Earnings Call: Q2 2019

Aug 1, 2019

Good morning and welcome to the HCP, Inc. 2nd Quarter Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Andrew John's, Vice President, Finance And Investor Relations. Please go ahead, sir. Thank you, and welcome to HCP's 2nd quarter financial results conference call. Today's conference call will contain certain forward looking statements, although we believe expectations reflected in any forward looking are based on reasonable assumptions, our forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward looking statements. Certain non GAAP financial measures that we discussed on today's call. In Exhibit, today, K, we furnished the SEC yesterday, we have reconciled all non GAAP financial measures the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at www.hcpi.com. I will now turn the call over to our President and Chief Executive Officer, Tom Herzog. Thanks, Andrew, and good morning, everyone. With me today are Pete Scott, our Chief Financial Officer and Scott Brinker, our Chief Investment Officer. Also here and available for the Q And A portion of the call are Tom Klared, our Chief Development And Operating Officer and Trema Kenray, our General Counsel. Let me start by saying it was quite an active and productive first half of twenty nineteen. Orchard team has done to restructure the portfolio, strengthen the balance sheet, and enhanced infrastructure has positioned us to take advantage of favorable capital market conditions and accelerate our growth across all three of our core business segments of life science, senior housing and medical office. Specifically, we have better than expected operational performance in both our life science and medical office segments. We continued making progress transforming our senior housing segment which has performed generally in line with our expectation. We continue to reposition our portfolio for success with the acquisitions of $1,500,000,000 of strategic core real estate and closed replacement under contract $440,000,000 of non core asset disposition. In addition, we raised $650,000,000 of equity. We refinanced $1,300,000,000 of debt and we improved our liquidity by upsizing and extending our credit facility. These actions and positive outcomes have allowed us to increase the midpoint of our guidance ranges for FFO as adjusted by $0.02 per share and total SPP NOI growth by 50 basis points. Big picture, we remain focused on targeting attractive external growth in each of our private pay segments while maintaining a disciplined approach to capital allocation. Slide science, we continued our strategy of increasing density in our 3 core markets of San Francisco, San Diego and Boston. Last night, we announced the acquisition of the Hartwell Innovation Campus, which expanded our Boston portfolio. Capturing additional scale in this premier life science market is important to ACP as we continue to see demand from growing tenants in the short term and positive demand properties continue to be a preferred solution for specialist positions, hospitals and health systems. We're experiencing solid and consistent earnings growth the portfolio. Our active redevelopment program is improving the competitive nature of a number of our irreplaceable but older on campus MOB assets. With the team has identified $70,000,000 to $100,000,000 of projects annually for the next few years, that we expect to generate cash on cash returns in the range of 10% to 12%. And in senior housing, the rapid transformation of our portfolio and platform continues. HCP is well positioned as the fundamentals in the sector begin to improve over the next couple of years. Additional senior housing transactions announced today represent continued execution of our plan, which includes recycling capital away from older non core properties misaligned deal structures toward modern real estate and attractive markets with leading operators. As we look ahead, current portfolio through focused capital allocation supported by an ever improving operational and organizational platform. Continued to grow through acquisitions in our 3 core segments, but only when our cost of capital is supportive. Keep our portfolio fresh by maintaining a largely self funded development and redevelopment pipeline that will allow us to continue to refresh the portfolio on a non dilutive basis. Maintain a conservative balance sheet with ample liquidity and continue our decades long focus on our ESG effort With that, I'll turn it over to Pete. Pete? Thanks, Tom. I'm pleased to report that we have had a great start to the year. 2nd quarter, we reported FFO as adjusted of $0.44 per share and blended same store cash NOI growth of 3.5%. Let me provide some details around our major segments. Starting with Life Science. Yet another exceptional quarter with cash NOI growing 6.1%. Salts were driven by a favorable leasing environment producing strong tenant demand and mark to market opportunities. Year to date, we executed over 1,000,000 square feet of leases, including 600,000 square feet in the 2nd quarter. And our lease renewals exhibited a positive 11% mark to market. Turning to medical office. 2nd quarter cash NOI was 3.8%, driven by contractual rent escalators, increased occupancy, strong retention rate of 80%. Additionally, our Medical City Dallas campus experienced another quarter of strong growth, contributing approximately 80 basis points. Much higher than anticipated ad rent. For housing, triple net performance for the quarter exceeded expectations with cash NOI growing 3.1%. Dops declined by 2.3% with 4 growing positive 0.3% and transitions down 10.8%. Note that this quarter, we had approximately $500,000 of one time positive items in insurance and real estate taxes, which benefited our results. Also, our same store pool shrunk this quarter as we can executing our strategic plans in senior housing. In particular, certain non core properties are now formally held for sale and classified as such under GAAP Accounting rules. As a reminder, our shop same store pool is small, consisting of just $39,000,000 of NOI in the 2nd quarter. As of all, the recent transaction activity from our portfolio transformation, the vast majority of our highest quality senior housing real estate including Oakmont, Discovery, Sunrise, and most of Atrium are not in our same store pool today. By 2021, we expect these high quality assets and operators in our full year same store pool. At which point, our SVP results will be more representative of our underlying and completely transformed Senior Housing System. Turning to the balance sheet. We had a very busy and productive quarter in the capital markets. First, announced the closing of our $2,750,000,000 bank facility, consisting of a $2,500,000,000 revolver, and a new $250,000,000 term loan. So over $4,000,000,000 in commitments, we successfully upsized the facility by $750,000,000 improved our revolver pricing by 5 basis points and we extended the revolver maturity by 2 years. We very much appreciate our banking syndicate for their continued support and commitment to HCP. 2nd, we completed our first bond offering in nearly three and a half years, pleased with the execution and robust investor demand. Allowing us to upsize to $1,300,000,000 split evenly between 7 and 10 year notes. Blended interest rate across the two tranches was 3.38%. Proceeds from the offering were used to repay $1,300,000,000 in debt. Consisting of $800,000,000 of our 2020 notes, $250,000,000 of our 20 22 notes, $250,000,000 of our 2023 notes. With the bond issuance and concurrent debt repayment, we extended our weighted average debt maturity to 6.5 years. Eliminated all bonds from sharing until 2022, and we significantly improved our debt maturity profile. 3rd, we raised an additional $496,000,000 of equity under our ATM program, includes roughly $305,000,000 under forward contracts. We currently have 23,000,000 shares remaining under forward contracts or roughly $680,000,000 in net proceeds. A portion of that equity will be used to fund our recently announced acquisitions, which Scott will discuss. Shortly. The remainder of the proceeds we plan to settle over the next 6 to 12 months to fund our robust acquisition pipeline and development platform. Lastly, ended the quarter with $2,000,000,000 of availability under our line of credit and net debt to EBITDA Turning now to our guidance. To $1.75 per share from $1.73. In addition, we are increasing the midpoint of our blended SPP guidance to 2.5% from 2%. The update to our guidance ranges are driven primarily by 2 items. First, we achieved a significantly lower interest rate on our bond issuance. And second, the life science and medical office segments are performing above our initial expectations. First on dispositions, currently tracking approximately $700,000,000 at a blended cash yield in the mid to high sevens. Now incorporates the Prime Care disposition, which was not anticipated in our original guidance. Towards the acquisitions, We've already completed $1,500,000,000 year to date, which is substantially higher than the $900,000,000 we originally anticipated. Don't guide to future unidentified acquisitions, but we do have a strong pipeline that we intend to fund with our remaining equity forwards. With that, I would like to turn the call over to Scott. Thank you, Pete. We capitalized on a favorable cost of capital to acquire $1,500,000,000 of high quality real estate year to date already surpassing our full year guidance. Relationships are driving the deal flow and the pipeline remains strong. In July, through our relationship with King Street, we acquired a 4 property, a life science campus with 280,000 square feet, known as the Hartwell Innovation Campus in the Boston suburb of Lexington. Campus is 100% occupied with a 7 year weighted average lease term. Purchase price was $228,000,000, which is a 5.25 percent cash cap rate, including straight line rent and mark to market. The GAAP cap rate is in the mid sixs. The location of the campus is compelling. It's adjacent to Lincoln Labs, 2,000,000 square foot government funded research park affiliated with MIT. We've seen the benefit of local scale, time and again in South San Francisco and San Diego. We're now quickly approaching critical mass in Boston as well with 3 distinct life science campuses with an aggregate 1000000 square feet. Having a bigger chessboard, with multiple price points and suite sizes allows us to meet tenant demand for space as their businesses evolve. That flexibility is important because change is a constant in life science, often driven by capital raises, clinical trial outcomes and M and A activity. We intend to continue building scale in our 3 core life science markets. Speaking of critical mass, in July, we acquired a 56,000 square foot office building in the Sorrento Mesa submarket of San Diego. For $16,000,000. The property is located on our Director's Place campus where we own 2 successful life science buildings and a development parcel. We'll convert the acquired office building to lab upon expiration of the in place leases in 2020 and expect to achieve a stabilized return on cost of roughly 8%. Over time, this will become a 350,000 square foot Class A Life Science Campus. Continuing the theme, in June, we closed the $245,000,000 Sierra Point Towers acquisition at a 6% stabilized cash cap rate. This acquisition has more than 400,000 square feet to our now 1,000,000 square foot Class A campus at the Shore in South San Francisco at the Center for Life Science on the West Coast and where we enjoy number 1 market share. In the second quarter, we delivered phase 3 of the code in South San Francisco. All 324,000 square feet is fully leased with a 10 year weighted average lease term and 3.5 percent rent escalators. Phase 3 produces $24,000,000 of stabilized NOI equates to a 9.5% return on cost. And underscores the significant value created also expanded our relationship with ACA, the country's premier or profit health system, reached agreement to develop a $12,000,000 medical office building on the campus of Oak Hill Hospital in the Tampa MSA. HCA will reach 55% of the building, we expect the stabilized yield in the high sixes. We now have 5 new developments with aggregate spend of $110,000,000 underway with HCA. Going forward, we see a visible pipeline of $75,000,000 to $100,000,000 of new MLD development per year with HCA. We also acquired a medical office building in Kansas City for $15,000,000, which is a 5.5% year 1 cash cap rate. Properties located on the campus of HCA's Midwest, Menora Medical Center. The acquisition augments our local footprint as we already own an existing sixty thousand square foot MOB on the same hospital campus. Both MOBs are 100% occupied. Senior Housing, we're excited to announce an expansion of our close relationship with Oakmont, a premier, California based developer and operator. 5 asset portfolio is located in Huntington Beach, Los Angeles, San Jose and San Francisco, among the most affluent. In high barrier markets in the country. Copies are less than two years old on average and should be well positioned in their local markets for years to come. The acquisition closed in July for $284,000,000 and a year 1 cash cap rate is in the mid-5s. We issued downgrade units to the seller at $32 per share for just over 10% of the total consideration we assume $112,000,000 of secured debt. We also negotiated a highly incentivized management agreement this partnership has strong alignment. Year to date, we closed $400,000,000 of acquisitions with Oakmont. All recently built high quality properties in California, moving to asset management in particular senior housing. For the past year, we've created a strategic plan for every one of our senior housing properties. The data driven analysis to assess the performance outlook for each asset, including supply and demand, location analysis, competitive positioning and quality of physical plant. Each property was categorized as either core redevelop or sell. We created a strategic plan for each operating partner as well. Each partner being categorized as either grow, maintain, reduce or exit. The data and analysis was designed and evaluated by a team with a track record of building a senior housing business intend to do it even better this time at HCP. And currently, we've been building the senior housing team and platform to execute the plan. The actions you're now seeing from HCP quarter after quarter represent exactly that the execution of an intentional and long term strategic plan. For example, in the second quarter, we renewed the 10 property master lease with Aegis Senior Living for an additional 10 years. The annual rent is roughly $19,000,000, which will escalate at 3% per year. These are high quality, high performing core properties in Seattle, the Bay Area And Southern California. We continue to tackle key challenges head on. The second quarter, we amended our leases with HRA. We'll sell 6 non core assets. We combined the remaining 8 core properties in a single master that will mature in 2028. We obtained improved covenants and lease guarantees, and will provide $10,000,000 of capital to improve the portfolio, which will be recognized at 6.5%. Capital projects will disrupt operations for the next year or 2, after which performance should improve from the current level which is roughly 1.1x rent cover before management team. We also signed a definitive agreement to exit our non core 13 property portfolio with PrimeCare. Historically, we accounted for the investment as a direct financing lease because PrimeCare has a bargain purchase option. Sales is expected to close in September for a negotiated price of $274,000,000. Cash you amount sale is 8.2 percent, which reflects the asset quality and the bargain purchase option. This was an important cleanup transaction for HCP. Now stepping back for a moment before we turn to Q And A. The second quarter was highly productive. Accelerated our differentiated strategy by acquiring core real estate at accretive yields. We also deepened our relationships with industry leading partners including HCA, Oakmont and Kingstree. These investments position us to build on our strong year to date operating results. We will now begin session. And our first question today comes from Scott from Nick Yulico from Scotiabank. Please go ahead. Thanks. Hello, everyone. I was hoping you could talk a little bit more about the latest King Street partnership acquisition you did. What is what is sort of rent growth been like in that market? And, maybe you could also just frame out, I mean, this is now yet another meaningful deal you've done with them. I know King Street owns still more real estate in that market that could, they could transact with you over time. So how should we just think about that future opportunity as well, and timing on some of those deals? Hey Nick, it's Pete here. Hope all is well. So we're excited to add Heartwell portfolio into, our portfolio in Boston. One of the things that's quite important for us and Scott mentioned this in his prepared remarks, is getting to scale within the Boston market. We've had success in San Francisco as well as in San Diego. Moving tenants around. And with this latest acquisition and inclusive of the 75 Hayden Development, we're actually now about a 1,000,000 square feet, which we think is quite important. The campuses we own, we have 1 in West Cambridge and now 2 in Lexington, they're actually quite synergistic. We like this market a lot for both those markets a lot. Rental rate growth has been strong within West Cambridge. It's now up into the 70s for new leases. And now within the Lexington market, we're probably in the 60s, mid-60s actually at this point. And that compares to being in the mid-50s when we bought that campus. So a lot of really solid rental rate growth And if you look at the overall vacancy within the Boston market, it's around 2%. So we like that a lot. We're happy to grow with Kingstree too. They've been a great partner. Perhaps there are other opportunities we can do in the future together as well, but I'm not going to comment on that at this point. Okay, that's helpful. And then, Scott, in terms of addition, I think in the last call, you talked about additional seniors housing acquisitions that you lined up. And I guess I'm just wondering, was that fully accounted for by the new Oakmont deals or are there also some additional senior housing acquisitions in the works right now? Hey, Nick. I'm sure we have a lot of opportunity to do senior housing. We see multiples of what we could reasonably do and capitalize. The number of operators reaching out with high quality opportunities is I'm really exceptional. So we're pretty pleased with sort of the market's reaction to HEP's strategy and approach the business. So there's plenty of opportunity. I would say right now, it's more focused on recycling capital rather than exponential new growth in that segment, the portfolio that this team inherited, we didn't flood the whole thing. So we've been actively remaking that business in every sense. And that includes a lot of asset sales. And you've seen that for 2 years now, there is more to come. And we'll be recycling proceeds into assets that we think will help make HCP an out performer over time in senior housing. Okay. And then just my last question is on Brookdale. There is a shareholder proposal out there to add Jay Flaugherty, your former CEO, to the of Brookdale. And so I'm wondering if he does join that board, how do you think that changes your relationship with Brookdale given the bit of a messy situation that happened with Jay leaving years ago? Nick, it's Tom Herzog. Yes, hard to say. Here's what I will tell you, as we look at the proxy contest. Brookdale is an important value partner. We're in support of the recent initiatives, for our enhancement of their care and their operations. We are monitoring it closely, but I really can't respond directly to that. I think it's really up to the shareholders of Brookdale and their board to determine what's best, around the optimal outcome for their board. So that's probably all I can say on that topic at this point, Nick. That's helpful, Tom. I guess just a follow-up there. I mean, is there, what's the thinking of the company and your board right now about, doing something additional with Brookdale, if that opportunity were to arise, what's the latest think thought process there? Well, I would say this. Cindy, buyer and I are in routine conversations on different opportunities that we can consider. And, and there are things we can do, but obviously it would be very premature for me to get into any of those details. But That dialogue is taking place and, certainly would take place, in the future as well. I think regardless of, who is on that board. So stay tuned, but there's nothing imminent, but those are certainly things that we are considering in the future. All right. Thank you, Tom. You bet, Nick. And our next question comes from Nick Joseph with Citi. Please go ahead. Thanks. You've been active lower in leverage, partly driven by issuing equity at attractive prices on a forward basis. You put aside identified expected development spend, how much dry powder in terms of net acquisitions do you currently have the ability to do without going above target leverage levels? Yes. Hey, Nick, it's Pete. We've talked about from a leverage perspective wanting to be in the high 5s on a net debt to EBITDA basis, we're at 5.7. So we're essentially there at this point in time. It could go up a little bit you think about the equity forwards we have left, there are 23,000,000 shares left and net proceeds of approximately $680,000,000 for those 23,000,000 shares. About 350,000,000 to 400,000,000 of that will be used for the acquisitions we announced today, Hartwell, Oakmont, Director's Place, that leaves about $300,000,000 for the pipeline. Which we're not getting into specifics today. And we typically think about debt to equity on acquisitions as 65.35 So we have probably around $500,000,000 of purchasing power. I don't know, Tom, if you want to add anything to that. Pete, Pete, that's all exactly correct as I would have said it. Nick, I'd probably add a couple of things. Just as you look at the the magnitude of the transactions that we've been doing really for the last 3 years. And again, over the last couple of quarters, every now and then, we've got to step back and see where we're at. Internally, we do it every week, but from what you said, I talked last quarter about our portfolio mix, wanting it to be 35% to 40% senior housing and the balance split between life science and MOBs, we're currently at life science at on an NOI basis at 25% medical office at 31 and senior housing at 37. If we looked at the 2019 growth from acquisitions, developments, net of dispositions, that growth is expected to be on a net basis, net of dispositions, about $2,000,000,000, What's interesting is when you start adding up all the pieces, which are a lot of moving pieces, as you know, life science constitutes roughly $1,400,000,000 of growth. Senior housing on a net basis is $400,000,000. It's acquisitions of $900,000,000, less dispositions of $500,000,000, but there's a very solid pipeline behind it as as Scott had just mentioned. And MOBs, we've been a little bit more careful on where we're being quite discerning on which assets and portfolios we'll consider as they come to market based on quality and how we like to look at it, that's been about $100,000,000. Now what's interesting is we have raised enough capital to handle all take a bigger picture for just a moment, including development deliveries, and this is interesting. Life science, that side of our business will grow from around 7,500,000 square feet to something over 10,000,000 square feet based on our existing pipeline and what's already in place. Senior Housing, we'd see pretty good size growth with the embedded opportunities with Oakmont, Discovery and others as we previously discussed. MLBs, we've got the HCA program, we've got the redevelopment. There were a little light on opportunities for growth working hard to find other ways to grow that business. So I just wanted to round out for you as you think about the equity that we've been raising and been pretty sizable. It's $1,300,000,000 since last November in aggregate total, and it's allowed us to have some pretty strategic expansion, which has been part of our our strategic plan. So I thought maybe that background might be helpful for you. That's very helpful. Thank you. And maybe on the flip side, just be asset recycling. I mean, how much more is left, what you would consider non core? And I recognize every year there's probably some level of dispositions, but how much more log is there of stuff you'd like to sell? I would categorize it as normal, normal course pruning for the most part in medical office and life science. And that's certainly true in senior housing well. But within the senior housing segment, I think we'd also look to opportunistically sell assets if we thought the value proposition was favorable. If we had an attractive use of the capital. So that's probably the one distinction I would draw between the three segments. Thanks. Thanks, Dan. And our next question comes from John Kim with BMO Capital Markets. Please go ahead. Thank you. In Serenzo Mesa, I realize it's not a very big investment today, but what's the cost to convert the office into lab space? We bought the asset for about $15,000,000. It's just under 60,000 square feet. It will cost about $15,000,000 to fully redevelop into Class A lab space. Scott, you mentioned the overall campus will become like a 350,000 square foot campus, which presumably includes your existing two building. But how big is the development that land parcel that you have as far as square footage? Yes. Hey, John, it's 150,000 square feet is the development parcel. Within this. So the rest is the 3 assets, including this new acquisition. And we've actually had some success redeveloping assets from office. Into lab. It's a good opportunity within the San Diego market. We did it with a Qualcomm Building that's currently in redevelopment. Actually one of the assets is now 100% pre leased. And we're getting really nice returns on those conversions. So it's not the first time we've done this and we certainly had success. Hey, John, I would add this is Herzog again. As we look at that acquisition, you pointed out it's small, but it was very strategic. We're sitting with a nice campus with an asset sitting in the middle of it that, was important for us to pick up to capture the entire campus and you know how important it is to control those campuses as we're working with biotechs that are seeking to grow and have the opportunity to move tenants between properties. So that was beyond the small dollar amount. That was the strategic element of that acquisition. Digging to the strategic theme, the heart blow acquisition that you've done, looks like a good quality, but you also mentioned 100% lease, 7 year whale. Is there any near term upside to to either cash NOI or earnings, or is there any near term expirations or annual escalators that you talked about? Yes. So annual escalators in the Boston market are fixed. Essentially, it's just 3%. We do a little bit better in San Francisco. It's a 7 year weighted average lease term. There are a couple of leases within that that do mature in the next few years. On average, we think the rents are about 10% to 15% below market there, getting closer to 15% and to 10 over the last couple of months. So there's certainly a little bit of a near term benefit because not every lease is 7 years. There's a couple that are in the close to 10 years and a few that are in the 2 to 3 year range. Thank you. Thank you. And our next question comes from Jordan Sadler with KeyBanc Capital Market. Please go ahead. Hi. Just curious about sort of the appetite for the MOBs. I think, Tom, Or Zag, you went through it a little bit that you've been a little bit lighter there, but are you seeing the opportunity to achieve competitive IRRs versus your other opportunities in that space on stabilized assets? Or do you think you're unlikely to be an investor of size there given sort of just better return opportunities in LifeSci or and or seniors housing? Jordan, it's Herzogate. When we assess the MOB opportunities that have come to market. Some of those bring in some pretty nice yield They you got to be careful of what's off campus that's not anchored the quality of the health systems that they're near. When you get down to MOB properties that are of the quality that we want have in our portfolio, they're commanding much lower cap rates. And then when one assesses the IRR on those investments, we have found them to be lower than what has hit our threshold at times. So we've been more in the camp of developing with HCA, redeveloping some of our irreplaceable locations and getting some good returns on that. But by no means are we locking ourselves out from wanting to make acquisitions in MOBs because we would like to continue to grow that business. On an NOI basis, it's actually a pretty decent percentage of our portfolio. So it's already a big business. We will consider those opportunities as they as they present themselves, but we're not going to move down the quality curve. Scott or Tom Klaritch, anything you guys would add. You say we've seen several portfolios to date. So there's been plenty of activity, just nothing that better risk return thresholds, but there continues to be opportunity on our desk today. So we would like to grow that business. It just has to be at the appropriate cap rate for the quality. Okay. That's fair. And then, I guess, on the other side, what Pete could you elaborate on what was classified or moved into the held for sale this quarter? Yes. Hey, Jordan. Happy to talk about that. There is a good table in our supplemental on page 16, which goes through the sequential changes in our same store pool. We did have 27 assets go into held for sale this quarter, 16 of them were in SPP and it's shop senior housing triple net as well as some MOBs that came out of the same store pool and make up that 27 assets there. I think it's important to just note we're pretty large company. And we do dispose of assets and we've done a lot of capital recycling and assets will make their way into held for sale as the sales processes go along. At this point in time, as Scott mentioned, we've essentially identified within senior housing, every asset we want to hold, sell or redevelop And at this point, for the ones that we're looking to sell, we're pretty far along in the sales process. And we've got some assets actually under PSA at this point in time as well. So all these assets essentially triggered held for sale within the GAAP criteria this quarter. So they went into to help for sale bucket. There obviously was an impairment associated with that as well within these assets. Certain of the assets had impairments GAAP makes you book those impairments when they go into held for sale. Some of them will ultimately have gains, but you can't book those until the sale actually is is completed. So relative to the balance sheet figure in the quarter, it's going to be a bit bigger in terms of the size of that sale in the third quarter or 4th quarter? No. We marked all those assets to fair value. I guess I'm just reflecting on the gains, the potential gains that you can't book. Yes. We would book those later on in the year as the sales are completed, which would happen between now and the next 12 months. We think many of these sales will happen this year, but some may actually drag into the beginning of next year. Yes, George, your point is that you have to book the impairments immediately, but if there are gains on some of those assets, you have to wait until you complete the sale. And that's correct. Yes, I was just curious how big the sale, like what the dollar volume of the sale looks like to say it plainly? It's $174,000,000. That's what we've marked those held for sale assets, on our balance sheet. So it's a relatively small dollar amount given that it's properties. There could be some upside for those that have gains. So it's something greater than $170,000,000. Okay. That's what I was getting at. Okay. Thank you guys. Appreciate it. Thank you. Our next question will come from Jonathan Hughes with Raymond James. Please go ahead. Hey, good morning out there. On the newly disclosed Oakmont purchases, is there a lease up component there? I think it's on the press release there, less than two years old. And then could you also maybe provide any other color there in terms of unit mix, supply exposure in Oakmont, operating strategy? Yes, I can take that one, Jonathan. Yeah, the average age is less than 2 years and 2 of the properties were recently opened. In California, it's harder to build like the big campuses that we just acquired with, say, Discovery in Florida, where a 300 unit continuum of care campus is possible, not easy, but possible. In California, they tend to be more in the 60 to 80 unit range, especially in the markets where Oakmont builds like a Huntington Beach or San Jose or San Francisco, which is so hard to find adequate land. So they tend to be smaller properties in Oakmont. Fills their properties faster than anyone I've ever seen. So there really isn't material lease up period. These were almost 70% preleased. The day they opened. So there isn't much of a gap between the stabilized cap rate in the year 1. Cap rates. So we think Oakmont's a fantastic operator. We think California is a good place to do business long term and like to do more, with Oakmark going forward. They're a very active, high quality developer and operators. So we'd like to continue growing that. Was that a marketed deal? And may if so, maybe who are the owners? Was it Oakmont or was it private equity some other long term institutional capital source? Yes. Oakmont is a sort of owner developer operator. So at times, they'll have friends and family capital, but otherwise it's really the principles. And I'm not aware of widely marketed process. I know we had direct interactions with the principles. So I'll leave it at that. Okay. That's helpful. And then just one more from me. Kind of related, but a peer of yours just announced an exclusive development agreement with Discovery, who is also a senior housing operating partner of HCPs. I know you have the programmatic development agreement with HCA for MOBs, but have you explored partnering with the operators for future senior housing developments on an exclusive basis? I mean, like Oakmont? Yes. I mean, with Discovery, we actually do have development projects that we do have rights. We have a when we closed that $445,000,000 deal, it had 4 options, one which is already closed and other will close next week. And then we have rights on the other 2, we get a nice mezz debt slice at a very nice return for 15% of the stack and then a 6.25% purchase option So we really like that arrangement and there's more that we'll do with discovery over time. So And it's got you have others that you want to respond to? I would just say programmatically the team here has a lot of experience putting those types of structures in place. So that's for sure is how we would intend to grow the senior housing businesses, working relationships, direct discussions, at times there'll be stabilized acquisitions and at times there'll be participation on the front end of the project. We'll be flexible The most important thing for us is to be in markets that we think are strong long term real estate locations and to partner with operators that we feel are going to do high quality job and be trusted partners for us for a long time. So how we get to the final stage of owning a Class A asset, we can be flexible. It's more the real estate and the operator that drives everything that we're doing whether it's acquisition development, redevelopment, it comes back to a very, very disciplined and consistent theme that everybody here knows exactly what we're going to do and we're going to get there as fast as the capital markets permit and right now they've been pretty accommodative. So we've been able to accelerate that strategic plan which is exciting. And our next question comes from Chad Vanacore with Stifel. Please go ahead. Thanks. Since we're getting late in the call, I'll give you to a couple technical questions. So on guidance, run rate did $0.44 this quarter. That equates to $1.76. That's on the higher end of your current guidance. What could drive that FFO lower in the second half? Is that purely disposition or does that contemplate some additional downside and say shop? Hey, I'll take that here Chad. So you're right that the annualized number is $1.76, but with the PrimeCare sale and a few other of the dispositions, we do see about a penny of dilution in the second half of the year capital recycling. So that's what gets you back to the $1.75. All right. And then just thinking about organic growth. You raised guidance of 2% to 3%, but that still looks conservative because the first half you were running above the high end of that range. Is this just services and where should we expect some moderation as that can happen in some sub segments? Yes. Hey, it's Pete again here. So couple of things within each one of the segments. MOBs did benefit from some outsized ad rents in the first half of the year, life sciences, I have mentioned this a few times, there are a few vacates in the second half of the year as well. The good news is most of those are leased up at this point in time, but the leases don't start until 2020. And then senior housing triple net We do have some ad rents within the triple net Sunrise CCRCs that we think could impact us in the second half of the year. We had a pretty good fourth quarter last year for those Sunrise ad rents. So perhaps some conservatism embedded within the guidance, but more to come as the year progresses. All right. That's great. Thanks. Thanks, Chad. And our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead. Yes, thanks. Pete, can you touch on your comments earlier about your ability to grow in the Boston market? I mean, how competitive is that market? And what are some of the things that ACP can do to continue that growth? Yes. It's pretty competitive, Mike. On all transactions that we're looking at now, there are a lot more bidders for life science assets, especially in Boston. You've got core funds now looking at lab assets and that's a bit of a change from 5 to 10 years ago. So it's quite competitive. That's one of the reasons why we've really enjoyed the King Street relationship because it's allowed us to grow without having to compete in full auction processes. We certainly are looking at more assets in that market. Feel really good about the assets that we've bought and the price point that we've been able to achieve and it feels like pricing as well as cap rates as well as rental rates are all moving in the right direction. So we feel like we're well in the money, on the purchases that we've made and we'll continue to look within that market. But as you point out, it is quite competitive. So relationships are as important now as they've ever been. Okay. And then should we expect the deal to be kind of these smaller type transactions that you're able to get done in the Boston area? It's hard to comment on exactly what all the transactions will look like because they will vary mean, we've looked at smaller deals. We've looked at larger deals. So I would say it could be a mix. I don't know, Tom, if you want to add anything to that. Pete, I would put it this way. It could be a mix, but it will most certainly be strategic in how we go at it. So not a lot more we want to say right now, but hopefully next quarter, the quarter after we have some more to talk about. Okay. And then just last question. Can you talk a little bit about the South San Francisco market? I know you guys have a pretty big share there. Have a few developments curl under construction. What do you have to see, I guess, the break ground on some of the additional land sites? I mean, do you have to see leasing act activity at the Sierra Point Projects or is there anything else that you're kind of looking out for? Good question, Mike. South San Francisco is an incredibly important market to HTP and we're the dominant landlord within that market. Fundamentals are very strong. The vacancy rate is under 2% and for our major projects, the Cove were 100% leased right now, phase 1 of the shore, 100% pre leased. And that was really the catalyst for accelerating phases 23 of the shore. We'd like to see some leasing progress on Phase 2 before we would consider accelerating some more developments within our land bank within that market. Phase II is quite big as well, inclusive of Phase III also. Nothing to report on leasing right now, but certainly lots of interest. And also importantly, all the developments we think within that market will do quite well. In fact, when you think about the 2,500,000 square feet that's being developed currently, over 60% is actually committed. At this point in time. A lot of those projects don't deliver for 1.5 to 2 years, inclusive of our shore phase 2. So While there still is a lot of construction going on, there's a lot of leasing happening at the same time too. Okay, great. Thank you. Thank you. And our next question comes from Rich Anderson with SMBC. Please go ahead. Thanks. Good morning out there. And I'm suggesting we move to alphabetical list for the Q and A queue. So I was mentioned earlier on, I repeat $20,000,000 of NOI in the same store pool for shop, small potatoes relative to the size of your company, but that, that would grow as you bring in non same store asset into the pool. On top of that, your transition to assets, I assume, will be improving along the way. So come 2021 when you kind of have the kind of a fuller representation of same store in your shop portfolio. I mean, could this be something that really builds like from a few different directions, both from the introduction of new non same store into the pool and the transitions and And could we be looking at like an outsized growth profile at least in the short term as that all happens perhaps on top of one another? Hey, Rich. It's Scott. I'll try to take that. Today, our senior housing same store pool is roughly 70% triple net and 30% shop, 2 years from now, that probably is reversed as we exit or exit certain triple nets can hurt others to RIDEA. And then of course, the acquisitions that we've been doing And yes, our expectation is 2021 and beyond a combination of better industry fundamentals. Better management contracts, better operating partners, better real estate. There's a long list of things that we've been working on. To position that business so that it's going to be successful. It's hard to predict too far into the future in senior housing, just given the uncertainty about continuing new supply and labor costs, but our key metric is, are we doing better or worse in the industry. And historically, we did worse and we think we're building a business that's going to do better and hopefully substantially better. And we think 2021 from an SPP standpoint is probably the first time that that really starts to come through just because of the composition of the pool. 20 points is still going to be kind of a it's not going to include a lot of those really high quality assets. What's the NOI number in 2021 versus the $20,000,000, again, in the same store pool? Yes. Rich, I'd have to get back to you with a specific number, but if it's 70:30 today, we think it's going to be 30 70 roughly 2 years from now. Right. Okay. And then second question, maybe, for anyone, you and others are are stepping up the activity from an external growth standpoint. Perhaps the capital markets are behind that and just general, opening up the transaction markets. But what would you say to the risk that this is all happening in the 10th year of the expansion of this economy. And what's the risk that this is just all just poorly timed And a year from now, we'll look back and say, I wish we were perhaps not as aggressive on the external growth from? Just trying to play a little devil's advocate with all the activity that's happening around us. Yes, Rich, I'll take that one. The way we look at it, what's critical is to have a very clear and consistent and disciplined strategy, to have a balance sheet that's strong that will weather the cycles to manage our, our equity transactions where we're only issuing at a premium to NEV to do deals that are either strategic and or accretive and that it is literally impossible to predict where markets are going. Or where the economy is going or where interest rates are going, we're in the business to be in the business and to own a portfolio that will sustain the cycles. And as we look at the environment and where it would put us if there was a downturn and there will most definitely be a downturn over time and just none of us know when it will be. The important thing is that we have set our business up where our development pipeline and acquisitions are well funded. And we know where the money is coming from. The balance sheet is strong. We're in a more defensive sector to begin with. We've been careful to have private pay assets with good partners, good operators. We try to keep the real estate of high quality. And we think that through the cycles that we're going to have a great outcome, So the timing nature is something that I think we must do. And that's how we approach that. And our next question comes from Vikram Malhotra with Morgan Stanley. So a couple of your peers now have come out, highlighting they think next year is a turn in terms of senior housing occupancy at least from a top line perspective. And one has come out giving fairly aggressive kind of 4% to 6% growth numbers over a 5 year period. Scott said, I'm just wondering, I know you said 21 is sort of the year where we'll start to see the combined power of the shop portfolio. But just based on the HCP portfolio today, would you sort of say a top line turn is likely next year? And would you agree sort of with maybe a longer term view of mid single digit same store NOI growth? Hey, Vikram. Yeah, on the short term outlook, it really is local market specific. So each portfolio is a little bit different. We've evaluated our own portfolio in every imaginable analytical way to try to predict just supply and demand fundamentals and to try to pick a specific quarter would be false precision. We do think that we're going to start heading in the right direction from a supply and demand standpoint, whether it's late in 2020 or believe in mid-twenty 21, it's hard to predict, but it's somewhere in that range, would be our best guess just empirically using data but supplemented with a heck of a lot of discussions with operating companies, our own teams sort of on the ground. Just assessment to augment all the data that we look like. That's kind of our best guess, but understanding that in any local market, there are winners and losers that's particularly true in senior housing where the dispersion in performance is pretty wide regardless of what point in the cycle we're at, because there are groups today that are outperforming and they'll continue to outperform in the up cycle as well. So that's been a big part of our strategic plan is to position ourselves to be one of the out performers in each of the local market. So that's kind of our short term view. And our longer term view, I'd probably just get back to comment I made to Rich is that it's very hard to predict supply and demand fundamentals 3, 4, 5 years from now. The labor market is really important part of that assessment. And that's difficult to predict. Supply has been coming down 4, 5, 6 quarters in a row. That's obviously very helpful. If that continues, I think you can make a pretty bullish case over the next 5 years that the population growth is significant and it's getting better. The penetration rate continues to get better. So all of those things suggest that over the next 5 years, supply and demand fundamentals should be quite good, but we do continue to think that it's more back end weighted than front end. Weighted on that 5 year outlook. Okay. That's helpful. And then just a last question on life sciences. I remember you highlighted that there's some move outs, occupancy is sort of over the last, maybe few quarters printed down from like the 96 to the low 95 range. Can you remind us, or maybe give us a sense of how you expect that to trend, near term and then potentially sort of looking into 2020? Just given sort of the fact that you've produced now 6% same for NOI growth for two quarters, just trying to get a sense of the trajectory over the back half and into 2020. And just to finish on Life Science, the expirations pick up in 2021. I know there's a ways out, but any sense of remind us of any major move outs in 2021? Yes. Couple of questions in there. So I'll taking one at a time. Our 6.5 percent year to date growth, there are a few things that factor into that, but think about the 3 most important occupancies up 40 basis points. Escalators within life sciences are around 3.2%, which is actually quite strong. And then the mark to market on the leases that we've achieved year to date is actually around positive 15%. So that's really what's driving the 6.5%. You think about the 400,000 square feet that we have left that is maturing in the second half of the year. We've actually got about 60% of that now leased up, as well as some good prospects on the remaining portion. And you'll always have it from a little bit of lease up that you need to do in any large portfolio. So the reason why occupancy will tick down a little bit, maybe to the 95% range I said before is really because of those leases that will vacate this year, but ultimately beginning of next year, you will see some leases in place and actually some really good mark to markets as well. So I don't see occupancy dipping really below the 95% range. Again, too soon to come out with specifics for next year, but I'm just telling you that the overall trends that we're seeing. And then from an expiration standpoint, in 2021, there is a pretty large number there Amgen is one of the larger expirations, but that is at December 31, 2021. Too soon to comment on that at this in time. I will point out that the campus they're in is right next to the cove. So it's literally Maine and Maine from a location standpoint within South San Francisco. But, while it says a big number in 2021, you can almost look at it as a 2022 expiration given that it doesn't happen until the last day of the year. Okay, great. Thanks guys. Thanks, Vikram. And our next question comes from Daniel Bernstein with Capital 1. Please go ahead. Hi. I'll concur with Richard's alphabetical order. Just a quick question here, Elaine. I'm trying to reconcile some of the drop in the Knapp starts and supply growth versus all of the very aggressive, it seems like or significantly high volume of acquisitions that are out there on the senior housing side, both on the the dispositions from you and your peers and what you and your peers are buying. Is there any data points or what you've seen anecdotally where lending has dried up or reduced for construction start within the seniors housing space? And have you received any inquiries from increased inquiries from operator to say fund development, something that ACTUALLY would say that starts will continue to stay low and supply will continue to come down. Hey, Dan, it's Scott. I'll take that. I wouldn't say there's been any material change in the lending environment. That market remains relatively open. Maybe at the margin, the LTVs are a bit lower or the recourse is a bit higher, but not enough to meet materially change the amount of new supply. I think the bigger factor is just the cost of construction has gone up quite significantly. I think about the Discovery portfolio that we acquired for roughly $350,000, $360,000 a unit and we're building for additional properties with discovering those same markets. In fact, one is going to close on Monday. Next week and the all in cost to build that is almost $380,000 a unit. So costs continue to escalate. And I think that's probably the biggest factor that is are leading to at least a modest slowdown in new supplies that ultimately the developers and owners need a return on cost and the operating fundamentals today maybe aren't quite as favorable as they were 4 5 years ago when developers were putting new projects under construction. So I think from both the numerator and the denominator, the return on development has continued to come down. And certain projects still pencil out for sure. But less than penciled out 4 5 years ago. That's good color. That's all I really had. Thank you. Thanks, Dan. And we have two people remaining in the queue. Lucas, go ahead. Yes. Are you still on track to sell the remaining interest in the UK JV? What's the update there? Yes, this is Scott. I'll take that. So our intention remains to exit the UK. We have a 49% interest roughly $100,000,000 of equity. It's still outstanding. Our partner who owns 51% is in active discussions with a number of different potential buyers. So their intention remains to take us out in our intention remains to exit. So we're well aligned there. The uncertainty over Brexit hasn't helped, perhaps as soon as the new October 31 deadline, there's more certainty. But in the interim, that has created, some uncertainty among the buyer pool. It may or may not be insurmountable. We still feel good about exiting that investment. We think the value has held up in the interim. We have good relationship with our partner. We're earning a nice yield. So sooner than later, we'll exit that 49% the exact timing. We'll keep you posted. And the net balance of the thing is about $100,000,000. So it's not a big deal plus at this point, one way or another. We'll work through them. Right. And I know it's tiny, but coverage on the HRA assets still look tight after changes there. How do you generally think about setting coverage during negotiations like that? Yes. The primary goal there was to rightsize the portfolio. It was 14 assets. And neither HRA nor HCP wanted to own or operate all 14 assets. So we're going to sell 6 and the 8 that we're left with are core assets for HRA. They're in their Post State of Florida. They think they have upside. The buildings are twenty years old. So we're going to put some capital into the real estate that hopefully improve performance and hopefully that combined with improved industry fundamentals allows that portfolio to be a sustainable long term pencil strength. We now have a 10 year master lease. We also have significantly improved guarantees of covenant. So that certainly played a role in our thinking. And then otherwise, it's just a trade off between the earnings and the rent cover. And we thought this was the appropriate balance given the money that's going into this portfolio as well as the improved guarantor. Great. Thank you. Yes. Thanks Lucas. And our next question is Michael Mueller with JP Morgan. Please go ahead. Hi, good morning. Thanks for taking the question. This is Sarah on for Mike. So just on the land bank, I see that heavily skewed to California. Should we expect to see the balance out more with Boston over the next few years? We had a hard time hearing that. Could you repeat that, please? Oh, so just a quick one on the land bank. I see that heavily skewed to California. Should we expect to see that move more towards Boston over the next couple of years? Case by case specific as we look at acquisitions. But certainly within Boston, we have the 101 Cambridge Park Drive deal that at this point, we're still working through entitlements. So you'll notice we don't have square footages in there yet until we're through with the entitlement phase, although we feel good about getting through that, that phase. The others are really, some of it's legacy from slough. Some of the land that just came with that acquisition, which was over a decade ago. But as we've looked within Boston, 2 of the acquisitions have had land components to it and it's something we'll continue to look at as we go forward. And this will conclude our question and answer session. I'd like to turn the conference back over to Tom Herzog for any closing remarks. Thank you, operator. And thank you all for joining our call today and your continued interest in HCP and we'll talk to you all soon. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a good day.