Healthpeak Properties, Inc.
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the Third Quarter 2014 HCP Earnings Conference Call. My name is Ashley, and I'll 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 call is being recorded. Now, I’d like to turn the presentation over to your host for today's conference, John Lu, Senior Vice President. You may go ahead, sir.

[John Lu:]

Thank you, Ashley. 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 2013. 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 items are defined in our supplemental information package. I will now turn the call over to our CEO, Lauralee Martin.

[Lauralee Martin:]

Thank you, John. Good morning. And welcome to HCP's 2014 third quarter earnings conference call. Joining me this morning are Paul Gallagher, Chief Investment Officer; Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations. It is now one year since I joined HCP as CEO. As I evaluate what we have accomplished, I'm very proud to highlight four major areas of success. First, our diversified core portfolio continues to produce solid recurring growth, demonstrated by these quarters and year-to-date same-store increase of 3.2%. Second, our acquisition teams have executed on $2 billion of accretive investments to-date, providing attractive risk-adjusted returns and accelerating our earnings growth in both, 2014 and ’15, and accomplishment particularly remarkable in today’s highly competitive acquisition marketplace. Third, we address several potential future earnings speed bumps, including converting legacy Emeritus above market leases to a RIDEA structure on an economic breakeven basis and the elimination or extension of over 40% of the operator purchase options that previously encumbered our real estate portfolios. Finally, we continue to be a global leader in sustainability in the healthcare sector, achieving greater rankings and better scores year-after-year. Now let me turn the call over to Tim.

[Tim Schoen:]

Thank you, Lauralee. Let me start with our third quarter results. Our same property portfolio generated 3.2% cash NOI growth, compared to the third quarter last year. The results benefited from contractual rent increases and 150 basis point occupancy gains in both our existing RIDEA senior housing and life science portfolios, offset in part by lower performance in our medical office sector. Paul will discuss our results by segment in a few minutes. For the quarter we reported FFO of $0.82 per share, which included a $0.07 per share net benefit from the Brookdale transaction that consisted of an $0.08 per share gain resulting from the creation of a new 49 property RIDEA senior housing portfolio, as described in today's earnings release, partially offset by $0.01 per share of transaction and closing costs. Excluding the $0.07 per share favorable transaction-related items, FFO as adjusted for the quarter was $0.75 per share and FAD was $0.65 per share. Our third quarter 2013 results included a $0.05 per share gain from the par payoff of our U.K. Barchester debt investment, absent this gain, FAD per share increased 4.8% year-over-year. Next, our investment transactions and balance sheet, during the third quarter we closed an $834 million of investments. That consisted of, first, $588 million, representing our 49% ownership in the $1.2 billion entry fee CCRC portfolio as part of the Brookdale transaction, second, $179 million to acquire and develop three medical office buildings, and third, $67 million of investments in construction and other capital improvements. Subsequent to quarter end, in October, we acquired three additional care homes in the U.K. for $20 million, expanding our triple net lease portfolio operated by Maria Mallaband to a total of 20 assets. Yesterday, we announced a 395 million pound sterling or $630 million U.K. debt got investment secured by care home portfolio. We fund $580 million at closing, expected later this month. Our debt investment earns an annual effective yield of 8.2% and is immediately accretive to our annual FFO and FAD run rate by $0.03 per share based on the company's current leverage profile. Combined, these accretive acquisitions bring our year-to-date completed and committed investments to $2 billion, which provide a blended year one cash yield of 7.8% and will meaningfully add to our earnings growth next year. Turning to financing activities in our balance sheet. In August, we raised $800 million of 3.875% senior unsecured notes due in 2024. Proceeds were used to pay down our Q2 revolver balance and fund Q3 acquisitions. Our balance sheet continues to be strong as highlighted by our credit metrics at the end of the third quarter, including 40.6% financial leverage in line with our long-term target with 98% of our debt financed on a fixed rate basis. A 6.1% secured debt ratio, 5.2 times net debt-to-EBITDA and $2 billion of immediate liquidity from our revolver and cash on hand. On the debt maturities front, looking ahead to the end of 2015, we have $700 million of scheduled maturities at a blended interest rate of 6.2%, representing accretive refinancing opportunities in the current interest rate environment. Finally, our 2014 guidance, we are tightening our projected full year cash same-property performance growth to range between 3% to 3.5%, which is slightly below our last forecast, primarily due to lower performance in our medical office and Sunrise portfolios. We are increasing our 2014 NAREIT FFO guidance by $0.02 per share to a range between $3.03 and $3.09 per share. The increase is driven by $0.02 accretive benefit from our investment activities mentioned earlier and $0.01 higher income from Brookdale-transaction related items, partially offset by $0.01 due to lower forecasted same-store performance. We are raising our 2014 FFO as adjusted guidance by $0.01 per share to range between $2.98 and $3.04 per share, driven by our investment activity, but excluding transaction related items that have a net positive benefit of $0.05 per share for the year. We are raising our 2014 FAD guidance by $0.02 per share to a range between $2.52 and $2.58 per share, driven by our accretive investment activities but also including increased contribution from nonrefundable cash entrance fees related to our CCRC joint venture portfolio. With that, I will now turn the call over to Paul. Paul?

[Paul Gallagher:]

Thank you, Tim. As announced yesterday in our press release, HCP has provided a commitment to Formation Capital to finance approximately $630 million for the acquisition of NHP, a company that owns 273 nursing and care homes, including 226 homes operated by HC-One, the third largest operator of nursing and residential care homes in the United Kingdom. The financing with a five-year term and all in blended pricing to achieve an 8.2% yield to maturity includes 362.5 million pounds to fund a portion of the acquisition consideration and 32 million pounds to fund future capital improvements. The NHP portfolio located primarily in northern England and Scotland has a current occupancy of 88% and sufficient in place EBITDA to produce a fixed charge coverage of 1.5 times. The transaction provides HCP with an attractive risk-adjusted return at 11.4% EBITDA yield to the last dollar invested and allows us to expand our relationship with Formation Capital while providing optionality in a rate of first offer to provide financing for any additional properties that borrower may acquire. HCP’s year-to-date committed investments totaled $2 billion upon closing the NHP transaction, which is expected later this month. Now let me review the portfolio of third quarter performance. Senior housing, occupancy for our senior housing platform was 87.2%, down 10 basis points from the prior quarter but up 10 basis points from the prior year, driven by our same property RIDEA product portfolio where occupancy has increased 150 basis points and same property NOI growth is nearly 6% year-to-date. Same property cash flow coverage for the portfolio was 1.12 times, a decline of 1 basis points from the prior quarter. Same property performance increased 3.9% driven by contractual rent steps and the strong performance of our same property RIDEA portfolio. We continue to closely monitor new construction in our markets. Our RIDEA same property portfolio has a large concentration of independent living units in Houston, a market that has seen increased development. Our Houston RIDEA properties are performing well with 280 basis points year-over-year and 170 basis point sequential increase in occupancy. We attribute the strong performance to revenue-generating capital on the investments we made in 2013 and 2014, up $10 million to upgrade the assets. We are in the process of finalizing our capital plans for 2015 with Brookdale for our entire RIDEA portfolio and anticipate spending in excess of $35 million in 2015 in revenue enhancing CapEx that includes refreshes, unit conversions and upgrades. As of September 30, 2014, we have $133 million in construction loans outstanding related to seven senior housing developments and $50 million joint venture with Formation Capital. Post-acute/skilled nursing. HCR normalized fixed charge coverage for the trailing 12 months ended September 30, 2014 is 1.10 times, down 2 basis points from June 30, 2014's coverage of 1.12 times discussed on the last call. Normalized coverage excludes the impact of $30 million in insurance reserves related to prior period liability claims. Including these reserves, the reported September 30, 2014 coverage is 1.05 times. HCR continue to achieve increased managed care census in the third quarter versus prior year driven by its quality outcomes as a preferred post-acute provider. However total census and mix decreased slightly, impacted by continued industrywide challenges including fewer hospital admissions, shorter average patient length of stay and the increase shift to Medicare Advantage Plans. Additionally, HCR's hospice and homecare business continued to deliver near double-digit growth year-to-date driven by significant census gain. While we expect a shift towards Medicare Advantage to continue, HCR should benefit positively from the 2% increase in Medicare and the 1.4% hospice rate increase that become effective October 1st, along with forecasted improvements in hospital admissions on a year-over-year basis. Additionally, HCR expects to maintain strong cost controls, including the launch of the second round of cost reductions effective in the fourth quarter. HCR continues to invest in this business and ended the quarter with a $137 million of cash on hand. Same property performance for our post-acute/skilled nursing portfolio was 3.4% for the quarter, driven by contractual rent steps. Hospitals, same property performance increased 2.8% due to rent steps and increase ad rent at our HCA Medical City Dallas Hospital. Cash flow coverage declined 12 basis points from the prior quarter to 5.32 times. Medical office buildings, same property performance was impacted by the vacancy of a multi-location tenant, resulting in an increase of just 0.3%. Although same property performance was off this quarter, we expect full year same property performance to be 2%. Occupancy for our total medical office portfolio increased 10 basis points from the prior quarter to 90.8%. During the quarter, tenants representing 587,000 square feet took occupancy. The average term for new and renewal leases was 67 months and the retention rate was 77%. Excluding 435,000 square feet of month-to-month leases, we have 678,000 square feet of scheduled expirations for the balance of 2014. We've executed leases to address the 46% of these expirations. Additionally, we've executed 500,000 square feet of leases for vacant space and 2015 expirations that have yet to commence. On October 17, 2014, we executed a 15-year lease with UC Davis for the entire 92,000 square feet redevelopment project in Folsom, California. In August, we commenced construction on the $29 million medical office building with a projected return of cost of 8.8%. The MOB will be on the campus of Sky Ridge Medical Center in Denver, Colorado, which is owned and operated by HCA and will complement our two existing MOBs on the same campus, which are 96% occupied. We have pre-leased 31% of the 118,000 square-foot building to HCA, with strong interest in the remaining square footage. The Sky Ridge Development represents the second development project in its many quarters that will source through our long-term relationships with hospital operators. During the quarter, we acquired two medical office buildings, totaling 465,000 square feet for $150 million, including a 436,000 square foot MOB located in Philadelphia's University City Science Center that is 98% leased to two credit tenants, the University of Pennsylvania and Children's Hospital of Philadelphia. Life science, same property performance grew 4% in the quarter, driven by rent steps and an increase in occupancy of 150 basis points from the prior year to 93.6%. Overall, occupancy for the life science segment is 93.7% and represents an all-time high. During the quarter, tenants representing 565,000 square feet took occupancy, with the average lease term of 98 months. Leasing for the quarter totaled 387,000 square feet, bringing the year-to-date total leasing to over 1 million square feet, including three renewals that addressed 50% of our 2015 expirations. Scheduled expirations for the balance of 2014 are a 102,000 square feet, of which 45% has already been leased to new tenants. Additionally, we have executed 244,000 square feet of new leases that have yet to commence. During the quarter, we completed a second phase of redevelopment on the $24 million, 77,000 square foot, Carmichael facility in Durham, North Carolina that is 100% leased to Duke University. Life science development consists of 115,000 square feet in San Diego that is 100% leased and 31,000 square feet related to our Cambridge Massachusetts redevelopment project that is 91% leased. We continue to see strong demand for lab space, particularly in the Bay Area where rents are rising as immediately available inventory and lease concessions shrink. This is evidenced by our successful leasing of the 30,000 square-foot building in South San Francisco subsequent to quarter end. HCP will spend $12.8 million to reposition the updated vacant buildings to first-class lab facility. The project will be completed in Q2 2015 and deliver a total stabilized return on cost of 7%. With that, I’d like to turn it over to Lauralee.

[Lauralee:]

Thanks Bob. Our diversified portfolio today is well balanced between long-term triple net leases and operating businesses. As a result, we are positioned to deliver continued strong internal growth from both contractual rent increases and participation in market growth. Let me share some perspectives on our portfolio and in the following four categories. First, 31% of our portfolio representing 333 postacute and senior housing properties is master leased to HCR ManorCare, a triple net lease with attractive rental increases. While trailing 12-months coverage has not improved, HCR continues to meet their lease obligations, invest in our facilities and their business and maintain a healthy liquidity position. As we move into 2015, following an extended period of negative headwinds, positive trends just discussed by Paul appear to be coming. Our relationship with Paul Ormond and his management team is positive and open. We continued to work with HCR in a number of areas to improve lease coverage, such as supporting their exit from underperforming property and providing expansion capital for the highly successful Arden Court concept. The next 32% of our portfolio is comprised of triple net leases across senior housing, post-acute and hospital, with an average remaining lease term of 11 years. This pool of assets provides contractual predictable rent growth, with the increased safety and stronger coverage as evidenced by our heat map. Third, now moving to the operating business front. We own and operate 22 million square feet in our medical office and life science platform, which accounts for 27% of our NOI. Anchored in the land and entitlement constrained Bay Area, our life science business continues to benefit from favorable market fundamentals. Our recent leasing success has led to our all-time high occupancy and is expected to produce even stronger same-store growth next year, driven by scheduled rent commencements. Additionally, we have strategically located in both the Bay Area and San Diego representing attractive development opportunities. Our medical office portfolio is 94% hospital affiliated giving us diverse relationships with over 200 hospital systems. This year through September with our increased acquisition teams and focus on hospital relationships, we have invested $210 million and have underway two development projects totaling $50 million. This amount accomplished in nine months this year represents 70% of the total medical office investments made in the prior six years when we cumulatively invested only $370 million. Initial cap rates on this year’s acquisitions are over 7% and development yields exceed 8%. Finally, the Brookdale transaction this quarter reconstituted a significant portion of our senior housing portfolio, increasing our RIDEA senior housing operating business to 10% of our portfolio. These communities have meaningful growth potential over the next few years given their current occupancy in the low-to-mid 80%. As Paul mentioned, we are working with Brookdale to invest capital to accelerate the upside. In addition to the strong well-balanced portfolio we have in place, our transaction pipeline continues to be robust. As Tim described earlier, our acquisition financing commitment to Formation Capital helped bring our year-to-date accretive investments to a total of $2 billion, encompassing four property sectors using a variety of invest vehicles including triple-net leases, RIDEA, roundup development and debt investment, three quarters of which were sourced from relationships. Our UK portfolio now totals $1 billion having assembled a critical mass of debt and real estate investments, anchored by significant relationships with three premier care home operators; Four Seasons Health Care, Maria Mallaband, and HC-One. We are pleased to announce that in January we will be opening a London office led by [Andrea Audheri] (ph) who will be joining us as Senior Vice President of Acquisitions to help us manage and build on our active deal pipeline in the UK. Andrea comes to us after having spent over a decade at Goldman Sachs, where his responsibilities included coverage of the UK and European financial sponsors and health care operator landscape. Operator, we are now ready to open the call for questions.

[Operator:]

(Operator Instructions) Our first question comes from Emmanuel Korchman of Citigroup. Your line is open.

[Emmanuel Korchman:]

Good morning. Lauralee, if we look at your comments on ManorCare, EBITDA there declined again. You talk about attractive rental increases, which is good for HCP but bad for the coverages and then you also talk about positive trends coming. Those sort of all work together and against each other, but then you also mentioned exiting from underperforming assets. So would those be exits from assets of HCP owns and how do you kind of think about that in terms of loss NOI and also what’s the magnitude of sort of assets that are underperforming that if they are losing, coverage will go up?

[Lauralee Martin:]

Well, the one asset that I mentioned was an asset that we owned. They have also exited a couple assets that we don't own. Typically the profile of those assets is there a drag on their operations, which means clearly they are not contributing to coverage or positive impact to our portfolio. So we would work with them as we see those opportunities and they have been able to exit those and achieve good exit prices on them.

[Emmanuel Korchman:]

But you are saying that they would exit operations or you would sell the assets and they would exit operations?

[Lauralee Martin:]

Both.

[Emmanuel Korchman:]

Okay. And then on the -- Paul on the Philadelphia, maybe I missed this, but what was the pricing, maybe the lease structure there and was that a competitive situation or did you get that off-market?

[Paul Gallagher:]

It was a competitive situation. It’s a building that’s multi-tenant primarily leased to the few tenants that I talked about. And I think Lauralee talked about prices for our MLP being in the 7% type range. So it’s certainly in the ballpark there.

[Emmanuel Korchman:]

And then maybe final one on the UK deal. With growth from HC-One, Four Seasons and Care Management, is there any type of preferred relationship there or a writer first bid on the assets that they do?

[Paul Gallagher:]

On the HC-One, NHP portfolio that we bought with formation we do have a right of first offer for new financings with that relationship yes. And in the Maria Mallaband situation, we have the ability to do new development financing for them. They have got a couple of projects that they are in the process we are looking at right now. So we do have that capability.

[Emmanuel Korchman:]

Thanks.

[Operator:]

Thank you. Our next question comes from Josh Raskin of Barclays. Your line is open.

[Josh Raskin:]

Hi, thanks. So question just on ManorCare just in terms of the volumes, we’ve seen a pickup in hospital admits and those discharges. And I am wondering are you starting to see any of that improvement at the operator level for ManorCare?

[Lauralee Martin:]

Well, ManorCare continues to take market share. It’s just that as we move from Medicare to Medicare Advantage, the length of stay is down. So they are turning the admissions in order to keep the occupancy level. So yes, benefit of more coming in, but so far an offset through the shift in mix.

[Tim Schoen:]

Yes. Admissions are up Josh.

[Josh Raskin:]

Okay. So those have actually turned positive. The length of stay is pressuring the overall chances.

[Tim Schoen:]

And that market share has been something that’s happened in the past couple of quarters. So they’ve been able to achieve that, but that shift mix of the Medicare Advantage with the shorter length of stay is impacting overall census.

[Josh Raskin:]

Okay. Understood it. And then just on the -- I think you said on the MOB with the multi-site tenant loss, what happened there? And then do you say that overall occupancy was up including that tenant loss?

[Tim Schoen:]

Yes. So we had a situation where the tenant ended up going dark on us. Its nice assets Southern California and very desirable space. We’re in the process of back selling it and those things happen occasionally. So we’re looking for new tenants for the space.

[Josh Raskin:]

Okay. So this wasn’t M&A or anything, that was just a bad luck tenant again.

[Tim Schoen:]

Yeah.

[Josh Raskin:]

And then just on the CCRC JV, how should we think about just sort of taking a step back? What’s the reasonable expectation I guess in terms of the pace of capital deployment? Where you see the pipeline? What would you guys consider a success in terms of dollars invested over the next year, two years, three years how do you think about it?

[Tim Schoen:]

I think we targeted with the Brookdale to do over the next two or three years a couple of $100 million in that particular joint venture and I think that’s their expectations as well.

[Josh Raskin:]

Okay. So if you had a $100 million a year so that would be kind of a baseline?

[Tim Schoen:]

Yeah. Might be lumpy, but that might be a good run rate.

[Josh Raskin:]

Okay. Perfect.

[Operator:]

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

[Juan Sanabria:]

Close enough.

[Tim Schoen:]

Hi, Juan.

[Juan Sanabria:]

Hi. How are you? I was just hoping you would give us better sense of overall CapEx spend. You sort of flag the couple different opportunities. Some of it sounded more strategic or offensive in nature kind of what we should be thinking on a go forward run rate maybe over the next 12 months for maybe maintenance in one bucket and sort of redevelopment or revenue enhancing CapEx and the other?

[Tim Schoen:]

Yeah. In terms of the overall pipeline for this year, I’ll give you the full bucket Juan. About $283 million is the total CapEx budget for this year. In terms of the maintenance CapEx and I will break it out, it’s about $71 million for our forecast for this year. It’s a little bit higher than my previous guidance, but that’s the result of some leasing success that we’ve had in our life science portfolio that Paul mentioned where the occupancies at an all-time high. And then the rest of it is really due to increases in our development portfolio, both in San Francisco -- really in our life science portfolio. And then as Paul mentioned, the MOB development project. So call it $210 million in growth CapEx and $71 million in recurring maintenance CapEx.

[Juan Sanabria:]

And on that growth CapEx, do you think that that grows from here or is that kind of like a growth sort of number to think that you could do on a run rate basis?

[Tim Schoen:]

No. It’s a pretty decent run rate basis. It depends on some projects that we may bring out of the ground in the life science area at some point in time, but it’s a pretty good run rate. It’s a little higher than last year. But $200 million -- I would say $250 million, $275million dollar is a good run rate year in and year out over an extended period of time.

[Juan Sanabria:]

Okay, great. And now on the HC-One formation stuff, are those assets that you would like to own long-term if you have the ability? And is there any right to that you have to buy those assets if formation decides to liquidate their position down the track?

[Tim Schoen:]

Yeah. I think one of the things that’s real interesting here is at that portfolio going back to 2006, 2007 was financial $1.3 billion pounds of debt and the capital structure never really worked. It was at the fault scenario. Interest hasn’t been paid on the debt in over two years. The money has been funneled back into CapEx and into the particular property just to keep them running. So that’s one of the reasons why we’re winning there in a debt position. And we see an opportunity with our capital plan and you’re working with the HC-One folks and Dr. Chai Patel getting these assets turned around as a -- in facts spent the capital, get them reposition and get operations back up running well. We see an opportunity to be able to convert possibly some of our debt positions into sale leaseback and we do have a right first offer for any future financings on those particular assts.

[Juan Sanabria:]

Okay. And then just on the CCRC, what do you see is the market pricing, any sort of range you can provide on cap rate basis? And how we should be thinking about that? And are you seeing increased competition for those types of assets?

[Tim Schoen:]

I don’t know about increased competition. We’re starting to see some opportunities out there in the marketplace. And I think it's really going to be a function from a cap rate standpoint as to where you read with the particular asset. If you look at the assets that we did in joint venture with Brookdale, they had an occupancy play as they lease those things up. And as result, we were able to get a very favorable cap rate. I would think that if you’re in a more stabilized situation cap rates might be a little lower than where we were able to acquire the assets that. But we do see an increased deal flow in that particular space. And a nice premium to straight triple that lease senior housing, right, 150 to 100 basis points.

[Juan Sanabria:]

Great. Thanks, guys.

[Operator:]

Thank you. Our next question comes from Vikram Ahuja of Morgan Stanley. Your line is open.

[Landon Park:]

Hi. This is Landon Park on for Vikram. Just coming to the life science portfolio, can you talk about what you're expecting for the next couple years as with your rent rolls in that portfolio?

[Tim Schoen:]

Yeah. We’ve got a fairly muted roll there Lan over the next couple years. But I would expect those to roll pretty much at market. We’ve got expirations of 325,000 square feet in 2015, about 393,000 square feet in 2016. And I would expect those to be roll out or near market.

[Landon Park:]

Okay. And what about on the potential leasing up the remaining vacancy in that ramp portfolio?

[Tim Schoen:]

It’s really not lot of vacancy in the portfolio. We’re up about 90 -- as Paul mentioned, just sort to 94%, so we’ve had a lot of leasing success there driven by the Bay Area. I think that given the demand that we see in those costal land and entitlement constrain markets, we like the growth profile there as leases roll and as where our assets are located in core life science markets.

[Landon Park:]

Okay. And just one more question, just on the new London office that you guys are opening. I'm not sure what that costs are associated with that. But what kind of, I guess, deal volume, are you sure of underwriting to sort of justify the new operations over there?

[Paul Gallagher:]

What we have right now, we got billion dollars in our platform which is a good base to be running from. And quite frankly, we’ve got a very robust pipeline over there of opportunities. So we saw the need to have foots on the ground and then to be active in the market place.

[Lauralee Martin:]

So one of the attractions to Andrea is that, he has been in this space on the other side of house, clearly knows what the opportunities are there and saw the HCP platform as the way he could execute them. So again we think that’s a good positive in terms of decision?

[Landon Park:]

Are you able to share anymore details just on your pipeline there, just maybe how it puts up between properties and guidance for just any details at all?

[Tim Schoen:]

We’ve got robust pipeline.

[Landon Park:]

All right. Thank you.

[Operator:]

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

[Daniel Bernstein:]

Hi. Good morning. I guess I want to go back to HCR and then given what we saw in the cap rate paid by [mega-deal] (ph) and just general cap rate compression spaces there. Is there opportunity to dispose off some underperforming assets in that portfolio and maybe another way to ask this would be looking at the lease coverage there -- a bottom 5% or 10% or 20% assets that are really an issue at HCR that if you got rid of those, the risk coverage should be lot better. So that’s kind of general question I have on HCR?

[Tim Schoen:]

I think both us and HCR constantly monitored the portfolio and look for various different opportunities to take advantage of just that sort of thing. Quite frankly with the assets that was disclosed that we owned, was not covering rent -- for that matter was not covering operating expenses and they were able to get very attractive price for those types of assets. So to the extent, we’re able to monetize and reinvest those proceeds to provide some relief to the operating company. Then we’ll entertain those sorts of things. And we think that's kind of a win-win for both the opco and the propco on a long-term basis.

[Daniel Bernstein:]

Okay. Now I mean, that’s exactly why he asked the question that should be win-win. And then also historically I think some non-cash true-ups in the prior quarter, true-ups have sometime been included in the EBIDTA and lease coverage numbers. Was there anything unusual in the quarter besides what you talked about broadly impacting the lease coverage in the quarter?

[Tim Schoen:]

No.

[Lauralee Martin:]

No.

[Daniel Bernstein:]

Okay. And then you picked up development on the life science side and MOB side. Are you working at senior housing opportunities at this point is well and maybe just generally where would you be comfortable bringing say -- I don’t know, what metric you want to use but CIP the gross assets to at some point. Do you want to bring development up significantly from here as well as the total investments?

[Paul Gallagher:]

We have actually had our development construction long program up and running for a couple of years now. And some of those assets are beginning to fill up and we’re going able to take advantage of our right to buy those assets and to retain the ownership there. I would have expected that the returns for new construction would have started to squeeze at this point in time. But we still see opportunity out there, still quiet significant premium to where our current cap rates are for stabilized assets. So even though the volume of construction has increased, we still see those returns as being good on risk adjusted basis. I think from a standpoint we fairly selectively want to do good quality assets. We’ve had trouble finding good sites to be able to put our capital in play but yes, we would -- we would still consider doing development in the senior houses basis on a selective basis.

[Tim Schoen:]

Yeah. And development, Dan, is fairly small part of our portfolio. It’s 2% to 3% today. But as Paul mentioned, they have attractive risk adjusted returns, particularly when you take a new account. The fact that those are typically a third to one-half pre-leased when we bring those out of the ground.

[Daniel Bernstein:]

Okay. Sounds good. That’s all for me. I’ll hop off. Thanks a lot.

[Tim Schoen:]

Thanks.

[Operator:]

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

[Kevin Tyler:]

Hi. Good morning. It’s Kevin Tyler here for Michael. Thanks for the color. On Houston, you talked about the reinvestment there driving occupancy gains. As you look across the portfolio, I was curious, what other markets you might be focused on for allocating the balance to that $35 million that you mentioned with Brookdale. And then the side question, do you find that the independent properties may have a longer runway for this CapEx and stay in assisted property in a similar location?

[Tim Schoen:]

I don’t know -- I don’t know about longer runway but the way we’re looking at allocating the capital, it really come across a couple of different areas. Those that are in desperate need of like a refresh simply because they haven’t had capital spent on them. And then there is kind of the repositioning where you are converting units, say from independent to assisted to memory care and things of that nature. And then the final bucket is really expansion of existing space. And what we have been able to do and what’s nice about the transition and the integration that we are doing with Brookdale is they’ve been very focused on. And I am kind of jumpstarting to CapEx spent on our RIDEA assets. And despite the fact that they’ve been going through an integration with their Emeritus portfolio, we will be able to start spending money on those assets, whether it’s anyone of the three buckets to kind of get that portfolio up and running and repositions.

[Kevin Tyler:]

Okay. That’s helpful. Thanks. And then as you look at outage your acquisitions on the senior housing side, what’s your appetite today for RIDEA versus triple net? And are there other opportunities in the current portfolio that you have, where you have an eye on, restructuring like you did with Brookdale moving from triple net to RIDEA, I mean?

[Tim Schoen:]

We’ve always been a risk-adjusted investor and to the extent, we see opportunities out there, whether it’s through occupancy, repositioning assets, rate change in operations to an operator that can provide more different services to a particular facility. We will be investors in the RIDEA, to the extent that we get paid for the risk associated with that transaction. So to the extent, we find those opportunities like we did with our CCRC joint venture where there was a good occupancy play then we will declare a capital there.

[Lauralee Martin:]

And if you look at our heat map, you can see that we have very little in our portfolio that has been performing now at a very high level with coverage. So we think we are in a very good shape.

[Kevin Tyler:]

All right. Okay. Thanks. And then last one for me on the life science side. You’ve performed pretty well, but the majority of your assets are on the West Cost. I was curious that your appetite for further expansion beyond the West Coast and maybe moving into some of the East Coast clusters?

[Tim Schoen:]

Yeah, well first of all, Jon Bergschneider and his team have done a great job on our portfolio on the West Coast and the development opportunities that we’ve had with Duke that they’ve developed. But we would absolutely look to expand in the core market in Boston, Washington DC area, continued expansion in the North Carolina markets. And then continue to develop our relationship with the University of Utah up in Salt Lake. But short answer is we’d continue to look at opportunities in the core markets.

[Kevin Tyler:]

Okay. Thank you.

[Operator:]

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

[Rich Anderson:]

Thanks. I just have a technical question. On the accounting for the RIDEA, kind of lease termination, I guess you would call it to convert into RIDEA structure. Why the $23 million of purchase options, why would that be viewed as a deduct? Were they kind of like out of market but in terms of -- why would that be a deduct?

[Tim Schoen:]

Because that’s our consideration to them. We have to think about it as almost like a lease termination fee, Rich. The total consideration is what we wanted to get to terminate those leases, offset by our desire to get out of the purchase options.

[Rich Anderson:]

I see. So the $23 million is effectively an implied termination fee you are paying them.

[Tim Schoen:]

Exactly.

[Rich Anderson:]

And the $129 million is the -- if I’m using the right number, $131 million is the implied termination they are paying you?

[Tim Schoen:]

Right, right exactly. And then you are left with a number of about $108 million and you have to get into technical accounting, then you have to offset some of the intangibles that are on the balance sheet to come up with a net gain.

[Rich Anderson:]

Okay. And then the cash payments, I think it was $54 million. When does that start getting recognized?

[Tim Schoen:]

That actually will get two payments this year, that’s on a quarterly basis.

[Rich Anderson:]

Okay.

[Tim Schoen:]

On the lease termination fee and then the debt is outstanding as of the close so.

[Rich Anderson:]

So….

[Tim Schoen:]

And that’s recognized and that’s in the lease termination fees, are recognized on a FAD basis, Rich because we get the dollars and over time it’s carved out for FFO at closing.

[Rich Anderson:]

Okay. So what would it be for the remainder of this year?

[Tim Schoen:]

For the lease termination fee?

[Rich Anderson:]

Yeah, the $54 million.

[Tim Schoen:]

So while it’s broken down into two, it’s $34 million on lease termination fees and $20 million in interest. So if you break that down on a quarterly, $34 million over three years that will breakdown the lease termination fee on a pro rata basis.

[Rich Anderson:]

Okay. Got it. Thanks for that technical feedback. That’s all I have.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from John Roberts of Hilliard Lyons Capital. Your line is open.

[John Roberts:]

Thank you. Good morning. I got a question on the income statement here. The operating and other line looks like it is going up considerably more this quarter versus the set of associated revenue. I was wondering if there is something in there that bumped that number.

[Tim Schoen:]

Yeah, John that was -- I was just taking to Rich about, that’s the RIDEA restructure that we did that’s what bumped it up in the quarter.

[John Roberts:]

And how much was that?

[Tim Schoen:]

It was -- well, it was net gain of about $38 million.

[John Roberts:]

Okay. All right. Thanks.

[Operator:]

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to Lauralee Martin, President, CEO, for further remarks.

[Lauralee Martin:]

So, thank you all very much for joining the call this morning. And I expect we are going to see many of you shortly in person and we can talk a lot more. So thank you very much.

[Tim Schoen:]

See you in Atlanta.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.