Healthpeak Properties, Inc.
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

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

[John Lu:]

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

[Lauralee E. Martin:]

Thank you, John, and welcome to HCP's 2015 second quarter earnings call. Joining me this morning are Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations. Our dedicated HCP team delivered a solid productive quarter across many fronts. Our investment activity continues at a strong pace with $1.9 billion of acquisitions and developments so far this year, already matching the total achieved in 2014. Our cash same-store growth outlook continues to strengthen, allowing us to raise guidance for the year, which Tim will cover in a few minutes. HCR ManorCare's normalized year-to-date EBITDA results are 2.6% above prior year and ahead of their budget. Their normalized fixed charge coverage was 1.11 times for the trailing 12 months ending June 30, representing a three basis-point improvement, but more indicative is the run rate fixed charge coverage, which for the second quarter was 1.18 times. Both coverage ratios exclude any benefit from the pending asset sale. The asset sales are progressing ahead of expectations driven by robust interest from a large group of buyers. We have 46 out of 50 properties under letters of intent and we expect to generate total proceeds between $300 million and $350 million, which represent the higher end of our original guidance range. The sales were closed in multiple tranches with the first half completed last Friday and three-fourths of the total proceeds expected during the balance of this year. In addition to the pending HCR asset sales, we are taking advantage of attractive market pricing to recycle capital to fund our completed investments. Tim will discuss our balance sheet details in a few minutes. And proudly, we continue to demonstrate our leadership and commitment to sustainability. Newsweek's 2015 U.S. 500 Green Rankings rated HCP second in the entire REIT industry, and placed us among the top 10% of the 500 largest publically-traded U.S. companies. With that overview, let me highlight our investment transaction. We closed on $1.4 billion of acquisitions during the quarter, bringing our total year-to-date investments to $1.9 billion across our diversified sectors with an attractive blended cash yield of 6.7%. Beginning with senior housing, we closed the acquisition of 35 private pay senior housing communities with Chartwell ahead of schedule for $847 million, with a year one projected cash yield of 6.6%. This transaction expanded our Brookdale partnership through a 90

[Timothy M. Schoen:]

Thank you, Lauralee. Following an active quarter led by $1.4 billion in acquisitions, we are raising guidance on all fronts including cash same-property performance, FFO and FAD, which I will discuss shortly. Let me start with our second quarter results. FFO, as adjusted, for the quarter was $0.79 per share and FAD was $0.69 per share, representing year-over-year growth rates of 5% and 10% respectively. The increases were driven by accretive external growth during the last 12 months, a gain from monetizing our senior housing development project in Germantown, Tennessee, offset in part by reduced rent from the HCR ManorCare portfolio effective April 1. NAREIT FFO for the quarter was $0.65 per share, which included several items representing a net impact of $0.14 per share as follows

[Operator:]

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

[Vikram Malhotra:]

Thank you. Could you maybe just elaborate a bit more on comments about your Brookdale assets and kind of how they may – the growth there may be a bit different from kind of the weakness Brookdale has seen?

[Timothy M. Schoen:]

Yeah, Vikram, it's Tim, let me take that. Our Brookdale portfolio was roughly about 24% of the company. Half of that is triple-net leases, with obviously a strong creditworthy counterparty and the other half is our RIDEA exposure. And as we mentioned, three out of the four of those RIDEA portfolios are performing at or ahead of plan, and that's because three of those portfolios had no transition issue, those are being operated by Brookdale today. And then, the remaining one is our RIDEA 2 portfolio, that is obviously undergoing the transition from Emeritus to Brookdale. And when I think about it, it's actually similar to what we saw in RIDEA 1, where we transitioned from Horizon Bay to Brookdale and there were some operating declines in the first nine months to 12 months, but it's also similar in the RIDEA 1 portfolio and the fact that we transitioned and upgraded the operations. The portfolio was non-stabilized and had lower margins, and we were investing capital to improve the asset's competitive advantage in the marketplace. And then finally, obviously Emeritus – or I'm sorry, Brookdale is actually in the final stages of their transition. They've got nearly all of their EDs in place. There is only – they're always seeking two EDs in 49 of our communities. They're in the final stage of the integration where they're focusing on their care assessment and labor and service alignment. And as I mentioned, we started to put CapEx into 20 of the 49 properties to upgrade the performance of those assets. So, I guess that's a bit of a long answer, but really, it's the only RIDEA 2 portfolio that we've got any performance concerns left, which is roughly about 3% of our portfolio.

[Vikram Malhotra:]

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

[Timothy M. Schoen:]

That's probably around, on average, around $20 – about $2,000 a unit across our RIDEA portfolio and probably $2,500 to $3,000 in RIDEA 2.

[Vikram Malhotra:]

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

[Timothy M. Schoen:]

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

[Vikram Malhotra:]

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

[Timothy M. Schoen:]

Yeah, I'll let John take that.

[John Lu:]

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

[Vikram Malhotra:]

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

[John Lu:]

Yeah. Just some minor characterization between revenues and contract expenses, but again, the way I'll think about it is the 5% top-line growth, that drives the 9% same-store for the quarter.

[Vikram Malhotra:]

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

[John Lu:]

Yeah. Again, it's the characterization between revenue and expenses, it's about $800,000 straight from in a (22

[Vikram Malhotra:]

Okay. Okay. Thank you.

[Operator:]

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

[Nick Yulico:]

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

[Timothy M. Schoen:]

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

[Nick Yulico:]

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

[Timothy M. Schoen:]

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

[Nick Yulico:]

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

[Lauralee E. Martin:]

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

[Nick Yulico:]

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

[Lauralee E. Martin:]

I should call it a hearing, technically it's a hearing.

[Nick Yulico:]

Okay. Because what I was going to ask was whether there is any indication at this point of whether the parties might be heading towards a resolve – resolution of this without going to trial some sort of settlement?

[Lauralee E. Martin:]

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

[Nick Yulico:]

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

[Timothy M. Schoen:]

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

[Nick Yulico:]

Okay. Thanks everyone.

[Timothy M. Schoen:]

Yeah.

[Operator:]

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

[Jordan Sadler:]

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

[Timothy M. Schoen:]

Yeah. I guess let me start on a macro level and I'll sort of drill down to the real estate. Jordan, this transaction is a pretty unique opportunity to expand HCP's relationship with; one, an A-rated hospital system; and two, the largest not-for-profit system in Southeast Texas. Memorial Hermann has 13 hospitals and has the largest market share in Houston, as Lauralee mentioned. And they're uniquely positioned to serve the fifth largest MSA in the country. Following the portfolio acquisition, HCP will now have buildings on six of Memorial Hermann's campuses. We'll have a total of 14 buildings, including two that are under development, will be their largest third-party landlord. The recent acquisition that Lauralee mentioned is a 5.7% – and I want to stress, economic cap rate, we did say, it is on a triple-net basis, but I think it's important to note that that triple-net structure of the lease eliminates the lease of – the risk of leasing, tenant improvements and any CapEx costs, and provides relatively attractive risk-adjusted return given that it's an A-rated counterparty. If people get chance, the quality of these assets are highlighted in the page 12 of our supplemental today, so it'll give you a chance to take a look at it. But in short, the transaction represents an opportunity to expand a long-term relationship and align our interest with the number one hospital system in one of the largest Metropolitan areas of the country. I think that's the type of transaction we should be doing.

[Jordan Sadler:]

And what would you expect in terms of return on the development and will it be added to a master lease or how that..?

[Lauralee E. Martin:]

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

[Timothy M. Schoen:]

And as we look at expanding other campuses, and then, Lauralee mentioned the returns, mid-8%s to high-8%s, those will come with anywhere between a third and a half pre-leased when we look at putting those buildings or start to go vertical on those buildings. So, anywhere from really 25% to 40% pre-leased.

[Lauralee E. Martin:]

On-campus.

[Timothy M. Schoen:]

On-campus.

[Jordan Sadler:]

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

[Timothy M. Schoen:]

Yeah. We're seeing single-floor users. We're seeing multi-floor users. Both of those buildings, about 253,000 feet, and that was designed to be a multi-tenant building. But we're seeing anything from three to four-floor users, which would take an entire building, to single floor users and I would expect that we'll probably end up with three to four tenants there at or above the rents that we looked at in pro forma (30

[Jordan Sadler:]

Okay. Thank you.

[Operator:]

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

[Juan C. Sanabria:]

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

[Lauralee E. Martin:]

Right. We discussed HCR and we continue to be pleased that they're ahead of their budget. Just some more details on the stats (30

[Juan C. Sanabria:]

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

[Lauralee E. Martin:]

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

[Juan C. Sanabria:]

Thanks.

[Operator:]

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

[Smedes Rose:]

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

[Lauralee E. Martin:]

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

[Timothy M. Schoen:]

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

[Smedes Rose:]

Okay. That's it. Thank you.

[Operator:]

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

[Michael Carroll:]

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

[Timothy M. Schoen:]

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

[Lauralee E. Martin:]

And at the same time, improve the overall capital structures for both Tandem and quite honestly, the economic position for ourselves.

[Michael Carroll:]

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

[Timothy M. Schoen:]

Lower rate as well.

[Lauralee E. Martin:]

Lower rate.

[Timothy M. Schoen:]

Lower rate as well.

[Michael Carroll:]

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

[Timothy M. Schoen:]

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

[Michael Carroll:]

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

[Lauralee E. Martin:]

Well, I think if you look at hospitals, we continue to see that hospitals systems view their acute hospitals as core to their strategy. But as they do execute on their ambulatory strategies, they are pushing out more services into their MOBs, it both gets them to lower cost settings. It definitely builds the relationships with their doctors, and particular if the MOBs are in campus. So, there is recent benefits to them, now monetizing their MOBs. Part of it is their traditional capital sources are limiting what they can put into technology. You're buying doctor practice facilities, this is a really effective way, we believe, for them to raise capital. But because hospitals are very much about control, who owns this real estate, long-term ownership of this real estate, owners of this real estate that understand their business and the need for really effective relationship with their doctors puts in a stronger position than others. So, the question, did it go to market? Yes, but there was more than price that determined Memorial Hermann's decision.

[Timothy M. Schoen:]

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

[Michael Carroll:]

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

[Timothy M. Schoen:]

Yeah. We're active across the MOB portfolio.

[Michael Carroll:]

Gone through sale leasebacks with the existing health systems?

[Timothy M. Schoen:]

Sale leasebacks, development opportunities, both – on both fronts.

[Lauralee E. Martin:]

And just outright ownership and market leases.

[Michael Carroll:]

Great. Thank you.

[Operator:]

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

[Daniel M. Bernstein:]

Hi. Good morning.

[Timothy M. Schoen:]

Good morning, Dan.

[Daniel M. Bernstein:]

Hi. So, in this morning's call, Health Care REIT, they talked about increasing construction cost across the board. And I just wanted to hear your thoughts on that, particularly since you said you'll be picking up some construction in life sciences, and also have you seen any pullback in construction in the senior housing space as a result?

[Lauralee E. Martin:]

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

[Timothy M. Schoen:]

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

[Daniel M. Bernstein:]

Does this seem like market rates are – construction costs may be going up, but market rates are going up. So the IRRs of the development are about the same, would that be correct assumption?

[Timothy M. Schoen:]

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

[Lauralee E. Martin:]

Yeah, and we're able to price the lab improvements at the time we see a lease. So, you can match those up pretty closely.

[Daniel M. Bernstein:]

Okay.

[Timothy M. Schoen:]

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

[Daniel M. Bernstein:]

Good. Lots of good color. Thank you. In regards to Brookdale, I noticed the lease coverage deteriorated a little bit, I assume that some seasonality and some of the integration and it may deteriorate a little bit further from seasonality and integration when we come out with the third quarter numbers. How are you thinking about the lease coverage there? And what rights do you have and do they have any purchase – do they have any purchase options left on those assets and if you can give some details on that?

[Timothy M. Schoen:]

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

[Daniel M. Bernstein:]

Okay, okay.

[Timothy M. Schoen:]

And to answer your question, there is none with Brookdale.

[Daniel M. Bernstein:]

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

[Lauralee E. Martin:]

Well, I think just for starters, some markets are still very capital-liquid. And anytime that happens, asset pricing, it's tough to make it (43

[Timothy M. Schoen:]

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

[Daniel M. Bernstein:]

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

[Timothy M. Schoen:]

Okay.

[Operator:]

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

[Kevin Tyler:]

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

[Timothy M. Schoen:]

Yeah. Well, let me – as I just mentioned, there was a little bit of coverage deterioration, a basis point or so on the triple-net leases, but nothing material. And with regards to RIDEA 1, we were up 180 basis points in occupancy. Sequentially, we were up 20 basis points. Year-over-year, we were up 100 basis points. Sequentially, we were up 20 basis points. Rates year-over-year were up 3.2%. Sequentially, they were up 1.2% on RIDEA 1. And then on our margins, year-over-year, they were up 160 basis points. Sequentially, they were down 50 basis points. But across the board, pretty solid performance. And I think that's a function of the fact that we have very little exposure to the assets that are being integrated from Emeritus to Brookdale from a RIDEA perspective. And even though, although the occupancy had deteriorated in our RIDEA 2 portfolio about 110 basis points, NOI was actually up sequentially, and that's really a function of the cost savings and some of the synergies that Brookdale; one, mentioned on their call; and two, we actually saw in our portfolio.

[Kevin Tyler:]

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

[Timothy M. Schoen:]

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

[Lauralee E. Martin:]

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

[Timothy M. Schoen:]

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

[Kevin Tyler:]

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

[Lauralee E. Martin:]

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

[Kevin Tyler:]

Thanks for the thoughts.

[Operator:]

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

[Omotayo T. Okusanya:]

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

[Timothy M. Schoen:]

We don't – no. I don't think so, Tayo. That's not something we would look at right now.

[Omotayo T. Okusanya:]

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

[Timothy M. Schoen:]

Yeah. To your latter question, the answer is yes. I think 10-year debt, you're in the low-4%s for unsecured debt (50

[Omotayo T. Okusanya:]

Okay. I mean, it sounds like a lot...

[Timothy M. Schoen:]

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

[Omotayo T. Okusanya:]

It's in the low-4%s. Okay. And that hasn't kind of created any impact on cap rates yet on any of the healthcare property types?

[Timothy M. Schoen:]

No. We talked a little bit about that at NAREIT, but we think that – if obviously there is a tick-up in interest rates, that could affect pipelines and be a little bit of a price discovery. Think about what we saw in May of 2013 when Bernanke introduced tapering into our lexicon and we had a period of time there in the middle part of 2013, where pipelines slowed down. So, obviously if you get a change in interest rates, we think there'll be a period of price discovery and potentially some slowdown, but obviously, interest rates the last of couple weeks have gone the other way.

[Omotayo T. Okusanya:]

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

[Timothy M. Schoen:]

Yeah, that's a good question, Tayo. It's actually that FX remeasurement that we talked about. It's just related to foreign exchange remeasurement. So, there'll be some volatility in that for the – about 10% of our equity ownership in real estate in the UK.

[Omotayo T. Okusanya:]

Okay.

[Timothy M. Schoen:]

That bounces around (51

[Omotayo T. Okusanya:]

Okay. And about how much of that was in that line, that's the $0.02 you were talking about?

[Timothy M. Schoen:]

Yeah. That's most of it, Tayo.

[Omotayo T. Okusanya:]

Okay.

[Timothy M. Schoen:]

Usually in that line item is $1 million plus or minus.

[John Lu:]

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

[Omotayo T. Okusanya:]

Okay. Thank you very much.

[Operator:]

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

[Richard C. Anderson:]

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

[Timothy M. Schoen:]

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

[Richard C. Anderson:]

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

[Timothy M. Schoen:]

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

[Richard C. Anderson:]

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

[Timothy M. Schoen:]

No. Yeah. If you recycle that capital, I would think that with the acquisitions, think about that on – $0.03 on an FFO basis on a run rate and $0.04 on an FAD basis.

[Richard C. Anderson:]

To the downside, you mean?

[Timothy M. Schoen:]

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

[Richard C. Anderson:]

Oh, I see. Okay, okay. Okay, got you. All right. Thank you.

[Timothy M. Schoen:]

I think what you're trying to ask, I think which is, with the stabilized capital structure and without the benefit of some temporary leverage, what the run rate and benefit of our acquisitions would be?

[Richard C. Anderson:]

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

[Timothy M. Schoen:]

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

[Richard C. Anderson:]

Okay. And that starts this quarter?

[Timothy M. Schoen:]

Yeah. We expect to see that. I think for the year, you should expect it to be in that 5% range.

[Richard C. Anderson:]

Okay. You guys...

[Timothy M. Schoen:]

I would say in the – yeah, probably the 6% to 8% range for the year, Rich.

[Richard C. Anderson:]

Including the 9.2% for this quarter?

[Timothy M. Schoen:]

Yes.

[Richard C. Anderson:]

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

[Timothy M. Schoen:]

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

[Lauralee E. Martin:]

We're up 20%...

[Timothy M. Schoen:]

Yeah.

[Lauralee E. Martin:]

...from just recently. So yes, we love the business.

[Timothy M. Schoen:]

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

[Richard C. Anderson:]

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

[Lauralee E. Martin:]

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

[Richard C. Anderson:]

Okay. Fair enough. Thank you.

[Operator:]

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

[Michael W. Mueller:]

Yeah. Hi. A couple things. First, have there been any organizational adjustments or plan changes following Paul's departure?

[Lauralee E. Martin:]

Yeah. Actually, this gives me an opportunity to publicly thank Paul for his 12 years of service, which I did not get to do with his departure. But to answer that, let me just sort of level-set where HCP is, and as a result, how we think about talent and our needs. And for those of you that were able to join us at Investor Day, we clearly profiled our P&L leaders. But more specifically, if I look at the $1.9 billion of acquisitions we've done to-date, those were investments that were generated and structured and underwritten by those P&L leaders. And if I can brag on them for just a moment, so you start to get to know some of their names better. But in the senior housing space, Kendall Young, and remember, we've been adding acquisition support as well into the team. So Darren Smith and the rest of the senior housing team are the ones responsible for growing the Brookdale relationship, the Chartwell transaction, adding the MBK relationship, harvesting the Formation relationship development project. There's been a lot of questions on the medical office business, but Tom Klaritch and Glenn Preston and our medical office team in Nashville have grown that business over 20%. And you can really see their strategic focus. They target markets like a Philadelphia or all of a sudden over a million square feet. They've targeted premier hospital systems like Memorial Hermann, who have entrusted us with their MOB portfolio. And life science, we got Jon Bergschneider and the life science team, but you can see that they're focused on developing and leasing and building that portfolio where we're now in excess of 98% occupancy. And internationally, John Stasinos, Andrea Auteri who is in London, Taylor Sakamoto. This is the international team that has converted the HC-One debt into sale leaseback, have added the relationship in Maria Mallaband, and have really positioned us with two premier operators to grow in the UK caring home process. So, we've done a lot with talent and empowering those teams. In terms of our investment process, that process is really established and proven within HCP. The investment committee is now chaired by Tim Schoen. I know all of you have his confidence. He has your confidence. So, this is a very long way to say that I think the ship is sound, and it's sailing quite confidently. So, your specific question, we will continue to add talent into our business teams. And what do I think about talent? We need talent that has operator confidence, talent that knows our industry specialties, talent that has market reputation and presence, which net-net means we can accelerate our access to investment opportunities and continue HCP's success.

[Michael W. Mueller:]

Okay. So, not specifically trying to replace ball?

[Lauralee E. Martin:]

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

[Michael W. Mueller:]

Okay. And one other quick one, going back to the ManorCare sales, is anything closing in the third quarter?

[Timothy M. Schoen:]

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

[Michael W. Mueller:]

Okay. That's it. Thank you.

[Timothy M. Schoen:]

Yeah. Thanks.

[Operator:]

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

[John P. Kim:]

Thanks. Good morning. I had a follow-up on the Tandem mezz loan. It sounds like it's pretty expensive debt for them to borrow just to reduce the rate on the senior net – on the senior debt. So, are there specific cash flow drivers for the company that gives you confidence they will repay this loan within three years?

[Timothy M. Schoen:]

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

[John P. Kim:]

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

[Lauralee E. Martin:]

Yes. They're current on their debt. And we did our impairment as we talked about relative to what it happened in terms of discounts on the trades, but we've continued to feel confidence in our investment.

[John P. Kim:]

So what happens from an accounting point of view, you reverse this impairment when the principal gets repaid or it's accounted as a gain when it gets repaid? How does that work?

[Timothy M. Schoen:]

Yeah. I mean, look those have a fairly short fuse because it's a marketable security. But to the extent that you see their performance improve or their – we look that there's going to be an event, we would accrete that back up to the par value, John.

[John P. Kim:]

Okay. Great. Thank you.

[Timothy M. Schoen:]

Yeah.

[Operator:]

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

[Lauralee E. Martin:]

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

[Operator:]

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