quality stuff that you own? I'm just curious, your perspective on medical office, specifically in terms of the cap rate environment.

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [32]

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I would say we love that business, and we'd love to grow it. The challenge in growing it has been the cap rates are stubbornly low. So I think high-quality assets, especially on campus, are still in the low 5s. Off-campus or lower quality, unaffiliated are at least 50 basis points higher than that. And at least, in our view, the transactions that has been on the market in the past 2 to 3 quarters, including the ones that we see today, they do come at a higher cap rate. But we think that reflects the asset quality more so than a change in cap rate or market demand. We just haven't seen anything that suggests that institutional demand to invest in medical office has declined. If anything, it seems to just keep growing. Tom, you wanted to add something?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [33]

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Yes. The only thing I'd add, Rich, is that when you look at the activity to the extent that you can see from what we’ve said in these transactions, you've probably noted that we have been absent for many of them. Not saying that that's good strategically for somebody else, but we have very much protected what we believe to be a high-quality portfolio as far as location of the on-campus MOB with strong health delivery institutions, hospital institutions. And that -- we consider that to be very, very important, especially in the current environment where there's going to be efficiencies seeked in spend in the outpatient settings. But we also do see certain competition in urgent care centers, retail clinics, et cetera, and we do like housing specialists in the on-campus setting. So that caused us to steer away from a number of those different portfolios that have come to market just based on how we look at it strategically.

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Operator [34]

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Our next question comes from John Kim with BMO Capital.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [35]

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On life science, it outperformed this quarter. For the remainder of this year, you have 4.5% of leases expiring. Are there any known large move-outs that would bring the occupancy down for the year?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [36]

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Yes. John, it's Pete here. I'll take a stab at that. We do have about 400,000 square feet that expires towards the end of the year. The good news on that front is we've actually backfilled a lot of that under LOI at this point in time, with actually some nice positive mark-to-markets. Two in particular: Qualcomm, which we knew was going to actually vacate because that's a redevelopment. We do have Merck vacating as well at the Hayden campus, but we've known that for years now. And we've been able to backfill those. So a lot of that 400,000 remaining this year is actually under LOI. Some of that, since the quarter end, have actually turned into leases as well, so that number will come down as the year progresses. But we do have a couple known vacates, and it does take a little bit of time to finish the TI work for the new tenants. So we expect occupancy to tick down a little bit from 97% to 95% but then tick back up as we head into 2020.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [37]

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Okay. And then can you also discuss the sequential improvement in your same-store SHOP NOI? I think, Pete, you mentioned that the first quarter is seasonally high for NOI, but I thought that was not the case...

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [38]

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Yes. John, it's Scott here. I mean part of it is that the fourth quarter wasn't a very good quarter, but also the fact that 1Q is always a seasonally high quarter. And the reason for that is that most operators charge rent on a monthly basis, so the -- and they increase the rate on January 1, so you get a nice increase in revenue. But the first quarter only has 90 days of expenses, and a lot of the expenses are either daily or based on utilization. So you end up with full revenue but not full expense, plus you get the benefit of the rate increase. And for the most part, wages increase annually on March 1, so that number is going to be elevated sequentially in the second quarter. So just from an absolute dollar standpoint, NOI always looks really good in the first quarter. So all that being said, we're still pleased with the transition portfolio. It is moving in the right direction.

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Operator [39]

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Our next question comes from Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [40]

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Scott, I know the Oakmont and Discovery portfolio acquisitions were relationship-driven, but curious about the potential for expanding your reach with new senior housing operators. I've seen articles from industry sources that have highlighted the shortage of quality operators that subsequently led to lower transaction volume. Just would be great to hear any thoughts you have there about expanding the operator base.

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [41]

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Yes. Happy to cover that. I mean, getting the right family of operating partners is critically important part of our strategy for senior housing, and I mentioned on the call part of that is reducing the number of operating partners that we have. Our goal is really to have critical mass with a very select group of operating partners that we have a lot of confidence in, not only their business strategy but their real estate, but also the quality of the people and relationships we can have with them because it really is a partnership. For the REIT to have a successful real estate portfolio is usually dependent on the operating partner. And that means not just their systems and team but also the relationship that exists between the REIT and the operating partners.

So we're making a lot of progress on that. I think there is enormous upside that will be a differentiator for our senior housing business over time. The fact is that, right now, we have more opportunity to do things in senior housing than we could possibly fund. So we're in a unique position where we can be pretty picky about what we do, and the Oakmont and Discovery rose to the top of the list I think they're as good as anyone at what they do.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [42]

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Okay. And maybe what's your target number of operators you'd like to have in that portfolio? And maybe how many do you have today?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [43]

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Yes. We have 25 a year ago. We're down to about 20 today, and we've got 250 properties. So hopefully, at some point -- we've got more than 250 properties. But if it's just a static portfolio I'd love to have 10 to 15 really high-quality partners, where we don't have overconcentration with any one partner but we've got a really strong critical mass of assets with each one of them so that they're important to us and we're important to them.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [44]

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Okay. Great. And then just one more for you. Any changes or updates you can share on the senior housing platform in terms of processes or capabilities that you've built out since you joined a little over a year ago?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [45]

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Yes. We've got a great team here. I'll start with that. There isn't a single opening on that team that needs to be filled. That's a really important piece. I'm extremely pleased with the quality of that team. They're helping build out, pretty dramatically, a change in the way that we report, the way we forecast, the way we have relationships with operating partners. They've gone top to bottom with every single asset and operator that we own and come up with a strategic plan for those assets. I think the business intelligence platform, we've got the first version of that now up and running. I think a year from now, it'll be even better. We continue to improve that platform over time, but I'm really, really happy with the progress that we've made on the technology and platform side.

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Operator [46]

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Our next question comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [47]

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Scott, you mentioned creating more alignment in these new RIDEA contracts, the conversions. Can you talk and maybe expand upon that a bit? Like how are these newer contracts different from the others or prior ones that you have experience with?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [48]

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Yes. I'll just say that there's a lot of lessons learned over a decade of investing in the RIDEA structure, and you try to set up contracts moving forward that the operating partner and the real estate owner share in the upside and share in the downside in a pretty dramatic way. And I think when an operating partner is willing to sign that kind of contract, that says a lot. They have confidence in their abilities and their projections, and that's meaningful to us. And we're willing to let them participate a little bit more in the upside as long as they're willing to participate in a really, really meaningful way in the potential downside.

The other thing is just the life of the contract. The concept of a 30-year management contract in the hotel business seems to be an industry standard. I think a lot of the management company wanted something similar in senior housing as we transition to the management contract structure. And that's fine if everything's going well, but at least in my experience, operating companies change over time. All companies change over time, new ownership, new management, new cultures, and what worked 5 years ago may not work very well today. And that's certainly the case with the 30-year contracts. So we've been prioritizing much shorter contracts with flexibility for really both sides. If they're not happy with the relationship, they're able to move on. And there are some examples of long-term contracts in place that maybe the management companies aren’t all that excited about. So that's been an important one for us in terms of aligning incentives so that you really, on an annual basis, have to sit down with your partner and see if they want to keep doing this together. I think that drives behavior in a positive way.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [49]

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Okay. That was clear. And then just as a follow-up, can you expand or just remind us of the $40 million or so of rent expiring in the triple-net segment? Kind of who are the major -- what are the major buckets there? And can you tie that back to sort of rent coverages?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [50]

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Sure. The $40 million or so that matures next year, $8 million of that was Oakmont. That just converted to RIDEA so you can eliminate that one. The coverage there is slightly above 1.0 anyway. There's about $20 million of rent with Aegis, super high-quality provider out of Seattle, on 10 properties. The lease coverage on that after management fee is 1.25 or 1.3x, so it's really strong. We'll see -- they have renewal rate. We really like that real estate. And then the balance is about $14 million with Capital Senior Living. It's 9 assets. The lease matures late next year. Of the 9, 2 or 3 are just really not good real estate. They don't produce much NOI, and we would almost certainly look to sell those.

I don't expect Capital Senior Living to renew that lease. That's obviously their choice, but I wouldn't expect it given the lease coverage is around 0.8, 0.9x depending on the time period used. But then the other 6 assets are actually quite good, and we'll be happy to own them, whether it's with Capital Senior Living or with some other operating partner. So I think really, that covers the $40 million. There may be a small handful of buildings in addition, but that's 99% if it is not 100%.

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Operator [51]

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Our next question comes from Tayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [52]

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Good quarter. Page 21 of the sup, CapEx. When I try to look across SHOP, life science and MOBs, it looks like the recurring CapEx spend for this quarter is a little bit lighter than where you were running last year. Just kind of curious what's kind of driving that and how we should think about that in the context of AFFO.

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [53]

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Yes. Tayo, it's Pete here. Good point you bring up because our payout ratio was obviously lower this quarter. I would say you should look at it over a 4-quarter period and not over 1 individual quarter. We did guide from a recurring CapEx perspective on the guidance page in the back that's what we expect from a full year perspective. Sometimes the CapEx spend is a little bit lighter in the first quarter, a little bit heavier in the fourth quarter. It's not evenly divided throughout the year. But I would focus on the CapEx on the guidance. And it might just be a little bit light in the first quarter but will catch up.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [54]

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Got you. Okay. That's helpful. And then the other question is just a clarification. The transitions happening that you announced this quarter from triple-net to RIDEA, whether that's Oakmont or Sunrise, again just to confirm that the net impact of that is going to be positive to FFO this year.

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [55]

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Yes. Why don't I take that here, Tayo, because it's a good question. And as Scott mentioned in his prepared remarks, it's neutral on a FAD basis and actually modestly accretive on an FFO basis. If you think about Oakmont, Oakmont had $15 million of NOI, $14 million of rent. So there's a little bit of a pickup from an FFO perspective but it's immaterial. When you go back to the Sunrise structure, it's quite complicated, as we've talked about, but our rent payment that we received is net of CapEx. It was about $5 million to $6 million of CapEx within that portfolio if you look back to 2018. When we converted into SHOP, that CapEx will go into FAD capital, so there's a little bit of a pickup with regards to FFO but neutral to FAD.

And importantly though, if you think about what that means from an FFO perspective, the modest accretion, it's about $0.01 and, again, neutral to FAD. That's on a full year basis. Not all of these converted at the beginning of the year, only a few did. And importantly, and we've touched on this, we've been working on these conversions for quite some time now. So it was fully baked into our 2019 guidance at the beginning of the year. And also, it helps to offset some of the known headwinds in our transition portfolio and then the ramping up of the development and redevelopment, which was also baked into our guidance as well. So I just wanted to clarify the accretion from an FFO perspective but the neutral aspect from a FAD perspective.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [56]

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Got you. And when you're kind of done with all these transitions, on a pro forma basis, how much of your overall portfolio is going to be RIDEA-based?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [57]

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I can't say exactly, Tayo. But certainly, any acquisitions that we do going forward, it's fair to say that those would be structured in the RIDEA structure. There are a handful of leases that we have today that we may well keep them as leases for a long time. We don't dislike the triple-net structure. As long as there's adequate alignment of interest, meaning the tenant is equally happy paying the rents and collecting the net cash flow after the rental payment, we're happy to do triple-net leases. So I don't think it goes to 0. And I also don't think you're going to see us convert low-quality real estate. If it's not functioning properly under a triple-net lease, we're not just going to convert it to RIDEA. I think we'd be more likely to exit those properties. We're going to be very careful about what goes in that RIDEA portfolio. But you will see the balance continue to shift over time towards RIDEA versus historical mix of HCP would have been tilted towards triple-net.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [58]

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And I would add we have done some of those calcs, as you can imagine. There are a couple of moving pieces remaining that will become more clear over the next quarter or 2, and then we'll be able to provide the actual breakdown.

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Operator [59]

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Our next question comes from Lukas Hartwich with Green Street Advisors,.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [60]

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I'm just curious what your thoughts are on developing SHOP in-house.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [61]

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Well, I can -- I'll start, and Scott, you can jump in. Here's a thought, Lukas. The development of SHOP in-house, there are a few different ways to go at it. It could be participating debt structures, it could be these junior debt with purchase options or we could just do ground up or we could do partnerships. The SHOP structure comes with a fairly long development period relative to the size and output of the asset ultimately, and then it has a lease-up that extends for a long period of time, which creates a lot of drag.

So it becomes one of -- a decision, does one take on that much drag?, which, of course, when I speak to drag, I mean drag on earnings, in SHOP, when we have opportunities to either acquire fully developed SHOP assets, like we just did, or enter into somebody's other arrangements that get us to the same place but on a less dilutive basis with that reduced drag. So at this point, we've made the decision to typically stay away from just ground-up development of SHOP on block. So that's been our rationale.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [62]

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Great. And then sticking with SHOP. How confident are you on hitting the 6% yield for the Discovery portfolio? And can you kind of give us a sense of the timing of that?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [63]

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Lukas, it's Scott here. I'm happy to take that one. The initial yield's on the low 4s. We're projecting that it gets to 6% by approximately year 3. The occupancy today is in the high-70s. It's been improving nicely the past couple of months and quarters. A number of those properties are either newly built and newly opened. And 3 of the 9 were actually -- Discovery did not build them, they actually took them over. So there's a new operator in place, and those have taken a while to move as well. But ultimately, we're expecting sort of a low- to mid-90s stabilized occupancy with a margin in the high-30s, which we think is totally achievable given Discovery's historical performance. So we're pretty confident. We've got a very incentivized management contract in place that also provides protection on our unwritten NOI.

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Operator [64]

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Our next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [65]

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I'll apologize in advance for not asking about life science because I know you're killing it, so I'll go back to seniors housing. When I look at the lease coverages like Brookdale, Harbor, Cap Senior, they kind of deteriorated quarter-over-quarter, and I know you're picking up a little bit of 2018 1 quarter in arrears, but can you talk a little bit more about the trends you're seeing in those portfolios, how you think they'll trend through the year? And is there any dispositions or trends -- transitions to RIDEA that's kind of not contemplated in guidance that you're looking at now with regard to those portfolios?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [66]

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Dan, it's Scott. I'll start. Tom may have some comments as well. I've already covered Capital Senior Living so I won't go back to that one. With HRA, we have active dialogue with HRA about that portfolio. It's 14 assets. Four of them are already in the process of being sold. I think 2 or 3 more will likely be sold. These are the lower-quality assets. They don't produce much NOI anyway. They're really a distraction for HRA. And we’d be left with 7 or 8 of what we think are at least reasonable-quality buildings. And we think those are viable long term, and we would expect HRA to continue to be the operator under those under a triple-net lease but just with less rent and about half the number of properties that we have today.

And with Brookdale, the coverage had declined a fair amount over the past year. The last quarter or so, it's been more stable. Brookdale really likes that portfolio geographically and from a real estate quality standpoint, so we're not expecting any change in that master lease with Brookdale.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [67]

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Okay. And then real quick on Discovery again. Do you have any exclusivity in terms of funding future development beyond the 4 that you're a junior partner with? And we know that Discovery is kind of a prolific developer down in Florida. So just any exclusivity or any rights to develop with them in the future?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [68]

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We clearly have the contractual right to buy the 4. And I probably should stay away from talking about contractual future rights with operators, but I would just say there's a mutual desire to grow with both Discovery and Oakmont.

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Operator [69]

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Our next question comes from Michael Mueller with JPMorgan.

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Mei Wen Tan, JP Morgan Chase & Co, Research Division - Analyst [70]

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This is Sarah on for Mike. So congrats on the results. Just a question on life science. For this quarter, I think your lease spreads were 21%. What do you guys see as the overall mark-to-market today for that portfolio?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [71]

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Yes. Sarah, I think you said the lease spreads are 21%, which I had in my prepared remarks, positive 21%, which is accurate. We quoted before what we think our mark-to-market is for the next few years, and it's probably about 15-ish percent positive mark-to-market as we look at the expiring leases. And that's blended across all the markets. It's probably a little bit higher in San Francisco, maybe not as high in San Diego. But generally, it's pretty robust, and we see that through the next couple of years. Any further questions, Sarah?

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Operator [72]

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At this time, there are no further questions.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [73]

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Well, thank you, operator, and thanks for all of you joining our call today. We always appreciate your continued interest in HCP. Buh-bye.

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Operator [74]

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