Healthpeak Properties, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter and 2015 HCP Earnings Conference Call. My name is Crystal, and I will be your coordinator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir

[John Lu:]

Thank you, Crystal. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations of our tenants. The statements are made as of today's date and reflect the company's good faith, beliefs and best judgment based on current information. These statements are subject to the risks, uncertainties and assumptions that are described in our press releases and SEC filings, including our Annual Report on Form 10-K for the year ended 2014. Forward-looking statements are not guarantees of future performance. Actual results and financial condition may differ materially from those indicated in these forward-looking statements. Future events could render the forward-looking statements untrue and the company expressly disclaims any obligation to update earlier statements as a result of new information. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these measures to the comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC today and are available on our website at www.hcpi.com. Also during the call, we will discuss certain operating metrics, including occupancy, cash flow coverage, and same-property performance. These metrics and other related terms are defined in our supplemental information package. I will now turn the call over to our CEO, Lauralee Martin.

[Lauralee E. Martin:]

Thank you, John. Welcome to HCP's 2015 first quarter conference call. Joining me this morning are Paul Gallagher, Chief Investment Officer; Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations. We are off to an exceptionally strong start to the year. Let me summarize the highlights. We generated 3.5% same-store cash NOI growth, driven by strong RIDEA performance and robust leasing in our premier life science portfolio. We have executed agreements for $1.5 billion of investments, details of which Paul will discuss shortly. We amended our Master Lease with HCR ManorCare to improve our lease coverage and provide financial flexibility for HCR to focus on growth. We increased our dividend 3.7%, representing our 30th consecutive year of dividend growth. And we continue to be a leader in healthcare sustainability efforts, publishing our first combined annual and sustainability report for 2014. Let me now turn the call over to Paul to cover our investment activity.

[Paul F. Gallagher:]

Thank you, Lauralee. Let me start with an overview of our investments. As Lauralee mentioned, we're off to a strong start in 2015 with investments and commitments in excess of $1.5 billion with a blended cash yield of 6.8%. Our investment activity is comprised of a senior housing joint venture with a new partner; the expansion of our international portfolio; exercise of two purchase options on newly constructed properties; and development activity in three of our segments. In March, we agreed to acquire 35 private pay senior housing communities from Chartwell Retirement Residences for $849 million with a projected first-year cash yield of 6.6% and is expected to close by the third quarter. The portfolio was currently 89% occupied with a majority located in top 31 MSAs and will be held in a 90/10 joint venture with Brookdale, who has operated the communities since 2011. Brookdale's operating knowledge of the portfolio will be a tremendous asset, enabling us to avoid transition disruptions and immediately implement capital investment programs to refresh and reposition the assets to generate future growth beyond traditional triple-net rent escalators. In February, we expanded our relationship with HC-One and facilitated their acquisition of Meridian Healthcare by adding a £108 million short-term bridge tranche to our existing £394 million debt investment, bringing our total investment to £502 million. In April, we converted £174 million into a sale leaseback on 36 care homes. All 36 facilities will be long-term leased to HC-One at a 7.25% initial lease yield with inflation-based escalators at a 2015 EBITDAR coverage of 1.35 times. In February, we broke ground on the first phase of The Cove at Oyster Point, encompassing two class A buildings totaling 253,000 square feet at a cost of $177 million, expected to be completed by the third quarter of 2016. Our leasing prospects have exceeded expectations and we are encouraged with the high level of interest we have received from the life science community. In January, we also began construction on a $36 million medical office building with a projected return on cost of 8.7%. The 165,000 square-foot MOB will be on the campus of Memorial Hermann Cypress, Texas Hospital in suburban Houston and is 25% pre-leased. This is our third ground-up MOB development project in process. Our MOB development pipeline now consists of $162 million of projects. In March, we formed a 50/50 joint venture with MBK Senior Living that acquired three senior housing facilities from MBK for $126 million with a projected first-year cash yield of 6.9%. The assets will be managed by MBK in a RIDEA structure. The venture has the capacity to acquire additional senior housing facilities through off-market transactions with a total target investment of $400 million. In March, we exercised our purchase option right embedded in our development loan to acquire a newly developed assisted living and memory care facility currently 99% leased in Houston, Texas for $36 million at a yield of 6.8% net of our participation interest of $4 million. The facility was contributed to our Brookdale RIDEA joint venture. In addition, we began to develop a 117-unit independent living facility to complement our adjacent, newly constructed, assisted living facility in Houston I just mentioned. The $29 million development has a 10.9% return on cost and will also be contributed to our RIDEA joint venture with Brookdale upon completion. This is our second joint venture in process with Formation Capital and brings our total senior housing development pipeline to $77 million. Our second quarter investment activity is off to a strong start. In April, we exercised our option to acquire an assisted living and memory care facility currently 94% leased in Germantown, Tennessee for $72 million. The investment will yield 6.9% net of our participation interest of $9 million. The Germantown facility is the second assisted living facility that we will have acquired under our $141 million participating development loan program with Formation that allows us the opportunity to convert our debt investments to real estate ownership in an off-market transaction. Upon closing, the facility will be contributed to our Brookdale RIDEA joint venture. In April, we acquired a 705,000 square foot medical office building located in Center City, Philadelphia for $161 million and a cash yield of 6.6%. The building is 92% leased, including over 50% leased to the AA-minus rated Thomas Jefferson University Hospital whose campus is adjacent to our building. This asset complements our 2014 acquisition of 3535 Market Street and results in a concentration of over 1.1 million square feet in the Philadelphia market. Now, let me review the highlights of the portfolio's performance. Our RIDEA portfolio performed well in the first quarter with same-store component reporting growth of 6.7% over the same quarter in the prior year. The RIDEA occupancy declined 30 basis points from the prior quarter to 86.4%, which is due to normal, seasonal variations and is consistent with NIC's industry average. Year-over-year occupancy increased 100 basis points compared to 35 basis point NIC average. Cash flow coverage for our senior housing same-property portfolio declined 2 basis points from the prior quarter and 4 basis points from the prior year to 1.11 times. The decline is driven by the integration of the former Emeritus assets and rent escalators on our Brookdale portfolio. As mentioned on our last call, coverages are expected to recover as Brookdale completes the integration and accelerates the CapEx spending to improve the underlying performance of the portfolio. In summary, we ended the first quarter with strong same-store growth and a high volume of investment activity, including expansions in our international platform and our development pipeline. With that, I'd like to turn it over to Tim.

[Timothy M. Schoen:]

Thank you, Paul. I'll start with our quarter results. As Lauralee mentioned, our same property portfolio generated 3.5% cash NOI growth compared to the first quarter last year. The results benefited from contractual rent increases and solid performance from our operating portfolio led by a 500 basis-point occupancy gain in life science to another all-time high of 96.5%. We reported NAREIT FFO of negative $0.26 per share, which was impacted by a non-cash impairment charge of $1.04 per share announced in March related to our HCR ManorCare DFL investment. The charge reduced the carrying value of our HCR ManorCare real estate portfolio from $6.6 billion to $6.1 billion. Also included in NAREIT FFO this quarter was $0.01 per share of acquisition and pursuit costs in connection with our investment activities. Excluding the impairment and acquisition pursuit cost, FFO as adjusted for the quarter was $0.79 per share and FAD was $0.69 per share, representing year-over-year growth rates of 5% and 10%, respectively. The increases were driven by same-store growth and the accretive benefit from our 2014 acquisitions that were back-end weighted last year. Also impacting the quarter were two one-time items. We've recognized $0.01 per share of income from our participation interest in a senior housing development loan that Paul just mentioned, which was partially offset by interest expense to opportunistically prefund all of our 2015 debt maturities in January. Next, our investment activities. Year-to-date, we have announced $1.5 billion of acquisitions and development that Paul just walked you through. These transactions utilize four investment vehicles across four of our segments. First, $960 million related to expanding our senior housing RIDEA platform; second, $240 million of committed new development projects led by a $177 million for The Cove life science project; third, $164 million or £108 million add-on debt investment to our UK HC-One portfolio; and fourth, a $161 million fee ownership of a medical office building in Philadelphia. Subsequent to quarter-end, we converted £174 million, representing one-third of our total HC-One debt investment into ownership in a portfolio of 36 care homes of equal value. While we match funded the investment used in the multi-currency capacity under our revolver, this funding structure introduces the potential for non-cash currency translation volatility on a GAAP-basis going forward. Moving to our financing transactions and balance sheet. During the first quarter, we raised $933 million of external financing comprised of $600 million of 10-year senior unsecured notes at 3.4% that refinanced all of our 2015 debt maturities at favorable terms and $333 million or £220 million four-year term loan to match fund a portion of our 8.2% HC-One debt investment. We concurrently entered into an interest rate swap that fixes the rate on the term loan at 1.79%. Our balance sheet continues to be strong. Financial leverage was 43% at the end of Q1, which increased from year-end due to the reduction in our growth assets related to the HCR ManorCare DFL. The prefunding of our remaining 2015 debt maturities and using GBP-denominated borrowings have provided a natural hedge for our UK investments. Our fixed charge coverage at 4.0 times and net debt to EBITDA at 5.3 times remain stable. And our secured debt ratio continues to be at historical lows at roughly 5%. At quarter end, we had immediate liquidity, totaling $1.8 billion from our revolver and unrestricted cash. In addition, we expect to receive $250 million to $350 million in connection with our HCR ManorCare asset sales starting in the second half of 2015 along with the potential for additional proceeds from capital recycling across the rest of our portfolio. Finally, our 2015 guidance. In March, we updated our guidance to reflect the amendment of HCR ManorCare's Master Lease and first quarter impairment charge. In addition, our cash same-store guidance was revised to be flat year-over-year at the midpoint of our range as the rent reduction offset the growth in the rest of our portfolio. Outside HCR, the remaining 70% of our assets are performing slightly above plan, going at 3% to 4% driven by life science leasing and senior housing RIDEA One portfolio performance. As a result, today we are increasing our 2015 cash same property performance to 0.25% at the midpoint with a range of negative 0.25% to positive 7.5%. We expect 2015 NAREIT FFO to range from $2.02 to $2.08 per share, which is unchanged from our March guidance. Our current guidance contains the following items not contemplated in the March update

[Lauralee E. Martin:]

Thank you, Tim. A great deal has happened with our HCR ManorCare relationship since our last earnings call. I want to highlight the significant changes as well as provide some color on our decisions. First, let me note that HCR completed a very positive first quarter. EBITDAR grew 3.6% year-over-year as a result of both reimbursement rate increases and continued cost controls. First quarter results were also ahead of their 2015 budget. Normalized fixed charge coverage for the trailing 12 months was 1.08 times consistent with the prior quarter, which does not include our rent reduction effective April 1. And HCR's quarter-end cash balance increased to $142 million. We acknowledge that one quarter is not a trend. However, we are encouraged by their favorable first quarter results. The recent decision by the Department of Justice to intervene against HCR in the pending false claims actions was not a factor in the timing of our decision to amend the lease nor has it changed the decisions we made. We did not know if or when the Department of Justice would move from an investigation to a civil complaint. HCR, as posted on their website, believes the allegations are unjust and intends to vigorously defend against them. At this early stage, we cannot predict or speculate on the outcome of the Department of Justice complaint. However, we do not anticipate a significant impact to HCR's profitability in the near future. Recall in our fourth quarter earnings call, we announced a cooperation agreement with HCR to market up to 50 non-strategic assets. This was a critical step in our relationship as it demonstrated a joint and proactive asset management action with HCR focusing on its core post-acute strategy and HCP improving our portfolio of quality and our lease coverage. The asset sale efforts are proceeding well. Six properties are currently under letter of intent and should close in the third quarter. The balance of the assets are in a sale process, which has attracted a large number of potential national, regional and local buyers. First-round bids have been received and are being evaluated. Effective April 1, we amended our Master Lease, reducing net annual rents by $68 million. In exchange, we received nine unencumbered assets valued at $275 million with a median age of four years, a lease receivable of $250 million with full repayment required prior to any cash being disbursed to the equity owners of OpCo, and the lease was extended by five years. In reaching this agreement, we evaluated the trades offered by HCR and what rent reduction would provide them sufficient operating flexibility to grow their business and make them competitive in their marketplace. With the rent reduction, together with the asset sales, HCR will have a capital structure measured by corporate fixed charge coverage similar to its large industry peers. Our pro forma fixed charge coverage is close to 1.3 times on a full-year run rate basis. We also evaluated facility lever coverage, focusing on achieving an initial coverage in excess of 1 times or pro forma of 1.05 to 1.07 times when management fees are applied at the industry levels of 4%. As Tim mentioned, HCR's actual management costs ran approximately 3.6%. The amended Master Lease and pending asset sales combined are expected to provide HCR with $130 million of pro forma annual cash flow, which must be retained by the company. As such, we expect HCR to increase their capital investments in the business, with resulting growth that will benefit our lease coverage. Some of the areas of growth they are targeting. HCR currently has three development projects underway and a strong pipeline. Now, with increased financial flexibility, they plan to reinstate these activities. The majority of the assets transferred to us with the lease amendment were developed after our original transaction closed, indicating how much value HCR can create. They continue to expand their preferred provider relationships to gain market share. They have just certified their 100th MedBridge facility, branding that recognizes facilities that have a 75% or better discharge rate into the community, a return to the hospital rate of 18% or less, and a customer satisfaction rating of 85% or better. The MedBridge brand is valuable in sourcing new, preferred provider relationships. Outside of post-acute and skilled nursing, HCR continues to have solid performance in their hospice business, being the third largest hospice provider in the United States and their private pay Arden Courts product where they are the second largest, stand-alone memory care provider. With this update, operator, can you please now open the call for questions?

[Operator:]

Thank you. And our first question comes from Nick Yulico from UBS. Your line is open.

[Nick Yulico:]

Thanks. On the HCR ManorCare issue, I was hoping you could help us understand the chain of events a little bit better this year. Earlier this year, you decided on doing asset sales to help coverage. Then, you and HCR came to the table to decide on a rent cut. Then, there was a DOJ complaint that got unsealed, which point to HCR, potentially, needing more cash if they were to settle or found liable. A cynic might look at this and say, HCR came to the table for a rent cut with HCP because they were worried about this complaint, they needed cash. How much did that affect the rent cut negotiation at all? Could you shed some light on that for us?

[Lauralee E. Martin:]

The Department of Justice was not a factor in our lease amendment. What was a very important factor to HCP was number one

[Nick Yulico:]

Okay. Just one of the HCR questions and, I think, Ross had a follow-up on something else. Are you spending much time these days with hiring your own counsel or doing your own due diligence on what the ultimate outcome of this complaint might be and how it impacts HCP? And if so, are you actually accruing expenses for that today? And where would that be showing up on your P&L?

[Lauralee E. Martin:]

The complaint is against HCR, not HCP. So, no, we don't need legal counsel. We always keep track of what goes on in the industry, but that is not any different expense than we would have on a normal basis.

[Nick Yulico:]

Okay. Thanks. I think Ross had a follow-up.

[Ross T. Nussbaum:]

Yeah. Hi, guys. 833 Chestnut that you bought after the quarter, my understanding is you bought that from Digital Realty and the building has some data center, meet-me-room space in it. How much of the NOI from that building is actually coming from office versus data center?

[Paul F. Gallagher:]

It's a pretty small amount. It's basically on one floor. And when we went to underwrite that what we did was we put a discount on that particular income. Not only that, but given our relationships that we have with property managers in the marketplace, we've actually got a good team of people that had experience operating that particular business. We've actually been able to sign a lease since we've announced the transaction. So we feel okay about that. The play really is converting what is mostly an office play conversion to medical office, and we see that happening with the demands coming from Thomas Jefferson University.

[Timothy M. Schoen:]

It's only about 15% of the office – about 15% of the space, Ross.

[Ross T. Nussbaum:]

Okay. And is the – I think you said it's a 6.6% cap rate, cash cap rate?

[Paul F. Gallagher:]

Yes.

[Ross T. Nussbaum:]

There's a data center website out there saying the building had $9.3 million of NOI, which is a 5.8% cap rate. Is that not accurate, or is the 6.6% a stabilized number that you hope to get?

[Paul F. Gallagher:]

I think you need to look at leasing that's occurred, we've gone through. And in the normal due diligence, we evaluate all the lease income and what have you, and we feel confident that we'll be able to deliver 6.6%.

[Timothy M. Schoen:]

Yeah. It's about 85% occupied today, Ross. It's 92% leased. So some ramp-up.

[Ross T. Nussbaum:]

Thank you.

[Timothy M. Schoen:]

Okay.

[Operator:]

Thank you. Our next question comes from Derek Bower from Evercore ISI. Your line is open.

[Derek A. Bower:]

Great. Thanks. Sorry, just wanted to follow up on ManorCare. Can you speak to any recourse that you may have to you as part of your lease to ManorCare if they are found at fault by the DOJ?

[Lauralee E. Martin:]

Well, we have a lease to ManorCare. This is a civil investigation so – and I think you're probably stretching a little bit too far with the question.

[Derek A. Bower:]

Okay. Got it. Just following up on the six asset sales, can you just talk about the profile of the buyers? And just to confirm, are these the six assisted living facilities that I think were part of the 50 assets or is there also a mix of the skilled nursing?

[Lauralee E. Martin:]

This is a mix. It's more an exit from a state. So I think you should focus on it that way. The buyers are – they really run the full gamut. We've seen REITs; we've seen regional operators; we've seen national operators, local operators. The level of interest has been very positive. And like I said, the first round bids are in. It's too early, but we're very pleased with where we stand at this point.

[Derek A. Bower:]

Okay. Thanks. And then just for Tim, how was the funding of the Chartwell deal contemplated in full-year guidance?

[Timothy M. Schoen:]

From a modeling perspective, Derek, we continue to underwrite the transactions based on 60-part equity and 40-parts debt. So that's what you should assume in that transaction. And accordingly, our 2015 guidance reflects that financing mix.

[Derek A. Bower:]

Okay. Still early toward third quarter, so how should we be thinking about timing?

[Timothy M. Schoen:]

Yeah. Yeah. I think that's right. That's the right way to think about it. But from a practical standpoint, being a little less theoretical, we've got about $1 billion remaining to fund in the second half of the year. Obviously, from a liquidity standpoint, we have immediately liquidity underneath our revolver. From a longer-term perspective, though, as you know, we've got some capital recycling going on; we've got the HCR ManorCare sales coming back this year. And then we've got some potential for some other capital recycling opportunities in the portfolio. Also we've got our retained cash flow and our DRIP proceeds that we put in the mix as well.

[Derek A. Bower:]

Okay. Got it. Thank you.

[Timothy M. Schoen:]

Yep.

[Operator:]

Thank you. And our next question comes from Joshua Raskin from Barclays. Your line is open.

[Joshua R. Raskin:]

Hi. Thanks. Just on the ManorCare. I know at the beginning of the year, you guys had the big write-down and one of the reasons that you cited was you'd seen a look at their outlook for 2015. So I'm curious where that 3.6% EBITDAR growth comes in relative to what your preliminary thoughts were? And then do you think that level of growth, that EBITDAR growth is sustainable? And I guess, the last part of the question, I know there's no direct impact from the DOJ in terms of short term, et cetera. But are there practices being contemplated in terms of changing around operationally or anything like that contemplated in the outlook?

[Lauralee E. Martin:]

First of all, let's address the 3.6%. That actually is a number that is ahead of their budget. So definitely off to a strong start for the year. We did comment it's one quarter. So it's too early to call that a trend. I'll take the second part – there was a lot of questions in there, but I think the last one. The investigation by the Department of Justice has been ongoing for about three years. HCR has maintained their business practices throughout that time and, in fact, has continued to increase market share and provide a relationship focused on the outcomes that they achieve in terms of – think about hospital readmissions and so forth. I would also add that – we mentioned this in a prior call, that in conjunction with winning some of those relationships, HCR actually had their billing practices, and this was again several years ago, audited by a CMS recommended audit firm, passed it, and felt that their practices are definitely to the standard that one would want. So no change in their business practice.

[Joshua R. Raskin:]

Okay. Got you. And then, maybe away from ManorCare with the understanding that you guys are selling down some of the exposure through the 50 asset sales. But how are you thinking about skilled nursing outside of ManorCare? Do you think there's opportunities in the market now? Or is this just let's try and figure out everything with ManorCare, get all of that done and maybe re-evaluate next year?

[Paul F. Gallagher:]

Yeah. I think we've always looked at skilled nursing from an opportunistic standpoint. We like good quality operators; we like good Q-mixes. We want to stay away from the state-based Medicaid reimbursements. And to the extent we find those opportunities, we would be an acquirer of those assets.

[Joshua R. Raskin:]

Okay. Perfect.

[Operator:]

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

[Juan C. Sanabria:]

Hi. Good morning. I was just hoping you could speak to the senior housing same-store results on a sequential and quarter-over-quarter basis. It looked like occupancy actually increased a little bit bucking the trend of the seasonality, but the same-store NOI declined? Just hoping you could shed some light on what happened there. Was there any expense creep or anything?

[Timothy M. Schoen:]

I think you're talking to the decline going from quarter to quarter, on a year-over-year basis, we were up.

[Juan C. Sanabria:]

Correct.

[Timothy M. Schoen:]

I think that's just more a function of timing and that sort of thing. But on a year-over-year basis, occupancy rate and margin were all up. Occupancy up 100 basis points; rate's up 200 basis points; and margin's up 120 basis points. So that was driving the 6.7% year-over-year growth, which is the way we look at it.

[Juan C. Sanabria:]

But sequentially was there anything that – with the occupancy up, was there anything sequentially on the cost side that impacted margins and that hit the cash NOI?

[Timothy M. Schoen:]

Yeah. There's some seasonality. There's add rent in the fourth quarter that has a tendency to spike at quarter-over-quarter, Juan. So it's higher in the fourth quarter and traditionally lower in the first quarter.

[Paul F. Gallagher:]

But we're also not seeing any change or increase in expenses, or wages, or things of that nature.

[Timothy M. Schoen:]

No. There's just some seasonality in the portfolio, Juan.

[Juan C. Sanabria:]

Okay. And then with regards to capital recycling, Tandem is out there as money you could potentially get back. Do you have any color on how that situation plays out with regards to funding Chartwell?

[Paul F. Gallagher:]

Sure. Let's review that a little bit with you. We've had a lot of activity with Formation. We've done conversions of our participating construction loans. We've expanded and converted our UK debt. Our loan that we have outstanding with them on Tandem is locked from prepays through August of 2015. But based on the activity, I think you can assume that discussions of all of our investments with Formation are occurring. So everything is on the table.

[Timothy M. Schoen:]

Yeah. That's a couple hundred million dollars, Juan.

[Juan C. Sanabria:]

Okay. Great. And then I was just hoping you could speak to opportunities you're seeing ex, I guess, HC-One in Europe, kind of, what asset classes and what geographies are you focused on at this point and when should we see, sort of, the next step overseas?

[Paul F. Gallagher:]

Yeah. We like – in the UK, we like the care homes and we like the hospital space. Continental Europe, we like some of the post-acute, some of the care homes and some of the hospitals. I think the thing that we like especially in the UK and the stuff that we've done, we've been able to buy below replacement cost. Most of the assets historically had not had the necessary capital invested to make them competitive. That's an opportunity for us, obviously, to provide that capital and reposition those assets. We like the demographic trends both in the UK and in Continental Europe. And what we're seeing in the UK is the NHS is starting to look for low-cost solutions; and our operators are looking to capitalize on that. So we see a couple of different factors that make it an interesting play for us.

[Juan C. Sanabria:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Kevin Tyler from Green Street Advisors. Your line is open.

[Kevin Tyler:]

Yeah. Hi, guys. Talking about The Cove specifically, how does the downsizing that was in the press related to the Onyx had been playing into the competitive dynamics of that market?

[Paul F. Gallagher:]

I think with Onyx, they're going to end up having a building that is leased to one of our competitors that's not going to be necessarily a multi-tenant-type building, but one of the things that we're seeing in our portfolio is the occupancy is up nearly 500 basis points. You've seen significant rent growth. The reception that we've gotten on The Cove has been excellent. Prospects outpace the available space. We're expecting to still achieve a high-7% type return. So we see a lot of opportunity in our portfolio and that one specific downsizing didn't have an impact.

[Timothy M. Schoen:]

Right. Onyx is owned by Amgen, as you know.

[Kevin Tyler:]

Correct.

[Timothy M. Schoen:]

And they're actually consolidating into our Oyster Point project in South San Francisco. One of those buildings actually, Kevin, is an office building. So I don't think it – given the size of the South San Francisco market has that much impact.

[Kevin Tyler:]

Okay. Thanks. And then, Paul, you have some hospitals – acute care hospitals specifically in the portfolio. Can you provide some insight into the CapEx profile of those assets? Specifically, what does the burden look like for the operators?

[Paul F. Gallagher:]

Well, I have actually had a lot of experience not only investing in them, but repositioning hospitals. And you really got two components, which is one of the reasons why looking at going in EBITDAR cash flow coverage is important. And then after real estate CapEx, cash flow coverage, and then after hospital CapEx, cash flow coverage is important. And there is your typical ongoing real estate, if you will, component to that CapEx, but more significantly, there is the hospital, which is IT and machine and equipment and things of that nature that really drive a tremendous need for large coverages. And what I found over the last 12 years of doing this is there is extreme volatility in having good coverages on a going-in basis is very important. So we look to underwrite coverages on an EBITDAR basis, north of 2.5 times. If you look at that and compare that to what we're seeing in the UK, where it's a different type of hospital and is not quite the same acute care type facility and where you've got operators with much larger volumes, we see a significantly lower coverage appropriate, because you don't have those same amount of costs because of the makeup of the hospitals.

[Kevin Tyler:]

Okay. I appreciate all that color. And the last one from me, when Emeritus was sold, you were able to structure a deal that was, I think, very favorable for both HCP and Brookdale. Can you provide any color on the steps you'd take, or maybe a negotiating leverage you could pull if Brookdale was sold to a competitor?

[Lauralee E. Martin:]

I guess, for starters, we don't comment on the rumors of the transaction. What we are excited about is that we continue to expand our relationship with Brookdale on a growth basis, for example, the recent Chartwell, which now makes three growth joint venture RIDEA structures with them. So we obviously have an excellent relationship. At this point in time, we just support Andy and his team. We think it's incredibly important they complete the Emeritus integration, particularly, important to us, it's a priority with our portfolio. But I guess, we would anticipate being a part of any real estate decisions they would make in the future.

[Kevin Tyler:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Andrew Rosivach from Goldman Sachs. Your line is open.

[Caitlin Burrows:]

Hi. Good morning. This is Caitlin Burrows. Kind of on a similar note to the previous question, just given that Brookdale is already almost 20% of your revenues, how much appetite do you have to expand that relationship going forward?

[Lauralee E. Martin:]

I think – and I'll put it in the context of how we believe the rating agencies and the banks and we think about it is, it's a very diversified portfolio, geographically, product-type. So we're in independent, we're in assisted, we're in memory care, we're in CCRCs. The structures are set up that were strongly aligned to make sure that the properties stay competitive in the marketplace given the joint CapEx efforts and strategies we put together. So we believe that although we have the best operator, which is a concentration, the actual portfolio is incredibly diversified. And we would find it attractive to do more with Brookdale.

[Paul F. Gallagher:]

And one of the things that we do consistently throughout our portfolio is look at some of those lower growth assets. Tim mentioned capital recycling. We do that on a regular basis. As we add new – brand-new deconstructed assets into those RIDEA joint ventures, we're constantly calling the portfolio, looking for assets to sell, and as a matter of fact, we've actually had some asset sales out of our RIDEA portfolio with Brookdale.

[Timothy M. Schoen:]

And, yeah, listen, it's a risk-adjusted return discussion for us. We like Brookdale. They're a financially strong operator. We have various structures with them, both on RIDEA and triple-net. As Lauralee just mentioned, it's geographically diverse. And it's got a product type diversification of AL, IL and CCRC. So although, it is the common denominator, Brookdale is the operator. We do like all the aspects of that portfolio. And we'd look to grow with them if there's the opportunity.

[Caitlin Burrows:]

And then, are you concerned if Brookdale pursues the transaction elsewhere, if that could impact the credit on your leases negatively?

[Lauralee E. Martin:]

It is incredibly important to us that we have a strong operator. We believe we have appropriate protections to make sure that we retain a strong operator, and we would definitely make sure that happens.

[Paul F. Gallagher:]

We have covenants built into our lease as far as what they can and can't do from a lever standpoint.

[Caitlin Burrows:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Vikram Malhotra from Morgan Stanley. Your line is now open.

[Vikram Malhotra:]

Thank you. I just had a question on the RIDEA side. You guys have grown the constant – or grown the business over the last year-and-a-half. It's probably now 12%, 13% of the business, including the recent transactions. Just kind of wondering how you see that playing out over the next year or two? How large do you think that could become as a percent of the total business?

[Paul F. Gallagher:]

We've always looked at that as an opportunistic play. We look for assets that have outsized growth. Like you said, we're about 13% of the portfolio today. We think we can probably take that up to 20% or so. But we're going to do it on assets where we think it makes sense.

[Vikram Malhotra:]

And how do you think – I mean, some of your peers have grown that business over the last three years, but now we're seeing a meaningful uptick in several markets in terms of supply. So I'm just, kind of – how that decision is being – what's driving that at this point given that supply is becoming a bigger concern in many of the markets?

[Paul F. Gallagher:]

Well, I think when you look at the situation like with what we're doing with Chartwell and Brookdale, that's a scenario where certainty of execution was important. Brookdale and HCP had an edge. Brookdale was the existing operator. We also had certain rights there to acquire it, making it, kind of, a de facto off-market transaction; good strategic fit for us. We like the fact that there was no operator transition risk knowledge of the assets in the market. But I think more importantly, we looked at the assets and the rates from the underlying property level were deemed – from our standpoint, well below market with the capital investment program that we're going to employ there. We see tremendous upside. So we like taking those kinds of opportunities and utilizing the RIDEA structure to the extent we can do that through a triple-net lease, which we've done in the past and get outsized growth, we do that as well. It's all based on a risk-adjusted analysis.

[Vikram Malhotra:]

And then last one, just remind me on the RIDEA portfolio. What's the budgeted CapEx spend for this year maybe on a per unit basis or total?

[Timothy M. Schoen:]

Probably around $2,000 a unit. I'd have to get back to you on that, Vikram.

[Vikram Malhotra:]

Okay. No problem. Thank you.

[Operator:]

Thank you. Our next question comes from Smedes Rose with Citi. Your line is open.

[Smedes Rose:]

Hi. Thank you. I wanted to ask you just on the pace of acquisition activity. It's obviously a large number, but it's quite a bit a below the other two large REITs in the space. And I'm just wondering what kind of – I assume you guys all see a lot of the same product. I'm just wondering where is your criteria different do you think maybe that your pace is a little bit different now versus the others?

[Lauralee E. Martin:]

Well, I think first of all, it isn't how much we do, it's the invested returns on them and that's always been our focus. What I really like about the $1.5 billion we've announced, $1.2 billion of it are market driven if you think RIDEA, our development at The Cove and the medical office building in Philadelphia. And so if we think about those, they're moving into making sure that we're competitive in a rising interest rate environment if it ever decides to actually increase. But each one of those we had something that allowed us to get investment returns because it's a relationship or an advantage or our expertise. And that's what we'll continue to play off as the marketplace is competitive as to price.

[Smedes Rose:]

So it sounds like you're more focused on RIDEA in this operating environment, which makes sense on the things that you've just said. But I mean, when you look at – I mean, do you think pricing and cap rates is too high on some of the other assets that you can't – you don't see the, kind of, returns that you would want or?

[Timothy M. Schoen:]

Well, I think it's really always boils down to we look for an appropriate risk adjusted return. And if I'm in a scenario where I have to choose between a marketed deal at historic low cap rate and a valuation above replacement cost or something that provides me a very good risk adjusted return, then I'm going to pick the good risk adjusted return rather than the full valuation. It doesn't do me a lot of good to take an asset that is at or above value and put that on my balance sheet.

[Smedes Rose:]

Okay. Thanks for the color.

[Operator:]

Thank you. Our next question comes from Tayo Okusanya from Jefferies. Your line is open.

[Omotayo T. Okusanya:]

Yes. Good morning. Most of my questions have been answered, but I just wanted to focus on the medical office buildings a little bit. For the quarter, cash same-store NOI growth was basically 0%. It also came down last quarter, it was just 1.5%. Can you just talk a little bit about what's kind of happening there in regards to why the recent cash same-store NOI growth numbers have been somewhat weak and what the outlook is for that?

[Paul F. Gallagher:]

Yeah. I think if you go back and you look, as you mentioned, in the fourth quarter, it was off a little bit. In the fourth quarter, we had one or two unexpected vacancies. In the first quarter of this year, we actually had expected vacancies. We knew that the number was going to come in flat, but that it's going to ramp up over the quarter. We still expect to see 2% growth for the full year. If you take out the two vacancies that we had expected in the first quarter, growth would have been 3%. So the NOI and portfolio is doing well.

[Omotayo T. Okusanya:]

Okay. That's just one. That's one reason (50

[Timothy M. Schoen:]

Yeah. There's some volatility, Tayo, quarter-to-quarter, but like Paul said, it's still within our expectation of 2% growth for the year.

[Omotayo T. Okusanya:]

Great. I appreciate it. Thank you.

[Operator:]

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

[Michael Carroll:]

Yes. How quickly do you plan on growing the MBK JV? Is the $400 million target, is that a near-term goal? Is that just longer term or the ultimate goal you want to grow that JV?

[Timothy M. Schoen:]

As we see the opportunistic transactions, they really got a good track record of doing off-market type transaction and value creation. So we're excited about that relationship.

[Michael Carroll:]

So can you grow it more than the $400 million?

[Timothy M. Schoen:]

We could. I think it's really going to be a function of how much we get out and how quickly. And I don't think we have a timeframe around when we need to get that money out the door. We've already looked at a couple of transactions and we continue to be in the market.

[Michael Carroll:]

Okay. And then, how many phases do you plan at The Cove and how many more projects could you ultimately build that campus out to be?

[Paul F. Gallagher:]

That's a three-phase project. That's a 884,000 square-foot project, Mike. So if you think about it, if you're in an urban area, you take a 20, 25-storey building, cut it on its side and cut it into phases. So we're doing the first phase of 253,000 feet. It's a bite-sized piece relative to the size of not only our portfolio in South San Francisco, but in its entirety. And then, once Jon Bergschneider and his team get some leasing transaction there, we can look at building out the subsequent phases.

[Michael Carroll:]

Okay. And then, last question for me is, can you, kind of, give us some color on the patient mix of the HC-One portfolio in the UK? How much of that is private pay and how much of that is paid by the NHS?

[Paul F. Gallagher:]

Right now, it's kind of mid-to-high 20%s of private pay, the remainder being NHS. They actually look to see that as an opportunity to grow. We've got a big CapEx program in there. And they see an advantage both from the private pay standpoint and what I'd mentioned, low-cost setting to NHS where they can actually bring in NHS patients that pay a higher weekly reimbursement than what they get from just a normal care. So they actually see upside in two forms. And we don't necessarily view that an NHS-based asset as a bad thing. It's just we like the mix and we like the opportunity to move the mix, especially, as you spend the CapEx to reposition the assets.

[Michael Carroll:]

Okay. Great. Thank you.

[Operator:]

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

[Richard C. Anderson:]

Thanks. Good morning. Lauralee, at the beginning, you, kind of, seemed to be choosing your words carefully. You said that the DOJ intervention was not a factor in your lease negotiation. I guess, I want to ask, kind of, point-blank, did you know about it when you announced that? Or did you not know about it?

[Lauralee E. Martin:]

We did not. As soon as we received word, we issued an 8-K the next morning.

[Richard C. Anderson:]

Okay. So then, do you have any ability to go – I don't know, in what form this would take, but having not known that that was coming, or did you just – that was a risk that you had to take, knowing that there was an investigation going on? Is there anything you can do to recoup some of the value there in the aftermath of this now becoming a DOJ event?

[Lauralee E. Martin:]

The investigation was ongoing before that.

[Richard C. Anderson:]

Right.

[Lauralee E. Martin:]

What I did say and I think it's incredibly important, our rent reduction was a balance of two things. One, did we get appropriate trades for the amount of rent we gave up? And number two, is HCR now positioned with the right financial flexibility to grow their business? And those two things were exactly met with the structure that we put on the table and we closed.

[Richard C. Anderson:]

Okay.

[Lauralee E. Martin:]

And so we still feel very good about that.

[Richard C. Anderson:]

For the other two where the DOJ did not intervene, including HCP, are those matters over?

[Timothy M. Schoen:]

Yeah.

[Paul F. Gallagher:]

Yes.

[Richard C. Anderson:]

Officially over?

[Timothy M. Schoen:]

Yeah.

[Paul F. Gallagher:]

Yes.

[Richard C. Anderson:]

Okay. Okay. And then, I would like to get your opinion on the doc-fix pay for, I think, in the case of post-acute, you're going to see your market basket – I think I had this right, go down from, call it, 3.5% for that space to maybe 1% in terms of growth. First of all, do I basically have that right? And if I do, is it a good thing or a bad thing in the sense that right when you might be getting this HCR ManorCare thing behind you, and then, boom, here comes another anvil to stop the story. Any comment on that issue for us?

[Lauralee E. Martin:]

First of all, we're close to ACA, which is the group that represents the skilled industry. What I would say is they were very much front and center in the bipartisan transaction that was negotiated and feel that was a very good outcome. It took a number of uncertainties off the table. One, that, in fact, there could be a cut or an unknown. There is now certainty in definition. Also in there was an extension of some therapy capabilities, again, another positive for the post-acute. And what we've also been advised is that it has not been taken off the table that if pay-fors can continue to be put forward by the various organizations that would benefit keeping the cost down, quality outcomes up and so forth, which is what the post-acute and skilled industry provides, but those could be substituted for the transaction that has been agreed. So again, it takes a lot of unknowns off the table and allows HCR to run their business with known reimbursements relative to their business model.

[Richard C. Anderson:]

Okay. And then, the last question I have is maybe just a big picture, but a year ago, January, you had two issues to deal with. One was Emeritus coverage and one was HCR ManorCare coverage. You addressed Emeritus, now Brookdale, in very decisive manner about a year ago today. You don't look back now and say, this HCR issue is still a part of the conversation in a big way that I wish we'd done more?

[Lauralee E. Martin:]

Again, we feel we did a balanced transaction that was right for shareholders and what HCR needs and there would not have been a different structure that would have taken away your questions on the Department of Justice.

[Richard C. Anderson:]

Okay. Fair enough. Thank you.

[Operator:]

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

[Jordan Sadler:]

Thanks. I just wanted to follow up on the MBK JV and, I guess, Chartwell, you've kind of explained on some level. But the premium returns that seem to be achieved on these types of transactions, can you maybe just flesh out where that's coming from or how those are being sourced and the extent of future opportunities at those levels?

[Paul F. Gallagher:]

Yeah. Let me dive into that a little more. First off, the seed assets, we had the ability to select those assets. They're all in good locations. They're all in high growth markets, two of which are California. They've been a part of the revenue-enhancing capital investment program that has been started and will continue post-close on those particular assets, that's going to facilitate additional growth. Property performance of those assets actually exceeded our underwriting during the closing and licensing period. So we're actually ahead of budget already. We like the entry point, less than $300,000 a unit, and that includes two California properties. More importantly, we also like the alignment of the 50/50 joint venture. And we like the track record they have of going out and finding off-market, value-add-type acquisitions. And we think together as a group, we can go out and take advantage of that, our capital, their ability to turn assets around and create some growth.

[Jordan Sadler:]

Okay. And could you shed a little bit more light on the structure of the venture itself? I know it's 50/50. $400 million is total investable? What's leverage and fees – what do leverage and fees look like?

[Paul F. Gallagher:]

No fees.

[Timothy M. Schoen:]

Today, that's about $125 million joint venture. It had – I want to say about, call it, $75 million to $80 million of debt in place. So each equity investment is about – each equity share in the 50/50 joint venture Paul just talked about, it's about $25 million so far, Jordan.

[Jordan Sadler:]

Okay. And then last follow-up is on Tandem. Do you have – is it safe to assume that Tandem being repaid on the debt side is embedded in the low-end of your guidance?

[Timothy M. Schoen:]

Yeah. Tandem is in our – we assume the Tandem guidance, and that would be in the low-end of your guidance, yes, to answer your question.

[Jordan Sadler:]

Okay. Thank you.

[Timothy M. Schoen:]

That would be at the low-end.

[Operator:]

Thank you. And our next question comes from John Kim from BMO Capital Markets. Your line is now open.

[John P. Kim:]

Thank you. Good morning. It looks like you're expecting in the $250 million to $350 million in proceeds on the ManorCare sales. It looks like you're expecting about $5 million to $7 million per asset. And that compares to your $18 million book value per asset for this portfolio. So I'm just wondering, is that $250 million to $350 million, is that the gross proceeds you're expecting or the net proceeds? And then second of all, are the buyers looking to convert these assets into an alternative use?

[Lauralee E. Martin:]

The buyers are buying these assets as HoldCos. So they will run them consistent with their business models. They do – what we're being told is the assets are very attractive, number one, because they tend to have a higher Q-mix than many of these operators normally achieve. Additionally, they view the vacancies as real opportunities in terms of Medicaid, which is an expertise that most of them have as well. So again, yes, they're looking at the assets different strategically than an HCR ManorCare would who's very focused on post-acute.

[Paul F. Gallagher:]

Yeah. I don't think it's a change in use. It's a change in operating model.

[Lauralee E. Martin:]

Right.

[John P. Kim:]

Okay. And it looks like you fixed the cap rate on the sale at 7.75% and you're implying what the lost rent would be based on the sale price and the fixed cap rate of 7.75%?

[Timothy M. Schoen:]

That's right.

[John P. Kim:]

But my question is how did you get that 7.75%, because these assets are yielding right now at 8.6% and it looks like you're selling this at a significant discount, the book value. So if anything, the yield loss would be much higher than 8.6%, not lower.

[Timothy M. Schoen:]

No. It's – listen, the 7.75% was a negotiation. These are older, more mature assets, non-strategic. You should take that to mean locations that HCR doesn't necessarily have a strong foothold in. So we felt that given the quality of these assets that they were going to look to sell on the margin, we wanted to incentivize HCR to dispose of the assets. We think we can find an attractive use of the proceeds in the portfolio over the long run.

[John P. Kim:]

Maybe asking a different way, you're taking a top-down approach rather than a bottom-up approach?

[Timothy M. Schoen:]

No.

[John P. Kim:]

And would be the assets a year or two ago, would they have generated $500,000 in rent per asset because that's what you're implying with the sale price and the cap rate?

[Paul F. Gallagher:]

I'm not getting where you're going, John.

[John P. Kim:]

Well , it seems like the 7.75%, in other words, it was, sort of, an arbitrary number to reduce the dilution where in reality these assets...

[Paul F. Gallagher:]

Listen, I think it goes with the quality of these assets. I mean, we've said before they don't meaningfully contribute to the EBITDAR coverage associated with our lease. So, in fact, given the quality and age and mix and operations of these assets, so that was a fair cap rate.

[John P. Kim:]

Okay. And then just on ManorCare, to your knowledge, has the company had any additional scrutiny with Medicare in the past few months? And is there any potential revenue loss that the company might have going forward?

[Lauralee E. Martin:]

Not to our knowledge. We haven't seen anything in their first quarter results. And again, their business model has stayed consistent throughout the entire Department of Justice investigation and it is also the business model that's in the business plan for this year and the budget that they outperformed on in the first quarter.

[John P. Kim:]

Thank you.

[Operator:]

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

[Daniel M. Bernstein:]

Thank you. I appreciate you hanging on to take my questions here. In terms of HC-One, was the transition to a fee ownership, was that a part of a purchase option that you saw in this part of the loan? Or was that a negotiated transaction? And do you think – is there an opportunity to convert the rest of that loan into fee ownership 2015, 2016?

[Paul F. Gallagher:]

When we utilize debt, we like the optionality that it gives us. We do have rights to buy and finance as a result of our debt investment, and we were actually able to go through the portfolio and pick out the assets that we thought would be good candidates at this particular time.

[Daniel M. Bernstein:]

Okay. And then if I'm just reading your comments correctly on the potential to increase the RIDEA to 20% of the portfolio, or 20% of NOI, I'm not sure which one you said, but is that more of a, like you said, an opportunistic transactions rather than a bullish statement on senior's housing? Or should I read it as both given some of the weakness in the senior's housing NIC MAP data the last couple of quarters, maybe that's seasonal, maybe some of that's the Brookdale acquisition integration. But are you bullish in senior's housing? Or is it just more of just opportunistic we find assets that are under-performing, we think we can get extra growth, or is it both?

[Paul F. Gallagher:]

I think we've been consistent all along. We view RIDEA as meeting a different level of risk-adjusted return versus a triple-net-type asset. And therefore, we are going to be looking for opportunities where you can reposition assets, where you can look at market-driven rents, capital investment programs, rates and things of that nature to be able to drive NOI growth. And to the extent, we think that the risk-adjusted return is sufficient for the risk that we're taking versus a triple-net-type investment, we're going to go ahead and make that investment and we see that in both the Chartwell and the MBK transactions.

[Daniel M. Bernstein:]

Okay. And then in terms of the overall strategy for investments, historically, HCP has made some really large transactions, CNL, Slough, HCR ManorCare. More lately, it seems like you're doing more singles and doubles and more relationship building, rather than just these really large transactions. Is that how I should think about the portfolio, the investment that you're going to go forward with? Or are you inclined to do large transactions as well, not that Chartwell isn't large, but multi-billions of dollars, or should I think of you more of doing these $100 million, $200 million, $300 million and still getting to that $2 billion a year investment pace? Is that the strategy at this point?

[Paul F. Gallagher:]

Yeah. We've had a good history of doing large opportunistic transactions. One of the things that we saw was the ability to increase our origination capability. We brought in asset management people to help free up P&L leaders and been out in the marketplace, actively looking at what I consider to be kind of medium-sized transactions and trying to generate a deal flow. And I think you've seen that over the past couple of quarters where we've been able to go out and consistently win transactions that we think pay us a good risk adjusted return.

[Daniel M. Bernstein:]

Okay.

[Lauralee E. Martin:]

And we're going to spend a lot of time talking about this at our Investor Day. One of the things that I said earlier is that it's important for us to have a consistent growth and you do that by both middle market and transformative. But again, it will be a topic for Investor Day.

[Daniel M. Bernstein:]

Okay.

[Lauralee E. Martin:]

We have two more questions in queue. We'll take those because we're getting past the hour.

[Operator:]

Thank you. Our next question comes from Todd Stender from Wells Fargo. Your line is now open.

[Todd Stender:]

Hi. Thanks for staying on. Just a follow-up with regards to the Philly MOB. I don't know if I missed this. How much of the building does Thomas Jefferson take up? How long is their lease? And can you just talk about their in-place rent versus market?

[Paul F. Gallagher:]

I don't know specifically. I think it's less than 50% of the building, but there's opportunity for them to expand into the space. The rent is probably deemed to be slightly below market, but not tremendously below market. And lease term goes out, I believe, well over 10 years.

[Todd Stender:]

Okay. Thanks. And then just to go here a little bit more about the economics, what's your CapEx budget for the building? And you can talk about the economic cap rate that you underwrote it at and also on an IRR basis.

[Timothy M. Schoen:]

Yeah. I think – listen, I think we could see some upside. I know we'll see some upside in that building. As Paul mentioned, it's in a mid to high-6% cap rate going in. We've got some upside and some vacancy in the building that could move it up into the low-7%s. There'll be some CapEx involved in that, but that low-7% cap rate would incorporate the additional CapEx, Todd, that we need to put into the building. So that's why...

[Paul F. Gallagher:]

Yeah, but the CapEx is not going to be a tremendous driver. Over the past several years, a significant amount of the whole building systems has been upgraded. The building's actually in very, very good condition. The one thing that's left to do is an elevator upgrade that's factored into our particular numbers. So I don't think this is going to have a different CapEx profile than our other MOBs on an ongoing operating basis or other acquisitions that we make. It's not going to be a significantly different type economic cap rate type profile.

[Todd Stender:]

Okay. I ask because it's arguably one of your largest MOBs, so just, kind of, where on the risk spectrum does this sit versus, say, 100,000 square-foot building?

[Paul F. Gallagher:]

We feel really good about the relationship that we have with Thomas Jefferson University. We had extensive discussions with them in advance. They liked this particular building. They view it as a way for them to expand and to be adjacent to their particular university. So with both them and the docs that work at the university, we see the upside in being able to convert office rents into MOB rents going forward. And that's really going to be the economic play for us.

[Lauralee E. Martin:]

And they were very excited to have a true owner of healthcare and medical office buildings come in versus a landlord that had been focused in a different area. So I think the relationship will be nothing, but positive and Philadelphia is a very, very robust medical office center.

[Todd Stender:]

Thanks.

[Timothy M. Schoen:]

As Paul said, Todd, it's anchored by over 50% with Thomas Jefferson and it is a complement as well to our 3535 Market Building that we purchased last year giving us – as Paul – again, reiterating Paul's remarks, that we have 1.1 million square feet in that market today.

[Todd Stender:]

Thanks for that. And just finally who's going to manage the building, I guess, with the 50%, that's going to be multi-tenanted physician?

[Paul F. Gallagher:]

One of our large national operating relationships that we have in the MOB space.

[Todd Stender:]

Okay. Thank you.

[Operator:]

And our last question comes from Mike Mueller from JPMorgan. Your line is now open.

[Michael W. Mueller:]

Actually, I tried to get out of the queue. My questions were answered, but thanks.

[Paul F. Gallagher:]

All right. Thanks, Mike.

[Lauralee E. Martin:]

Okay. Well, thank you, all, for joining us this morning. We are very excited about our upcoming Investor Day and hope you'll be joining us on May 11 at the New York Stock Exchange. We will be profiling our business leaders, our segment strategies, our growth opportunities, as well as celebrating 30 years as a public company. Thank you again for this morning.

[Operator:]

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