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Edited Transcript of HCP earnings conference call or presentation 1-Aug-19 4:00pm GMT

Q2 2019 HCP Inc Earnings Call

Long Beach Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of HCP Inc earnings conference call or presentation Thursday, August 1, 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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* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* 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

* 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. Second Quarter Conference Call. (Operator Instructions) Please note this event is being recorded. I'd now like to turn the conference over to Andrew Johns, Vice President of Finance and Investor Relations. Please go ahead, sir.

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

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Thank you and welcome to HCP's Second 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 this call. In an exhibit of the 8-K we furnished to SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The 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.

Let me start by saying, it was quite an active and productive first half of 2019. The work our team has done to restructure the portfolio, strengthen the balance sheet and enhance infrastructure has positioned us to take advantage of favorable capital market conditions and accelerate our growth across all 3 of our core business segments of Life Science, Senior Housing and Medical Office. Specifically we had better than expected operational performance in both our Life Science and Medical Office segments; we continued making progress transforming our Senior Housing segment, which has performed generally in line with our expectations; we continued repositioning our portfolio for success with the acquisitions of $1.5 billion of strategic core real estate, and closed or placed under contract $440 million of non-core asset dispositions.

In addition, we raised $650 million of equity, we refinanced $1.3 billion of debt, and we improved our liquidity by upsizing and extending our credit facility.

These actions and positive outcomes have allowed us to increase the midpoint of our guidance ranges for FFO as adjusted by $0.02 per share and the total SPP NOI growth by 50 basis points.

Big picture, we remain focused on targeting attractive external growth in each of our private pay segments while maintaining a disciplined approach to capital allocation.

In Life Science, we continued our strategy of increasing density in our 3 core markets of San Francisco, San Diego and Boston. Last night, we announced the acquisition of The Hartwell Innovation Campus, which expanded our Boston portfolio. Capturing additional scale in this premier life science market is important to HCP, as we continue to see demand from growing tenants in the short term and positive demand versus supply fundamentals in the long term.

In Medical Office, our campus -- on-campus properties continue to be a preferred solution for specialist physicians, hospitals and health systems. We're experiencing solid and consistent earnings growth across the portfolio.

Our active redevelopment program is improving the competitive nature of a number of our irreplaceable but older on-campus MOB assets where the team has identified $70 million to $100 million of projects annually for the next few years that we expect to generate cash on cash returns in the range of 10% to 12%.

And in Senior Housing, the rapid transformation of our portfolio and platform continues. HCP is well positioned as the fundamentals in the sector begin to improve over the next couple of years. Additional senior housing transactions announced today, represent continued execution of our plan, which includes recycling capital away from older noncore properties with misaligned deal structures toward modern real estate in attractive markets with leading operators.

As we look ahead, our business plan remains straightforward and disciplined. We will maximize value from our current portfolio through focused capital allocation, supported by an ever-improving operational and organizational platform; continue to grow through acquisitions in our 3 core segments but only when our cost of capital is supportive; keep our portfolio fresh by maintaining a largely self-funded development and redevelopment pipeline that will allow us to continue to refresh the portfolio on a non-dilutive basis; maintain a conservative balance sheet with ample liquidity and continue our decade-long focus on our ESG efforts.

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. I'm pleased to report that we have had a great start to the year. For second quarter, we reported FFO as adjusted of $0.44 per share and blended same-store cash NOI growth of 3.5%.

Let me provide some details around our major segments. Starting with Life Science. We had another exceptional quarter with cash NOI growing 6.1%. The results were driven by a favorable leasing environment, producing strong tenant demand and mark-to-market opportunities.

Year-to-date, we executed over 1 million square feet of leases, including 600,000 square feet in the second quarter, and our lease renewals exhibited a positive 11% mark-to-market.

Turning to Medical Office. Second quarter cash NOI grew 3.8%, driven by contractual rent escalators, increased occupancy, strong retention rate of 80%.

Additionally, our Medical City Dallas campus experienced another quarter of strong growth, contributing approximately 80 basis points due to much higher-than-anticipated add rents.

In Senior Housing, triple-net performance for the quarter exceeded expectations with cash NOI growing 3.1%. SHOP declined by 2.3%, with core growing positive 0.3% and transitions down 10.8%.

Note that this quarter, we had approximately $500,000 of onetime positive items in insurance and real estate taxes which benefited our result. Also, our same-store pool shrunk this quarter as we continue executing our strategic plan in senior housing. In particular, certain non-core properties are now formally held for sale and classified as such under GAAP accounting rules. As a reminder, our SHOP same-store pool is small, consisting of just 39 assets and $20 million of NOI in the second quarter. Because of all the recent transaction activity from our portfolio transformation, the vast majority of our highest quality senior housing real estate, including Oakmont, Discovery, Sunrise and most of Atria are not in our same-store pool today. By 2021, we expect these high-quality assets and operators to be in our full year same-store pool, at which point, our SPP results will be more representative of our underlying and completely transformed senior housing business.

Turning to the balance sheet. We had a very busy and productive quarter in the capital markets.

First, we announced the closing of our $2.75 billion bank facility, consisting of a $2.5 billion revolver and a new $250 million term loan. With over $4 billion in commitments, we successfully upsized the facility by $750 million. We improved our revolver pricing by 5 basis points, and we extended the revolver maturity by 2 years. We very much appreciate our banking syndicate for their continued support and commitment to HCP.

Second, we completed our first bond offering in nearly 3.5 years. We were pleased with the execution and robust investor demand allowing us to upsize to $1.3 billion, split evenly between 7- and 10-year notes. Blended interest rate across the 2 tranches was 3% and 3/8%. The proceeds from the offering were used to repay $1.3 billion in debt, consisting of $800 million of our 2020 notes, $250 million of our 2022 notes and $250 million of our 2023 notes. The blended interest rate on the debt repaid was 3.2%. With the bond issuance and concurrent debt repayment, we extended our weighted average debt maturity to 6.5 years. We eliminated all bonds maturing until 2022, and we significantly improved our debt maturity profile.

Third, we raised an additional $496 million of equity under our ATM program, which includes roughly $305 million under forward contracts. We currently have 23 million shares remaining under forward contracts or roughly $680 million in net proceeds. A portion of that equity will be used to fund our recently announced acquisitions, which Scott will discuss shortly. The remainder of the proceeds we plan to settle over the next 6 to 12 months to fund our robust acquisition pipeline and development platform.

Lastly, we ended the quarter with $2 billion of availability under our line of credit and net debt to EBITDA of 5.7x, which is in line with our targeted range.

Turning now to our guidance. We're increasing the midpoint of our FFO as adjusted guidance to $1.75 per share from $1.73. In addition, we are increasing the midpoint of our blended SPP guidance to 2.5% from 2%. The update to our guidance ranges are driven primarily by 2 items: First, we achieved a significantly lower interest rate on our bond issuance; and second, the Life Science and Medical Office segments are performing above our initial expectations.

Let me touch on a few transactional items that were part of our original guidance. First, on dispositions. We are currently tracking approximately $700 million at a blended cash yield in the mid- to high 7s. This now incorporates the Prime Care disposition, which was not anticipated in our original guidance.

With regards to acquisitions, we've already completed $1.5 billion year-to-date, which is substantially higher than the $900 million we originally anticipated. We don't guide to future unidentified acquisitions, but we do have a strong pipeline that we intend to fund with our remaining equity forwards.

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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Thank you, Pete. We capitalized on a favorable cost of capital to acquire $1.5 billion of high-quality real estate year-to-date, already surpassing our full year guidance. Relationships are driving the deal flow and the pipeline remains strong. In July, through our relationship with King Street, we acquired a 4-property Life Science campus with 280,000 square feet known as the Hartwell Innovation Campus in the Boston suburb of Lexington. The campus is 100% occupied with a 7-year weighted average lease term. Purchase price was $228 million, which is a 5.25% cash cap rate. Including straight-line rent and mark-to-market, the GAAP cap rate is in the mid-6s. The location of the campus is compelling. It's adjacent to Lincoln Labs, the 2 million square foot government-funded research park affiliated with MIT. We've seen the benefit of local scale, time and again, in South San Francisco and San Diego. We're now quickly approaching critical mass in Boston as well, with 3 distinct life science campuses with an aggregate 1 million square feet.

Having a bigger chessboard with multiple price points and suite sizes allows us to meet tenant demand for space as their businesses evolve. That flexibility is important because change is a constant in life science, often driven by capital raises, clinical trial outcomes and M&A activity. We intend to continue building scale in our 3 core life science markets.

Speaking of critical mass. In July, we acquired a 56,000 square-foot office building in the Sorrento Mesa submarket of San Diego for $16 million. The property is located on our Directors Place campus where we own 2 successful life science buildings and a development parcel. We'll convert the acquired office building to lab upon expiration of the in-place leases in 2020, and expect to achieve a stabilized return on cost of roughly 8%. Over time, this will become a 350,000-square-foot Class A life science campus.

Continuing the theme. In June, we closed the $245 million Sierra Point Towers acquisition at a 6% stabilized cash cap rate. This acquisition adds more than 400,000 square feet to our now 1 million square foot Class A campus at The Shore in South San Francisco, the epicenter for life science on the West Coast and where we enjoy #1 market share.

In the second quarter, we delivered Phase III of The Cove in South San Francisco. All 324,000 square feet is fully leased with a 10-year weighted average lease term and 3.5% rent escalators. Phase III produces $24 million of stabilized NOI which equates to a 9.5% return on cost and underscores the significant value created given the fair market cap rate would likely be in the mid-4s. We also expanded our relationship with HCA, the country's premier for-profit health system. We reached agreement to develop $12 million medical office building on the campus of Oak Hill Hospital in the Tampa MSA. HCA will lease 55% of the building, and we expect a stabilized yield in the high 6s. We now have 5 new developments with aggregate spend of $110 million underway with HCA. Looking forward, we see a visible pipeline of $75 million to $100 million of new MOB development per year with HCA.

We also acquired a medical office building in Kansas City for $15 million, which is a 5.5% year-1 cash cap rate. The property is located on the campus of HCA's Midwest Menorah Medical Center. The acquisition augments our local footprint as we already own an existing 60,000 square foot MOB on the same hospital campus.

Both MOBs are 100% occupied. In senior housing, we're excited to announce an expansion of our close relationship with Oakmont, a premier California-based developer and operator. The 5-asset portfolio is located in Huntington Beach, Los Angeles, San Jose and San Francisco, among the most affluent and high-barrier markets in the country. The properties are less than 2 years old on average and should be well positioned in their local markets for years to come.

The acquisition closed in July for $284 million, and the year-1 cash cap rate is in the mid-5s. We issued downREIT units to the seller at $32 per share for just over 10% of the total consideration, and we assume $112 million of secured debt.

We also negotiated a highly incentivized management agreement, so this partnership has strong alignment. Year-to-date, we've closed $400 million of acquisitions with Oakmont, all recently built, high-quality properties in California.

Moving to asset management, in particular, senior housing. Over the past year, we created a strategic plan for every one of our senior housing properties.

This was a data-driven analysis to assess the performance outlook for each asset, including supply and demand, location analysis, competitive positioning and quality of the physical plant. Each property was categorized as either core, redevelop or sell. We created a strategic plan for each operating partner as well, with each partner being categorized as either grow, maintain, reduce or exit. The data and analysis was designed and evaluated by a team with a track record of building a senior housing business of significant and lasting value.

We intend to do it even better this time at HCP. Concurrently, we've been building the senior housing team and platform to execute the plan. The actions you're now seeing from HCP, quarter-after-quarter, represent exactly that, the execution of an intentional and long-term strategic plan.

For example, in the second quarter, we renewed the 10-property master lease with Aegis Senior Living for an additional 10 years. The annual rent is roughly $19 million, which will escalate at 3% per year. These are high-quality, high-performing core properties in Seattle, the Bay Area and Southern California.

We continue to tackle key challenges head on. In the second quarter, we amended our leases with HRA. We'll sell 6 non-core assets, and we combined the remaining 8 core properties into a single master lease that will mature in 2028.

We obtained improved covenants and lease guarantees, and we'll provide $10 million of capital to improve the portfolio, which will be rentalized at 6.5%.

Capital projects will disrupt operations for the next year or 2, after which performance should improve from the current level, which is roughly 1.1x rent cover before management fee.

We also signed a definitive agreement to exit our non-core, 13-property portfolio with Prime Care. Historically, we accounted for the investment as a direct financing lease because Prime Care has a bargain purchase option. The sale is expected to close in September for a negotiated price of $274 million. The cash yield on sale is 8.2%, which reflects the asset quality and the bargain purchase option. This was an important cleanup transaction for HCP.

Now stepping back for a moment before we turn to Q&A. The second quarter was highly productive. We accelerated our differentiated strategy by acquiring core real estate at accretive yields. We also deepened our relationships with industry-leading partners, including HCA, Oakmont and King Street. These investments position us to build on our strong year-to-date operating results.

With that operator, let's take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Nick Yulico from Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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I was hoping you could talk a little bit more about the latest King Street partnership acquisition you did? What has sort of rent growth been like in that market? And maybe you could also just frame out -- I mean this is now yet another meaningful deal you've done with them. I know King Street owns still more real estate in that market that could -- they could transact with you over time. So how should we just think about that future opportunities as well? And timing on some of those deals?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [3]

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Hi, Nick, it's Pete here. Hope all is well. So we're excited to add Hartwell portfolio into our portfolio in Boston. One of the things that's quite important for us, and Scott mentioned this in his prepared remarks is getting to scale within the Boston market. We've had success in San Francisco as well as in San Diego, moving tenants around and with this latest acquisition and inclusive of the 75 Hayden development. We're actually now at about 1 million square feet, which we think is quite important.

The campuses we own, we have 1 in West Cambridge and now 2 in Lexington. They're actually quite synergistic. We like this market a lot, or both those markets a lot. Rental rate growth has been strong within West Cambridge. It's now up into the 70s for new leases, and now within the Lexington market, we're probably in the 60s, mid-60s actually at this point. And that compares to being in the mid-50s when we bought that campus. So a lot of really solid rental rate growth. And you look at the overall vacancy within the Boston market. It's around 2%. So we like that a lot.

We're happy to grow with King Street, too. They've been a great partner. Perhaps, there are other opportunities we can do in the future together as well, but I'm not going to comment on that at this point.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. It's helpful. And then, Scott, in terms of addition, I think in the last call you talked about additional seniors housing acquisitions they had lined up. And I guess I'm just wondering, was that fully accounted for by the new Oakmont deals or there are also some additional senior housing acquisitions in the works right now?

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

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Hey, Nick. Actually, we have a lot of opportunity in senior housing, multiples of what we can reasonably do and capitalize. The number of operators reaching out with high-quality opportunity leases is really exceptional, so we're pretty pleased with the market's reaction to HCP's strategy and approach to business, so there's plenty of opportunity. I would say, right now, it's more focused on recycling capital rather than exponential lead growth in that segment.

The portfolio that this team inherited, we didn't love the whole thing. So we've been actively remaking that business in every sense. And that includes a lot of asset sales, and you've seen that for 2 years now. There's more to come, and we'll be recycling those proceeds into assets that we think will help make HCP an outperformer over time in senior housing.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And then just my last question is on Brookdale. There is a shareholder proposal out there to add Jay Flaherty, your former CEO, to the Board of Brookdale. And so I'm wondering if you guys joined that Board? How do you think that changes your relationship with Brookdale, given a bit of a messy situation that happened with Jay leaving years ago.

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

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Nick, it's Tom Herzog. Yes, hard to say. Here's what I will tell you as we look at the proxy contest.

Brookdale is an important and valued partner. We are in support of the recent initiatives for an enhancement of their care and their operations, we're monitoring it closely. But I really can't respond directly to that, I think, it's really up to the shareholders of Brookdale and their Board to determine what's best around the optimal outcome for their board.

So that's probably all I can say on that topic at this point, Nick.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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That's helpful, Tom. I guess, just the follow-up there. I mean is there -- what's the thinking of the company in your Board right now about doing something additional with Brookdale if that opportunity were to arise. What's the latest think -- thought process there?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [9]

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Well, I would say this, Cindy Baier and I are in routine conversations on different opportunities that we can consider. And there are things we can do, but obviously, it would be very premature for me to get into any of those details. But that dialogue is taking place and certainly, would take place in the future as well, I think, regardless of who is on that board.

So stay tuned, but there's nothing imminent, but those are certainly things that we are considering in the future.

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Operator [10]

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And our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [11]

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You've been active at lowering in leverage, partly driven by issuing equity at attractive prices on a forward basis.

Can you put aside identified expected development spend? How much dry powder in terms of net acquisition that you currently have the ability to do without going above-target leverage levels?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [12]

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Hey, Nick. It's Pete. We've talked about from a leverage perspective wanting to be in the high 5s on the net debt-to-EBITDA basis. We're at 5.7, so we're essentially there at this point in time. It could go up a little bit.

If you think about the equity forwards we have left, there are 23 million shares left. And that proceeds of approximately $680 million for those 23 million shares, about $350 million to $400 million of that will be used for the acquisitions we announced today, Hartwell, Oakmont, Director's Place. That leaves about $300 million for the pipeline, which we're not getting into specifics today.

We typically think about debt-to-equity on acquisitions as 65-35, so we have probably around $500 million of purchasing power. I don't know, Tom, if you want to add anything to that.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [13]

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Yes. And I think, Pete, that's all exactly correct as I would've said it.

Nick, I'd probably add a couple of things. Just -- as you look at the magnitude of the transactions that we've been doing really for the last 3 years. And again, over the last couple of quarters, every now and then, we've got to step back and see where we're at. Internally, we do it every week, but from where you sit, I talked last quarter about our portfolio mix, wanting it to be 35% to 40% senior housing and the balance split between life science and MOBs. We're currently in life sciences on an NOI basis at 25%, medical offices at 31%, and senior housing at 37%.

If we looked at the 2019 growth from acquisitions developments net of dispositions, that growth is expected to be on a net basis, net of dispositions about $2 billion.

What's interesting is when you start adding up all the pieces, which are a lot of moving pieces, as you know, life science constitutes roughly $1.4 billion of growth. Senior housing on a net basis is $400 million. It's acquisitions of $900 million less dispositions of $500 million. But there is a very solid pipeline behind it, as Scott had just mentioned. And MOBs, we've been a little bit more careful on. We're being quite discerning on which assets and portfolios that we'll consider as they come to market based on quality and how we like to look at it. That's been about $100 million.

Now what's interesting is, we have raised enough capital to handle all the investment volume that I just described. And as we look forward to 2020 and 2021, just to take a bigger picture for just a moment, including development deliveries, and this is interesting, life science, that side of our business will grow from around 7.5 million square feet to something over 10 million square feet, based on our existing pipeline and what's already in place.

Senior housing, we see pretty good size growth with the embedded opportunities with Oakmont, Discovery and others, as we previously discussed. MOBs, we've got the HCA program, we've got the redevelopment.

There we were a little light on opportunities for growth, but working hard to find other ways to grow that business.

So I just wanted to round out for you, as you think about the equity we've been raising, and it's been pretty sizable. It's $1.3 billion since last November in aggregate total, and it's allowed us to have some pretty strategic expansion, which is a part of our strategic plan.

So I thought maybe that background might be helpful for you.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [14]

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That's very helpful. And maybe on the flip side, just the asset recycling, I mean, how much more is left what you would consider non-core? And I recognize every year, there's probably some level of dispositions, but how much more backlog is there of stuff you'd like to sell?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [15]

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I would categorize it as normal course for the most part in medical office, in life science and that's certainly true in senior housing as well.

But within the senior housing segment, I think we'd also look to opportunistically sell assets if we thought the value proposition was favorable if we had an attractive use of the capital. So that's probably the 1 distinction I would draw between the 3 segments.

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Operator [16]

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And our next question comes from John Kim with BMO Capital Market.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [17]

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In Sorrento Mesa, I realize it's not a very big investment today, but what's the cost to convert the office into lab space?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [18]

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We bought the asset for about $15 million. It's just under 60,000 square feet. It will cost about $15 million to fully redevelop into new Class A lab space.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [19]

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And, Scott, you mentioned overall this campus would become like a 350,000 square-foot campus, which presumably includes your existing 2 buildings. But how big is the development at land parcel that you have as far as square footage?

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

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Hey, John, it's 150,000 square feet is the development parcel within this. So the rest is the 3 assets, including this new acquisition. We've actually had some success redeveloping assets from office into lab. It's a good opportunity within the San Diego market. We did it with a Qualcomm building that's currently in redevelopment. And actually one of the assets is now 100% preleased. And we're getting really nice returns on those conversions. So it's not the first time we've done this, and we've certainly had success.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [21]

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John, I would add. This is Herzog again. As we look at that acquisition, you pointed out, it's small, but it was very strategic. We're sitting with a nice campus with an asset sitting in the middle of it. That was important for us to pick up to capture the entire campus. And you know how important it is to control those campuses as we're working with biotechs that are seeking to grow and have the opportunity to move tenants between properties. So that was beyond the small dollar amount, that was the strategic element of that acquisition.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [22]

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Sticking to the strategic theme, the Hartwell acquisition that you've done, looks like it's good quality. But you also mentioned 100% leased up 7 year. Well, is there any near-term upside to see either cash NOI or earnings? Are there any near-term expirations or annual escalators that you can talk about?

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

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Yes. So annual escalators in the Boston market are fixed, essentially just 3%. We do a little bit better in San Francisco. It's a 7-year weighted average lease term. There are a couple of leases within that, that do mature in the next few years. On average, we think the rents are about 10% to 15% below market there getting closer to 15% than to 10% over the last couple of months.

So there's certainly a little bit of the near-term benefit because not every lease is 7 years. There's a couple that are close to 10 years and a few that are in the 2- to 3-year range.

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Operator [24]

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And our next question comes from Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [25]

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Just curious about sort of the appetite for the MOBs. I think, Tom Herzog, you went through it a little bit that you've been a little bit lighter there. But are you seeing the opportunity to achieve competitive IRRs versus your other opportunities in that space on stabilized assets? Or do you think you're unlikely to be an investor of size there given sort of just the better return opportunities in life science and/or seniors housing?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [26]

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Jordan, it's Herzog. When we assess the MOB opportunities that have come to market, some of those bring in some pretty nice yields. You've got to be careful of what's off-campus, that's not anchored, the quality of it, the health systems that they're near. When you get down to MOB properties that are of the quality that we want to have in our portfolio, they're commanding much lower cap rates. And then when one assesses the IRR on those investments, we have found them to be lower than what has hit our threshold at times.

So we've been more in the camp of developing with HCA, redeveloping some of our irreplaceable locations and getting some good returns on that. But by no means are we locking ourselves out from wanting to make acquisitions in MOBs because we would like to continue to grow that business.

On an NOI basis, it's actually a pretty decent percentage of our portfolio. So it's already a big business, but we will consider those opportunities as they present themselves, but we're not going to move down the quality curve.

Scott or Tom Klaritch, anything you guys would add?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [27]

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We've seen several portfolios to date, so there's been plenty of activity, just nothing that met our risk/return thresholds. But there continues to be opportunity on our desk today. So we would like to grow that business. It just has to be the appropriate cap rate for the quality.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [28]

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Okay, that's fair. And then, I guess, on the other side, Pete, could you elaborate on what was classified and moved into the held-for-sale this quarter?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [29]

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Yes. Jordan, I'm happy to talk about that. There's a good table in our supplemental on Page 16, which goes through the sequential changes in our same-store pool.

We did have 27 assets go into held-for-sale this quarter, 16 of them were in SPP and SHOP, senior housing triple net as well as some MOBs that came out a bit -- the same-store pool and make up that 27 assets there.

I think it's important to just note, we're a pretty large company and we do dispose of assets, and we've done a lot of capital recycling and assets will make their way into held-for-sale as the sales processes go along. At this point in time, as Scott mentioned, we've essentially identified within senior housing every asset we want to hold, sell or redevelop.

And at this point, for the ones that we're looking to sell, we're pretty far along in the sales process and we've got some assets actually under PSA at this point in time as well. So all these assets essentially triggered held-for-sale within the GAAP criteria this quarter, so they went into the held-for-sale bucket.

There, obviously, was an impairment associated with that as well within these assets. Certainly the assets had impairments, GAAP makes you book those impairments when they go into held-for-sale. Some of them will ultimately have gains, but you can't book those until the sale actually is completed.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [30]

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So relative to the balance sheet figure in the quarter, it's going to be a bit bigger in terms of the size of that sale in the third quarter or fourth quarter?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [31]

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No, we mark all those assets to fair value...

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [32]

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I guess I'm just reflecting on the gains, the potential gains that you can't book.

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [33]

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Yes. It -- we would book those later on in the year as the sales are completed, which would happen between now and the next 12 months. We think many of these sales will happen this year, but some may actually drag into the beginning of next year.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [34]

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Yes. Jordan, your point is that you have to book the impairments immediately, but if there are gains on some of those assets, you have to wait until you complete the sale. And that's correct.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [35]

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Yes. I was curious how big the sale -- like, what the dollar volume of the sale looks like, to say it plainly?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [36]

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It's $174 million. That's what we've marked those held-for-sale assets on our balance sheet. So it's a relatively small dollar amount given that it's [28] asset properties.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [37]

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There could be some upside for those that have gains. So it's something greater than $170 million.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [38]

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Okay. That's what I was getting at.

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Operator [39]

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Our next question will come 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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On the newly disclosed Oakmont purchases, is there a lease-up component there? I think it's on the press release they're less than 2 years old. And then can you also maybe provide any other color there in terms of unit mix, supply exposure and Oakmont's operating strategy?

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

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Yes. I can take that one, Jonathan. Yes, the average age is less than 2 years and 2 of the properties were recently opened. In California, it's harder to build like the big campuses that we just acquired with, say, Discovery in Florida where a 300-unit continuum of care campuses are possible, not easy but possible.

In California, they tend to be more in the 60 to 80 midrange, especially in the markets where Oakmont builds like Huntington Beach or San Jose or San Francisco, which is so hard to find adequate land. So they tend to be smaller properties and Oakmont fills their properties faster than anyone I've have ever seen. So there really isn't much of a lease-up period. These were almost 70% preleased the day they opened. So there isn't much of a big gap between stabilized cap rate and year 1 cap rate. So we think Oakmont's a fantastic operator, we think California is a good place to do business long term, and we'd like to do more with Oakmont going forward.

They're a very active, high-quality developer and operator. So we'd like to continue growing them.

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

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Was that a marketed deal? And if so, maybe who were the owners? Is it Oakmont? Or was it a private equity, some other long-term institutional capital source?

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

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Oakmont is a sort of owner-developer operator. So at times, they'll have friends and family capital. But otherwise, it's really the principals, and I'm not aware of a widely marketed process. I know we had direct interactions with the principals. So I'll leave it at that.

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

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Okay. That's helpful. And then just one more for me. Kind of related, but a peer of yours just announced an exclusive development agreement with Discovery who's also a senior housing operating partner of HCP's. I know you have the programmatic development agreement with HCA for MOBs, but have you explored partnering with the operators for future senior housing developments on an exclusive basis? I mean, like Oakmont?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [45]

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Yes. I mean with Discovery, we actually do have development projects that we do have rights, we have -- when we closed that $445 million deal, it had 4 options, one which is already closed and other will close next week. And then we have rights on the other 2. We get a nice mezz debt slice at a very nice return for 15% of the stack and then 6.25% purchase option. So we really like that arrangement, and there's more that we'll do with Discovery over time. And Scott, you have others that you want to respond to?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [46]

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I would just say, programmatically, the team here has a lot of experience putting those types of structures in place, so that's for sure it's how we would intend to grow the senior housing business is more through relationships, direct discussions, at times there will be stabilized acquisitions and at times there will be participation on the front end of the project. We'll be flexible. The most important thing for us is to be in markets that we think are strong long-term real estate locations and to partner with operators that we feel like going to do high-quality job and be trusted partners for us for a long time. So how we get to the final stage of owning a Class A asset, we can be flexible. It's more the real estate and the operator that drives everything that we're doing, whether it's acquisition, development, redevelopment. It comes back to a very, very disciplined and consistent theme that everybody here knows exactly what we're going to do. And we're going to get there as fast as the capital markets permit. And right now they've been pretty accommodating, so we've been able to accelerate that strategic plan, which is exciting.

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Operator [47]

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And our next question comes from Chad Vanacore with Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [48]

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Since we're getting late in the call, I'm going to keep it to a couple of technical questions. So on guidance, run rate is $0.44 this quarter, that equates to about 76. That's on the higher end of your current guidance. What could drive that FFO lower in the second half? Is that purely dispositions? Or does that contemplate some additional downside and, say, SHOP?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [49]

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I'll take that here, Chad. So you're right, the annualized number is $1.76, but with the Prime Care sale and a few other of the dispositions, we do see about a penny of dilution in the second half of the year from the capital recycling. So that's what gets you back to the $1.75.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [50]

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All right. And then just thinking about organic growth, you raised guidance to 2% to 3%, but that still looks conservative because in the first half, you were running above the high end of that range. Is this just conservatism? Or should we expect some moderation in the second half in some sub-segments?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [51]

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Yes. It's Pete again here. So couple of things within each one of the segments. MOBs did benefit from some outsized add rents in the first half of the year.

Life sciences, I have mentioned this a few times. There are a few vacates in the second half of the year as well. The good news is as most of those are leased up at this point in time, but the leases don't start until 2020. And then senior housing triple net, we do have some add rents within the triple net Sunrise CCRCs that we think could impact us in the second half of the year. We had a pretty good fourth quarter last year for those Sunrise add rents. So perhaps some conservatism embedded within the guidance, but more to come as the year progresses.

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Operator [52]

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And 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 [53]

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Can you touch on your comments earlier about your ability to grow in the Boston market? I mean how competitive is that market? And what are some of the things that HCP can do to continue that growth?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [54]

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Yes. It's pretty competitive, Mike. On all transactions that we're looking at now, there are A lot more bidders for life science assets, especially in Boston. You've got core funds now looking at lab assets and that's a bit of a change from 5 to 10 years ago. So it's quite competitive. That's one of the reasons why we really enjoyed the King Street relationship because it's allowed us to grow without having to compete in full auction processes.

We certainly are looking at more assets in that market. We feel really good about the assets that we've bought and the price point that we've been able to achieve. And it feels like pricing as well as cap rates as well as rental rates are all moving in the right direction. So we feel like we're well in the money on the purchases that we've made, and we'll continue to look within that market. But as you point out, it is quite competitive. So relationships are as important now as they ever been.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [55]

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Okay. And then should we expect the deal to be kind of these smaller type transactions that you're able to get done in the Boston area?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [56]

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Hard to comment on exactly what all the transactions will look like because they will vary, I mean, we've looked at smaller deals, we've looked at larger deals. So I would say, it could be a mix. I don't know, Tom, if you want to add anything to that?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [57]

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Pete, I would put it this way. It could be a mix, but it will most certainly be strategic in how we go at it. So probably not a lot more we want to say right now, but hopefully next quarter, the quarter after we have some more to talk about.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [58]

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Okay. And then just last question. Can you talk a little bit about the South San Francisco market? I know you guys have a pretty big share there, have a few developments currently under construction. What do you have to see, I guess, to break ground on some of the additional land sites? I mean do you have to see leasing activity at the Sierra Point projects? Or is there anything else that you're kind of looking out for?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [59]

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Yes, good question, Mike. South San Francisco is an incredibly important market to HCP and we're the dominant landlord within that market. Fundamentals are very strong, the vacancy rate is under 2% and for our major projects, The Cove, we're 100% leased right now, phase 1 of The Shore, 100% preleased. And that was really the catalyst for accelerating phases 2 and 3 of The Shore.

We'd like to see some leasing progress on Phase 2 before we would consider accelerating some more developments within our land bank within that market.

Phase 2 is quite big as well, inclusive of Phase 3 also. Nothing to report on leasing right now, but certainly, lots of interest. And also importantly, all the developments, we think, within that market will do quite well. In fact, when you think about the 2.5 million square feet that's being developed currently. Over 60% is actually committed at this point in time. A lot of those projects don't deliver for 1.5 to 2 years inclusive of our shore Phase 2. So while there still is a lot of construction going on, there's a lot of leasing happening at the same time too.

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Operator [60]

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And our next question comes from Rich Anderson with SMBC.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [61]

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I'm suggesting we move to alphabetical list for the Q&A queue. So as mentioned earlier on, Pete, $20 million of NOI in the same-store pool for SHOP, small potatoes relative to the size of your company. But that, that would grow as you bring in non-same-store assets into the pool. On top of that, your transitioned assets, I assume, will be improving along the way.

So come 2021, when you kind of have the kind of a fuller representation of same-store in your SHOP portfolio, I mean, could this be something that really builds like from a few different directions both from the introduction of new non-same-store into the pool and the transitions? And could we be looking at like an outsized growth profile at least in the short term as that all happens perhaps on top of one another?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [62]

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Rich, it's Scott. I'll try to take that. Today, our senior housing same-store pool is roughly 70% triple net and 30% SHOP. 2 years from now that probably is reversed as we exit or -- exit certain triple nets, convert others to RIDEA and then, of course, the acquisitions that we've been doing. And yes, our expectation is 2021 and beyond, a combination of better industry fundamentals, better management contracts, better operating partners, better real estate. There's a long list of things that we've been working on to position that business, so that it's going to be successful.

It's hard to predict too far into the future in senior housing just given the uncertainty about continued new supply and labor cost. But our key metric is, are we doing better or worse than the industry, and historically, we did worse. And we think we're building the business that's going to do better. And hopefully, substantially, better.

And we think 2021 from an SPP standpoint is probably the first time that, that really starts to come through just because of the composition of the pool.

2020 is still going to be kind of -- it's not going to include a lot of those really high-quality assets.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [63]

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What's the NOI number in 2021 versus the $20 million, again, in the same-store pool?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [64]

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Yes. Rich, I'd have to get back to you with a specific number, but if it's 70-30 today, we think it's going to be 30-70 roughly 2 years from now.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [65]

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Right. Okay. And then second question maybe -- or for anyone. You and others are stepping up the activity from an external growth standpoint. Perhaps capital markets are behind that, and just general opening up of the transaction markets. But what would you say to the risk that this is all happening in the 10th year of the expansion of this economy? And what's the risk that this is just all just poorly timed, and a year from now, we'll look back and say, "I wish we were perhaps not as aggressive on the external growth." But I'm just trying to play a little devil's advocate with all the activity that's happening around us.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [66]

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Yes. Rich, I'll take that one. The way we look at it, what's critical is to have a very clear and consistent and disciplined strategy to have a balance sheet that's strong, that will weather the cycles to manage our equity transactions where we're only issuing at a premium to NAV to do deals that are either strategic and/or accretive and that it is literally impossible to predict where markets are going or where the economy is going or where interest rates are going. We're in the business to be in the business and to own a portfolio that will sustain the cycles.

And as we look at the environment and where it would put us if there was a downturn, and there will most definitely be a downturn over time and just none of us know when it will be. The important thing is that we have set our business up where our development pipeline and acquisitions are well-funded and we know where the money is coming from. The balance sheet is strong. We're in a more defensive sector to begin with. We've been careful to have private pay assets with good partners, good operators. We try to keep the real estate of high quality. And we think that through the cycles that we're going to have a great outcome. So the timing of that is not something that, I think, we can do, but the disciplined capital allocation nature is something that I think we must do. And that's how we approach that.

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Operator [67]

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And our next question comes from Vikram Malhotra with Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [68]

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So a couple of your peers now have come out highlighting, they think, next year is a turn in terms of senior housing occupancy at least from a top line perspective. And one has come out giving fairly aggressive kind of 4% to 6% growth numbers over a 5-year period. Scott said, I'm just wondering, I know you said '21 is sort of the year where we'll start to see the combined power of the SHOP portfolio. But just based on the CP portfolio today, would you sort of say a top line turn is likely next year? And would you agree sort of with maybe a longer-term view of mid-single-digit same-store NOI growth?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [69]

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Vikram, on the short-term outlook, it really is local market specific. So each portfolio is a little bit different. We've evaluated our own portfolio in every imaginable analytical way to try to predict just supply and demand fundamentals and to try to pick a specific quarter would be false precision.

We do think that we're going to start heading in the right direction from a supply and demand standpoint, whether it's late in 2020 or early to mid-2021. It's hard to predict, but it's somewhere in that range. It would be our best guess just empirically using data, but supplemented with a heck of a lot of discussions with operating companies.

Our own teams are on the ground, just assessment to augment all the data that we look like. That's kind of our best guess. But understanding that in any local market are winners and losers. That's particularly true in senior housing where the dispersion and performance is pretty wide regardless of what point in the cycle we're at. Because there are groups today that are outperforming, and they'll continue to outperform in the upcycle as well. So that's been a big part of -- our strategic plan is to position ourselves to be one of the outperformers in each of the local markets.

So that's kind of our short-term view. And our longer-term view, I'd probably just get back to the comment I made to Rich is that it's very hard to predict supply and demand fundamentals 3, 4, 5 years from now.

The labor market is really important part of that assessment and that's difficult to predict. Supply has been coming down 4, 5, 6 quarters in a row. That's obviously very helpful. If that continues, I think you can make a pretty bullish case over the next 5 years. The population growth is significant, and it's getting better. The penetration rate continues to get better. So all of those things suggest that over the next 5 years, supply and demand fundamentals should be quite good. But we do continue to think that it's more back-end weighted than front-end weighted on that 5-year outlook.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [70]

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Okay. That's helpful. And then just last question on life sciences. I remember you highlighted that there's some move-outs occupancy sort of over the last maybe few quarters trended down from like the 96 to the low-95 range. Can you remind us or maybe give us a sense of how you expect that to trend near term? And then potentially sort of looking into 2020, just given sort of the fact that you've produced now 6% same-store NOI growth for 2 quarters. Just getting -- trying to get a sense of the trajectory over the back half and into '20. And just to finish on life science, the expirations pick up in '21. I know there's -- there are ways out, but any sense of -- remind us of any major move-outs in '21.

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

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Couple of questions in there, so I'll take them one at a time. Our 6.5% year-to-date growth, there are a few things that factor into that, but think about the 3 most important: occupancy is up 40 basis points; escalators within life sciences are around 3.2%, which is actually quite strong; and then the mark-to-market on the leases that we've achieved year-to-date is actually around positive 15%. So that's really what's driving the 6.5%.

You think about the 400,000 square feet that we have left that is maturing in the second half of the year. We've actually got about 60% of that now leased up as well as some good prospects on the remaining portion. And you'll always have from a little bit of lease-up that you need to do in any large portfolio. So the reason why occupancy will tick down a little bit maybe to the 95% range, I said before, is really because of those leases that will vacate this year. But ultimately, beginning of next year, you will see some leases and, actually, some really good mark-to-markets as well. So I don't see occupancy dipping really below the 95% range. Again, too soon to come out with specifics for next year, but I'm just telling you the overall trends that we're seeing.

And then from an expiration standpoint, in 2021, there is a pretty large number there. Amgen is one of the larger expirations, but that is at December 31, 2021. Too soon to comment on that at this point in time. I will point out that the campus they're in is right next to The Cove. So it's literally main and main from a location standpoint within South San Francisco. But while it says a big number in 2021, you can almost look at it as a 2022 expiration given that it doesn't happen until the last day of the year.

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Operator [72]

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And 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 [73]

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I'll concur with Rich's alphabetical order. Just a quick question here. I'm trying to reconcile some of the drop in the NIC MAP starts and supply growth versus all of the very aggressive. It seems like a significantly high volume of acquisitions that are out there in the senior housing side, those on the dispositions from you and your peers and what you and your peers are buying. Is there any data points or what you've seen anecdotally where lending has dried up or reduced for construction starts within the senior's housing space? And have you received any inquiries from -- increased inquiries from operators, to say, fund development, something that anecdotally would say that starts will continue to stay low and supply will continue to come down?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [74]

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Dan, it's Scott. I'll take that. I wouldn't say there's been any material change in the lending environment. That market remains relatively open. Maybe it's a margin. The LTVs are a bit lower and the recourse is a bit higher, but not enough to materially change the amount of new supply. I think the bigger factor is just the cost of construction has gone up quite significantly.

I think about the Discovery portfolio that we acquired were roughly $350,000, $360,000 a unit, and we're building 4 additional properties with Discovery in those same markets. In fact, one is going to close on Monday of next week and the all-in cost to build that is almost $380,000 a unit. So cost continue to escalate. And I think that's probably the biggest factor that is leading to at least a modest slowdown in new supplies that, ultimately, the developers and owners need a return on cost. And the operating fundamentals today maybe aren't quite as favorable as they were 4 and 5 years ago when developers were putting new projects under construction. So I think from both the numerator and the denominator, the return on development has continued to come down. And certain projects still pencil out, for sure, but less than pencilled out 4 and 5 years ago.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [75]

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That's good color there. That's all I really had.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [76]

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Thanks, Dan.

And we have 2 people remaining in the queue. Lukas, go ahead.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [77]

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Are you still on track to sell the remaining interest in the U.K. JV? What's the update there?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [78]

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Yes, this is Scott. So I'll take that. So our intention remains to exit the U.K. We have a 49% interest. Roughly USD 100 million of equity is still outstanding. Our partner, who owns 51%, is in active discussions with a number of different potential buyers. So their intention remains to take us out, our intention remains to exit. So we're well aligned there.

The uncertainty over Brexit hasn't helped. Perhaps as soon as the new October 31 deadline, there's more certainty. But in the interim, that has created some uncertainty among the buyer pool that may or may not be insurmountable. We still feel good about exiting that investment. We think the value has held up in the interim. We have good relationship with our partner. We're earning a nice yield. So sooner than later, we'll exit that 49% at the exact timing. We'll keep you posted.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [79]

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And the net balance of the thing is about $100 million. So it's not a big deal for us at this point one way or another. We'll work through them.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [80]

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All right. And I know it's tiny, but coverage on the HRA assets still look tight after the changes there. How do you generally think about setting coverage during negotiations like that?

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Scott M. Brinker, HCP, Inc. - Executive VP & CIO [81]

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Yes. The primary goal there was to rightsize the portfolio. It was 14 assets, and neither HRA nor HCP wanted to own or operate all 14 assets. So we're going to sell 6. And the 8 that we're left with are core assets for HRA. They're in their home state of Florida. They think they have upside. The buildings are 20 years old, so we're going to put some capital into the real estate to, hopefully, improve performance. And hopefully, that combined with improved industry fundamentals allows that portfolio to be a sustainable long-term metal stream. We now have a 10-year master lease. We also have significantly improved guarantees and covenants. So that's certainly played a role in our thinking. And then otherwise, it's just a trade-off between the earnings and the rent cover. And we thought this was the appropriate balance, given the money that's going into this portfolio as well as the improved guarantor.

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Operator [82]

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And our next question is Michael Mueller with JPMorgan.

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Mei Wen Tan, JP Morgan Chase & Co, Research Division - Analyst [83]

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This is Sarah on for Mike. So just on the land bank. I see that's heavily skewed to California. Should we expect to see the balance out more with Boston over the next few years?

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [84]

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We had a hard time hearing that. Could you repeat that, please?

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Mei Wen Tan, JP Morgan Chase & Co, Research Division - Analyst [85]

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So just a quick one on the land bank. I see that heavily skewed to California. Should we expect to see that move more towards Boston over the next couple of years?

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Peter A. Scott, HCP, Inc. - Executive VP & CFO [86]

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Yes. It's case-by-case specific as we look at acquisitions, but certainly within Boston, we have the 101 CambridgePark Drive deal that at this point we're still working through entitlements. So you'll notice we don't have square footages in there yet until we're through with the entitlement phase, although we feel quite good about getting through that phase.

The others are really some of its legacy from Slough, some of the land that just came with that acquisition, which was over a decade ago. But as we've looked within Boston, 2 of the acquisitions have had land components to it and it's something we'll continue to look at as we go forward.

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Operator [87]

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And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tom Herzog for any closing remarks.

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Thomas M. Herzog, HCP, Inc. - President, CEO & Director [88]

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Thank you, operator. And thank you all for joining our call today and your continued interest in HCP, and we'll talk to you all soon. Thank you.

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Operator [89]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a good day.