Good afternoon, good morning, welcome to the HCP, Inc. fourth quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone phone. To withdraw your questions, you may press star and two. Please note, today's event is being recorded. At this time, I'd like to turn the conference call over to Andrew Johns, Vice President of Finance and Investor Relations. Please go ahead.
Thank you, welcome to HCP's fourth quarter and year-end financial results conference call. Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations. A discussion of risks and risk factors is included in our press release in detail in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit to the 8-K we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Regulation G requirements. The exhibit is also available on our website.
I will now turn the call over to our President and Chief Executive Officer, Tom Herzog.
Thanks, Andrew, good morning, everyone. With me today are Pete Scott, our Chief Financial Officer, and Scott Brinker, our Chief Investment Officer. Also here and available for the Q&A portion of the call are Tom Klaritch , our Chief Operating Officer, and Troy McHenry, our General Counsel. Through our efforts over the last few years, HCP is well-positioned. We completed our portfolio restructuring and operator transitions, leaving us with a balanced portfolio and a clear and differentiated strategy. Additionally, our balance sheet is strong and positioned to support our growth strategy. Recent credit rating upgrades from S&P and Moody's confirm the progress we've made on this front. Across our three core segments, we continue to see plenty of opportunities to capture embedded upside in our portfolio and to create new value over time with development, redevelopment, and complementary acquisition activities.
Specifically, in medical office, tenant demand for on-campus properties remains strong. We are working to fill vacancies within the portfolio and seeing positive mark-to-markets on rents. We continue to mine our portfolio for redevelopment opportunities and are also actively working with HCA to schedule additional on-campus developments in our partnership program. In life science, we've focused on sourcing complementary acquisitions and creating value through our development pipeline. Late last year, we expanded this pipeline for a compelling opportunity to capture value at The Shore at Sierra Point . We added a combined $385 million for phases 2 and 3, resulting in a $1.2 billion pipeline, which is higher than normal for us, but allows us to pursue the opportunities we have worked hard to create. Even including the just-commenced phases 2 and 3 of the Shore, our pipeline is almost 65% pre-leased and approximately $500 million is already funded.
The remaining $700 million of development costs will be spent over the next 2 to 3 years and is captured in our guidance. Senior housing. Scott and his team are positioning our business for success. In 2019, you'll see us continue to work to make incremental moves to improve our portfolio and operator mix while supporting our platform with enhanced asset management capabilities and data analytics. We've come a long way in the last 2 years, but there's still plenty of room for additional improvement and upside, and we intend to pursue them aggressively. Moving on to our outlook for 2019. As we reported last night, we are guiding to a solid total portfolio same-store growth in 2019. Over the last month, we have communicated our expectations for choppy near-term senior housing fundamentals. Scott will elaborate on in a minute.
We are feeling pressure on both occupancy and expenses, but we're also navigating the headwinds that were the result of a number of intentional moves we made to improve our portfolio and position it for the long term. Accordingly, we still anticipate noise in 2019 SHOP results, but fully expect our senior housing business will stabilize and be a strong growth engine over time. We have been very deliberate in our portfolio repositioning to build a company with diversification designed to maximize long-term growth while reducing short-term volatility. We do recognize that each of our businesses operates within its own cycle, and accordingly, segment-specific growth rates will inevitably vary. Our primary focus at HCP is, and will continue to be, on the overall blended growth our portfolio can deliver. Now turning to the team.
I am very pleased with the way our senior leaders and their teams have come together. With all the major players now in place, we're able to fine-tune and are now formalizing certain responsibilities. First, I've asked Pete Scott to formally lead our life science platform, in addition to his role as our Chief Financial Officer. While we are announcing this today, Pete has functioned as the life science lead for the last 6 to 9 months and was instrumental in leading the operations and strategic transactions during that time, including the sale of the Shoreline campus. He has quickly built relationships with key customers and partners.
Pete leads a team of very experienced life science senior professionals that have an average tenure in the industry and at HCP of nearly a decade. In addition to his role as Chief Operating Officer, Tom Klaritch has also assumed the role of Chief Development Officer. As we've increased our development and redevelopment activities, we determined that centralizing management under Tom allows us to scale our resources and ensure we are using consistent best practices across all three of our businesses. We announced Executive Vice President promotions for Shawn Johnson, our Chief Accounting Officer, and Glenn Preston, who leads our medical office business. Shawn and Glenn's promotions reflect the leadership and expanded responsibilities they have assumed within our organization. I'm also pleased to announce that Jeff Miller recently joined HCP within our senior housing team.
For those of you who don't know Jeff, he brings tremendous experience to HCP, having spent over a decade at Welltower in roles including General Counsel and Chief Operating Officer. During his time at Welltower, Jeff worked closely with Scott Brinker. At HCP, Jeff is responsible for day-to-day operations of our senior housing finance and asset management teams and reports directly to Scott, who continues to lead our senior housing business. Jeff is an excellent addition, and bringing him on is just another important step in strengthening our senior housing platform. Before handing the call over to Pete, I'd like to provide a few board, governance, and sustainability updates. During 2018, we welcomed Lydia Kennard, Kent Griffin, and Kathy Sandstrom to our board as new directors and appointed Brian Cartwright as our Independent Chairman.
We also adopted a mandatory retirement age of 75 for directors, a policy in line with corporate governance best practices and one that ensures natural continued board refreshment. On the sustainability front, HCP has proven itself an industry leader and continues to build on the progress made since committing to focus on environmental, social, and governance initiatives over a decade ago. Our recent efforts were again recognized by prominent ESG reporting organizations. For the seventh consecutive year, HCP achieved the Green Star designation from GRESB and was named a constituent of the FTSE4Good Index. For the sixth consecutive year, we were named to the Dow Jones Sustainability Index and CDP's leadership band. Our cumulative efforts through our ESG initiatives have resulted in an ISS environmental score of one, social score of two, and an overall governance quality score of two.
These results reflect the hard work and emphasis this team places on pursuing our ESG initiatives. I'll turn it over to Pete to discuss our financial performance for the quarter and 2019 guidance. Pete?
Thanks, Tom. I'll start today with a review of our results, provide an update on our recent capital markets activity, and end with a discussion of our 2019 guidance and related assumptions. Starting with our fourth quarter results. We reported FFO adjusted of $0.43 per share and blended same store cash NOI growth of 1.5%. Full year 2018, we reported FFO adjusted of $1.82 per share and blended same store cash NOI growth of 1.4%, both of which were slightly above the midpoint of our guidance range. Let me provide more details around the full-year results. Medical Office, which represents 30% of our same store pool, we reported cash NOI growth of 2.1%, which was in line with our guidance range. In 2018, we executed leases on over 2.6 million sq ft of space, the highest volume of leasing activity in our history.
Turning to Life Science, which represents 23% of our same store pool, we reported cash NOI growth of 1.5%, was above the high end of our guidance range and driven by better leasing and occupancy. On a normalized basis, excluding the Rigel lease mark-to-market, cash NOI growth would have been 4.5%, which underscores the current strength of the Life Science segment. For our other property segment, which is primarily our hospital portfolio and 9% of our same store pool, we reported cash NOI growth of 3.2%, was above the high end of our guidance range. Strong performance for the year was driven by the results at our Medical City Dallas campus. Moving on to our senior housing segment. It is important to emphasize that approximately two-thirds of our senior housing portfolio is currently structured in triple net lease arrangements.
In this segment, which represents 28% of our same store pool, we reported cash NOI growth of 2%, which was above the high end of our guidance range. This result was driven by better-than-expected ad rents in our Sunrise portfolio. In our SHOP portfolio, which represents 9% of our same store pool, we reported NOI growth of -3.8%, which was at the low end of our guidance range. As we have previously discussed, it is important to differentiate between the performance of our core portfolio and our transition portfolio. Growth in our core portfolio was solid, at +1.7%. Those results were more than offset by our transition portfolio, which declined 17%. A quick note on the fourth quarter performance for our transition portfolio. NOI declined year-over-year from approximately $6 million-$4 million. This translated into a large percentage change.
However, given the small size of the pool, the financial impact was only approximately $2 million. Additionally, we were encouraged by the 30 basis points of sequential growth in occupancy. This growth was driven primarily by 350 basis points, sequential growth in occupancy from the initial seven assets we transitioned to Atria, and points to the upside potential as new operators stabilize performance. Turning now to the balance sheet. We made tremendous progress reducing leverage and improving our credit profile. In the fourth quarter, we used the proceeds from the Shoreline and the Apollo transaction to repay $1.2 billion of debt. These actions resulted in credit upgrades to BBB+ from S&P and Baa1 from Moody's, along with a move to positive outlook from Fitch.
At the end of the quarter, we reported net debt to adjusted EBITDA of 5.6 times, and we had $1.9 billion of availability under our line of credit. During the quarter, we were also active in the equity markets. We raised approximately $656 million, consisting of $156 million on our ATM and $500 million in a follow-on issuance, majority of which was structured as a forward offering. This was our first follow-on equity deal in six years. Turning now to our 2019 guidance. We expect full-year 2019 FFO adjusted to range between $1.70-$1.76 per share. During 2018, we completed our major capital recycling transaction. This resulted in a diversified, high-quality portfolio that we believe will generate superior risk-adjusted growth over time and a more predictable earnings stream.
As we previously disclosed, there is a significant carryover impact in 2019 from these activities, as well as from our balance sheet improvements, our ramp-up in development and redevelopment activities, and our senior housing operator transition. All of these positive actions will result in a stronger, better-positioned HCP, but in the near term, do result in some drag on earnings. On page 48 of our supplemental, we have included the detailed assumptions embedded within our 2019 guidance. I would like to take a moment to expand on four items. First, we have currently assumed a mid-year refinancing of our $800 million two-and-five-eighth notes due February 2020. Second, we have assumed $600 million-$700 million of development and redevelopment spend. This amount is elevated relative to 2018 in order to capture significant value creation opportunities.
Third, we have assumed $900 million of acquisition activity at an initial blended cash cap rate of 5%-5.5%. Finally, we have assumed $500 million of asset sales at a 6.5%-7.5% cash cap rate. We expect to fund our remaining capital needs through the drawdown of our $430 million equity forward and utilizing our excess debt capacity. Combined, these four key strategic decisions result in about $0.03-$0.04 per share of headwind to FFO in 2019. As we have said consistently, our goal in 2019 is to create a strong base year with a high-quality portfolio that we expect to grow off of going forward. Turning now to our SPP assumption. We are guiding to blended cash NOI growth of 1.25%-2.75%. We will update or reaffirm this range throughout the year based on performance.
The components of our blended growth rate are as follows. Medical office at 1.75%-2.75%, life science at 4%-5%, other at 2%-3%, and senior housing at -1.5% to +1.5%. Finishing now with some additional disclosure items. As part of our ongoing commitment to improve the reporting usefulness for our three core lines of business, we have made a few important changes. First, with regards to senior housing, we are now combining our triple-net and SHOP portfolios for purposes of guidance. We have disclosed that our guidance range was derived at the midpoint, based on expected triple-net growth of +2% and SHOP growth of -5%. Second, we added a summary table for our blended senior housing SPP growth in the earnings release. For the full year 2018, our blended senior housing SPP would've been +50 basis points.
This should provide some useful context as to how our 2018 performance compares to our 2019 guidance. Third, we expanded disclosure for our senior housing business. This quarter, we have provided additional quarterly detail pertaining to our core and transition SHOP portfolio. Page 34 of our supplemental. Finally, effective January 1, 2019, we are reclassifying Medical City Dallas within our MOB segment. This property is a fully integrated medical campus, and we determined that surgically splitting the income into two separate reporting segments, as we had done in the past, was not consistent with peer disclosure for how these assets would be valued in the private market. With that, I would like to turn the call over to Scott.
Okay. Thank you, Pete. There's a lot to cover on the investment front. We are using our deep relationships to acquire and develop well-located real estate where HCP and its partners have superior expertise. For example, in life science, we're expanding our footprint in Boston through our relationship with King Street. January, we recapped their property at 87 Cambridge Park Drive in West Cambridge. The asset has a superb location, just a one-minute walk from the Alewife T stop. The $71 million acquisition comes with a near-term market-to-market opportunity and should produce a 6% stabilized cap rate. In a separate but related transaction, also being done with King Street, we acquired a vacant land parcel that is directly adjacent to the acquisition property in West Cambridge. Within the next few years, we intend to develop a second building, creating a class A campus.
We're also expanding in the two premier life science markets on the West Coast. In November, we acquired our JV partner's minority interest in four buildings for $92 million. Two of the assets are located in Torrey Pines, the leading sub-market in San Diego. The other two buildings are located in South San Francisco and are nearing the end of a successful redevelopment. We've already leased the vast majority of the space and expect to achieve a 6% stabilized cap rate on the four-property JV buyout. Also in November, we went under contract to acquire Sierra Point Towers for $245 million, which is a 6% stabilized cap rate. The towers are highly strategic to us, given the campus is next door to our development at The Shore, a project that has tremendous momentum. The acquisition includes excess surface parking so we can densify the campus over time.
With this strategic and coordinated capital deployment, HCP is creating a class A life science campus with more than 1 million square feet. Moving to medical office. We're working on a number of potential on-campus development opportunities with HCA. We expect to announce new projects in 2019 and beyond, driven by a 20-year history of working together successfully. The transformation underway in our senior housing business is equally compelling but harder to see, because we had to take two steps backward to take three steps forward. The HCP senior housing business that is being created will be unrecognizable from what existed previously. The entire business is being transformed. The portfolio, operators, markets, deal structures, the team, and systems. In 2018, we took decisive actions that, while dilutive to earnings in the near term, were absolutely necessary to create a winning senior housing business over time.
We sold $1.5 billion of non-core senior housing last year. That's in addition to the $2 billion sold in 2017. What remains is a higher-quality real estate portfolio. We transitioned 38 properties to new operators who are completely focused on capturing the embedded upside. We're now seeing a nice lift in occupancy from the first wave of transitions last March. We expect continued improvement moving forward. We added two best-in-class operating partners, Discovery and LCS. Relationships like these will be instrumental to our success in senior housing. We put 10 well-located but older assets into redevelopment. The building enhancement will position these properties to perform over the long term. We exited or went under contract to exit five very small operator relationships. This will help make our platform more efficient.
Finally, we built out systems and remade the org chart, including adding Jeff Miller to lead senior housing asset management. I know firsthand that he's a great addition to the winning culture being built at HCP. Moving to the fundamentals in our three core segments. The medical office outlook in 2019 remains solid. Life science fundamentals remain very strong, with demand exceeding supply. We continue to be cautious about senior housing in 2019. I'll provide some additional color, because there's a longer-term story that's more relevant. We expect rents to grow in the 3% range in 2019. Wages are likely to grow at least 4% due to low unemployment and high demand for well-trained staff. Importantly, senior housing is a very local business. In many of our CHAT trade areas, the number of new deliveries in 2019 will exceed prior years. This will pressure occupancy.
Taking a step back, though, we're encouraged by three important trends. First, the penetration rate is growing as the physical, cognitive, and social benefits of senior housing are becoming better understood. Second, new starts have declined to a level where supply and demand should be more in balance within the next two years. Finally, the growth rate for the 85-plus cohort, which actually hit a trough in 2018, is now at the very beginning of an upward slope that will gather momentum over the next 10 years and act as a tailwind for several decades.
I'll now turn the call back to the operator for Q&A.
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on a touch-tone telephone. If you're using a speakerphone, we do ask that you please pick up your handsets before pressing the keys. To withdraw your question, you may press star and two. That everyone may have a chance to participate, we ask that participants please limit their questions to one and a related follow-up. If you do have additional questions, please re-queue. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Nicholas Yulico from Scotiabank. Please go ahead with your question.
Thanks. First question is just on development and redevelopment. You have $600 million-$700 million of spend in the guidance, and on the development page, you only have $750 million left to spend on everything that's listed there. What are you assuming in terms of additional projects being started? How should we think about that?
Hey, Nick, this is Tom Klaritch. We look at the HCA development program. We've kicked that off. Right now, we have one project that's announced. We've got three or four that we're in discussions with, and there's a pipeline behind that that'll be coming into the schedules later. Life science, as you know, we accelerated the start of phases two and three of The Shore because there's been such great leasing activity there. There is anticipated several senior housing projects as we move forward. We would look at 2019 being a fairly big year because of the acceleration of those projects at the $600 million-$700 million range. We have a solid pipeline of about $500 million a year for the next two to three years at a minimum.
Okay. I guess assuming that you start additional projects, with HCA or some other projects, can you just remind us how to think about timing of if you're spending money in the next year, when those projects would come online from a NOI benefit standpoint?
Usually you're looking at, in a medical office development, about 12 months to build the shell and core. It's about six months later to build out the tenant improvements on the initial leasing. Then, we look at a kind of two- to three-year lease-up to stabilization. Life science, we've seen a lot better activity in leasing, many of these projects that we're starting have, or are in process, are 100% leased. We have very good leasing activity. A little bit longer on the shell and core in those. In design, it's probably 18 months to two years, then lease-up, similar, six to nine months.
Okay.
Hey, Nick. Pete here, too. One other thing, if you look at our investor deck, there is a nice page that goes through all of our active developments, there is also a shadow pipeline that's not within that active pipeline. There's some projects, a lot of it's in life sciences as well. BML III, we've got our Forbes site as well in South San Francisco. We've got some land in Torrey Pines as well as another site called Directors Place, which is near Torrey Pines as well. Then our 101 Cambridge Park Drive acquisition that we announced today, that's a piece of land that we also will put into our shadow pipeline as well. We've got a nice, robust, active pipeline, also we're backfilling the shadow pipeline.
Okay, thanks for that. Just last question is on the dividend. It hasn't been raised in a while. The guidance for the year assumes it's not raised again. You have talked about this is a transition year. You're eventually returning to growth. How should we think about how the board's thinking about getting back to dividend growth, and just also wondering why assume that even at the end of this year, there wouldn't be any dividend growth, dividend raise?
Nick, it's Tom Herzog here. Fair question. Where we stand right now was with the restructuring that we did, the dividend coverage is a little higher than what we would consider ideal, we will grow back into that dividend as income growth starts to recur in 2020. I would say this year, even as we get into next year, we have to make another assessment as we go into 2020. We'll probably capture some additional coverage before we increase the dividend is my guess, that is a future board decision.
Okay, thank you, Tom.
You bet. Thanks, Nick.
Our next question comes from Jordan Sadler from KeyBanc Capital Markets. Please go ahead with your question.
Thank you. I wanted to just touch base on some of the acquisition and disposition activity baked into guidance for 2019. I'm curious around the acquisitions, how much of that is already baked, what types of assets would already be in there? Sorry, what types of assets you're looking at?
Jordan, it's Pete. Why don't I just quickly touch on the sources and uses, then I'll hit on the acquisitions and dispositions, and Scott can jump in if he has some additional color to add. From a uses perspective within our guidance
We've got acquisitions of $900 million, development and redevelopment at the midpoint of $650 million, the balance is about $200 million of capital spend. That all adds up to about $1.75 billion. The funding of that is through non-core sales of $500 million, which was within our guidance, the drawdown of our equity forward of $430 million, the balance of that to get to $1.75 billion is some additional debt capacity we have. We ended the year in the mid-fives. We have capacity to go up into the high fives. When you think about the acquisitions of $900 million, some of that's already been announced. We announced the Cambridge Park Drive acquisition today, 87 and 101, as well as Sierra Point Towers. That's about $350 million combined.
The balance in that $900 million is spec, we've got a nice pipeline of things that we're looking at right now. Nothing specific to disclose. On the disposition side, the $500 million, $100 million is actually already closed. It was some non-core senior housing stuff, we had this Poway land that closed in January already. Within that is the U.K. final piece of about $100 million.
Okay.
The balance of $300 million is just general pruning within the portfolio, important to just think about those components.
I would add, Jordan, that most of that has been identified. We're not ready to provide the details, but we do have a game plan around that.
Just as a follow-up for Scott, I sensed a little more optimism or a little bit of a more positive tone on seniors housing. I'm wondering if I'm reading that correctly. I know you were looking out into the future, but it seemed that way to me, reading between the lines. Anything else you might offer that you're seeing at the property level, as you have gone through this process of transitioning the portfolio and transitioning to new operators, and just making your way through it to a greater extent?
Happy to cover that, Jordan. I would say that there continues to be pretty wide disparity among markets and operators. We have a number that are performing quite well, even in the current environment. Overall, we still see 2019 as a challenging year for HCP, at least, in part because of the carryover impact of the transitions, which are starting to show improvement, which is one of the reasons for optimism. There's a lot of upside there to be recaptured. I think we will start to see sequential improvement in that portfolio in 2019. I would just point out that the year-over-year growth rate will almost certainly be negative for at least the first half of 2019, just to be clear on that.
We are seeing improvement sequentially, and I think by the end of the year, there's a good chance that you'll start to see year-over-year increase in the NOI growth. Hopefully into 2020 and 2021, rather than down 33, you start to see some materially positive percentage increases for growth. Again, it's a relatively small dollar amount. In absolute dollars, we're only talking about $4 million in that transition portfolio in 4Q, but the growth rate sure sticks out, and we're optimistic that in 2020, 2021, it will stick out as well, but with a positive number in front of it. The optimism is more looking into 2020 and 2021, Jordan. I think 2019 is difficult, in part because of the core portfolio, which amazingly, it had a great 2018. We were up almost 2% in the core portfolio year-over-year.
That, I think, would compare well to pretty much anyone in the sector. We did see performance tail off into 4Q, which is one reason we're less optimistic about the growth rate in 2019 for that core portfolio. Maybe the final point I'd make is just two-thirds of the portfolio, roughly, is still in triple net, where we've got contractual rate increases, and we're projecting about 2% growth in 2019. It's a good time to have a weighting towards triple net. Tom, I think you want to add something?
What I would add, Jordan, is as we've looked at our senior housing business, certainly there's more work to do, clearly. With that comes the potential for some strong upside. I think the optimism that you're hearing is that we have systematically taken that business apart and are rebuilding it literally in all aspects. We have rebuilt the team. We have put in place infrastructure and systems and have data and reporting. The portfolio today looks nothing like what it looked like a few years ago. The operator mix has been changed dramatically with more work to do and things that we're working on that we're not ready to announce yet, but over time, we will.
It's been a systematic process, and we are definitely playing the long game on this one because we believe we can create a very good business in a business that's quite inefficient, meaning that there are going to be some that do well and some maybe not so well. We like to be part of the group that does well in this business because we see long-term prospects being very good. That's probably the optimism that you're hearing within the comments.
Got it. Thank you.
Thanks, Jordan.
Our next question comes from John Kim from BMO Capital Markets. Please go ahead with your question.
Thank you. Good morning. I had a question on your development disclosure, page 22. You provide a stabilized occupancy date for your developments, and then there's a footnote saying six months later you'll have economic stabilization. Should we be looking at this as the occupancy is the FFO contribution and the stabilization date, which is three to six months after, is the AFFO contribution?
No, that's probably a good way to look at it. Really, the occupancy starts on these projects almost at six months after completion. The stabilized occupancy is when, for a medical office, we normally consider that in the 85+ range, similar for life science. That each segment should take a little bit longer to get to stabilization. If that answers the question.
Well, for instance, The Ridgeview and The Cove, are those going to contribute to FFO this year?
Yes. They will towards the latter half of the year. There is a free rent component typically within the leases in life sciences. It will contribute first to FFO, there's typically a six-month lag or so before it contributes to that.
Okay. A follow-up on your guidance. Some of your peers don't include acquisitions in their guidance. I'm wondering with this $900 million, which Pete, you said some of that's already been announced, is this figure realistic? Is it sort of a conservative number? How much of this is driven by your cost of capital?
I would describe it this way. Typically, we wouldn't put future acquisitions in our guidance. As you're well aware, when we took certain actions in 2018 that raised a lot of capital, we paid down debt below the level that we considered to be the optimal place to function, and we had a forward equity issuance. We have had a number of different transactions in mind that we've been working on that would utilize those proceeds. It's been part of a bigger plan. Therefore, in this particular case, because these funds are so obviously available, it would only make sense to you as you're trying to understand our numbers, if we provide to you the acquisitions that we do see coming our direction in totality. Otherwise, typically, if we didn't have the funds raised already and have access to them, we typically would exclude them.
That's helpful. Thank you.
Thanks.
Our next question comes from Drew Babin from Baird. Please go ahead with your question.
Hey, good morning.
Hey, Drew.
Quick question on the development pipeline. As you go through The Cove at Oyster Point and Sierra Point, the remaining phases at those projects, can you talk about the sequencing of yields as they deliver? I know some of these projects, a lot of infrastructure was put on kind of in the initial phases, and the yields kind of build over time. A little more specifically, what should we expect with those?
If you look at the various phases, normally the last phase is with The Cove. There are no amenities or parking garage, we're looking at a much higher yield on that in the upper 9s. The same is true of Sierra Point. The overall return on the shore at Sierra Point is in the low 6s. If you look, phase 1 had the amenity package. Phase 2 will have the parking garage. Again, the final phase 3, has none of that. The phase 3 is more on the low 7 range, while the other 2 phases are in the low 6s.
Okay, that's helpful. Just one question on the triple net portfolio. In the profile on page 28 of the supplemental, it looks like there's one lease with about 0.75x coverage. That's about 2% of your overall revenues with no corporate guarantee. I was just wondering if you can talk a little more specifically about what that is, when it expires, and what might be done to deal with that.
Scott here. I'll cover that. I think you're referring to one of the Sunrise leases. The lease matures in about 10 years. It's a complicated ad rent structure that we inherited more than 10 years ago, you've heard us talk on previous calls about the potential to convert some of the Sunrise ad rent leases into SHOP. I would put that in the category of a potential conversion. Despite the payments coverage showing up as 0.75 on the schedule, that would not be dilutive to our earnings because of the way the complicated rent waterfall works. At the end of the day, the rent that HCP receives is quite consistent with the EBITDAR that's generated at the property.
Okay. I guess just one more follow-up on the topic of Sunrise. As you look out to 2020, the triple-net maturities, obviously you've talked before about potentially converting some, if not all of this to SHOP. I guess, how do CapEx costs play into this, where if it's a SHOP asset, you're paying a management fee, you're taking on the CapEx burden. Could it potentially be more economical to stay triple-net with a lower rent payment? Or do you kind of think about it as at a troughing in the cycle, it might be better kind of all things considered to just go SHOP?
Yeah, it depends. Not all the situations are the same. Across the board, if you see us convert triple-net into SHOP, you can be assured that it would be higher-quality real estate and an operating partner that we have a lot of confidence in. If we don't check those two boxes, I think it's highly unlikely that we would look to convert to SHOP. Then on Sunrise in particular, which is the most likely candidate for conversion, because of the complicated way the waterfall works, the CapEx is actually paid before the rent. So there would not be any leakage in the SHOP structure there.
Okay.
I would add to that. When we think about the Sunrise conversion of those assets, again, it's a structure that's dated. SHOP has taken its place. When you think about our motivation to do it creates alignment with our operator. It's a lot less confusing to you. Frankly, it's less confusing to us because all these arrangements are different. It's a major headache. From an earnings perspective, it's relatively a push, and that's how I would look at it.
Okay. That's all very helpful. Thank you.
Thank you.
Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead with your question.
Yeah, thanks. Scott, I wanted to touch on the transition SHOP portfolio real quick. I know you made some remarks in your prepared comments. I just wanted to confirm, have those assets been stabilized already, and have you seen declines in, I guess, executive director departures and employee turnover and things like that?
I would definitely not call them stabilized. We transitioned 38 in total. The first wave of transitions occurred in March. Nearly half of the transitions occurred in the second half of 2018. There's still quite a divergence, even within the transition portfolio and performance. The ones that transitioned earlier have started to see a nice increase in occupancy and at least signs that expenses are getting closer to normal levels, or that they will return to normal levels. The assets that transition in the third and fourth quarter are still going through a period where occupancy is way down, hasn't yet started to recover. We just have some crazy increases in expenses that just will not recur. Just as an example, repair and maintenance is up 60% year-over-year, and insurance is up 80%, and contract labor is 10 times the normal level.
They're just absurd numbers that we could go through the exercise of normalizing all of this stuff, and it would be an enormous number. Back of the envelope was like $1 million of expenses that I think you could reasonably call transitory in nature, and you're on a base of $4 million of NOI. We didn't normalize any of those things, but we keep trying to say this is such a small pool with such small dollars, with such unusual elevated expenses, that the numbers this quarter are ugly, but we are going to recapture that. It's just a matter of time.
Okay. I think in the prior calls, you highlighted that by stabilizing these assets, you can generate about $25 million of incremental NOI. Is that still a good estimate for stabilizing these assets and where that NOI number can go?
Yeah, I think that's still a good estimate. The big question is timing, and I think we are going to start seeing improvement in 2019. At the same time, a number of the assets didn't transition until late in the year, and those will take some time. We've put seven of the 38 assets into redevelopment, and there's massive upside on those, but it's actually dilutive in 2019, like any redevelopment, and then we start to see some real benefit in 2021 and 2022.
Scott, correct me if I'm wrong, we might have $4 or $5 million of the $25 million built into our numbers, which could be higher, it could be lower. The timing is difficult to determine, but just for a basis for the analyst to use, probably $4 million-$5 million has been incorporated. Correct?
Correct.
Okay, great. Then the redevelopments, is that in your development page, the 10 that has a total budget of about $80 million to complete those?
That's right.
Okay, great. Thanks, Scott.
Our next question comes from Nick Joseph from Citi. Please go ahead with your question.
Thanks. I just want to understand the thought process behind the refinancing of the 2020 debt, given the low coupon. Is there a cost associated with the early repayment mid-year?
Hey, Nick, it's Pete here. What I would say about that is there wouldn't be a cost, just given the low coupon that that bond trades at. It actually trades at a discount to par now. If we take it out early, we have to pay par on that, but nothing above and beyond par. We'd have to pay par at maturity anyways, too. As you think about refinancing that, we obviously would love to keep that low rate as long as possible, but we have to pay that debt back anyways, in early 2020. By incorporating it in our guidance, it gives us some flexibility if the bond markets are cooperating to do something earlier, if we so choose. We also have very little secured debt as well, if we so choose to do something there.
Although our goal typically is to do the unsecured bond market from an issuance perspective. From a rate perspective today, where would we issue? It's somewhere between 4% and 5%, but it depends upon tenor. The longer the tenor, the higher the rate. I would say on a 10-year basis, we're probably right in the middle of that. Maybe we could do a little bit better today. Again, we assumed a mid-year refinance of that.
Thanks.
Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead with your question.
Great. Thanks for the question. The life science segment continues to be very strong. The guidance certainly suggests that. I'm wondering if you can give a bit more color on the components of that same-store NOI between sort of occupancy rent spreads. Just given the expirations over the next two years, sort of where do you think those are relative to market?
Yeah. Good question, Vikram. Obviously that market is performing well. 2018 was really a banner year across the board for the industry. Our occupancy is already quite high, in the mid to high 90s, so the vast majority of that same-store growth, above and beyond what you would expect normal escalators being around 3%, is from the mark-to-market on the rents. Rents have gone up pretty dramatically the last couple of years in all of our markets, especially San Francisco. What I would say from a mark-to-market perspective, the next couple of years, the rents expiring in 2019 and 2020, as we look at it, are about 15%-20% below market.
While we're having a nice year this year in life sciences as part of our guidance, we see this trend persisting for at least another year, perhaps beyond, which gives us some comfort with regards to the developments and other things we're doing within that segment.
Okay. To clarify that, when do the new developments roll into same-store?
Typically, it's about a year after it hits its stabilization period. For example, right now, none of The Cove project phase II at least, I don't think phase I is actually in our same store at this point in time. You really wait for a full year to wrap around for a good year-over-year comparison.
Okay, great.
Vikram, we don't apply judgment on that. If you go back to our glossary and our stuff on the stabilization period-
Yep
you'll be able to read very specifically, just so you don't think there's judgment that we apply.
Okay, great. Just a clarification on the expirations, and the potential restructuring you referenced. The triple net expiration in 2020, is that mostly Sunrise, and is that what you were referring to as a candidate for restructuring into RIDEA?
Hey, Vikram. It's Scott. The Sunrise lease that Drew mentioned is a 2030 maturity. It shows up 10+ years from now. The nearer-term maturities, like 2020, be assured we're actively asset managing each of those and have ongoing dialogues with the operators, nothing to report at this point.
That big $40 million, is that just a combination of a bunch of different operators?
Yes, that's correct. Not one operator.
Okay, some could be RIDEA. There could be different outcomes for each. Is there any majority are converting or not? Is it too early to tell right now?
I'd say the majority of that is very high-quality real estate that would be a good candidate for conversion, and there are a handful that are more likely sale candidates.
Okay, great. Thank you.
Thank you.
Our next question comes from Chad Vanacore from Stifel. Please go ahead with your question.
All right. Thanks. I just want to roll back to comments on the senior housing operating platform. I think, Scott, you gave us rate expectation of 3%, and that's overall, not just in place. Is that right?
Correct.
All right. Was that expenses up 4%, or was that just the wage and labor portion of expenses?
It's really both, but it's compensation expense that is driving most of it. That insurance expense is going to be elevated a bit in 2019 as well. Both labor and total operating expenses should be in the, say, mid-fours for 2019.
Okay. All right. Just given that leads to a component of a question on occupancy, because that would imply still a deeper occupancy drop. Are we thinking about that right? Kind of what level of occupancy drop are you expecting?
Yeah, I'll separate the core portfolio from transitions. The core being about three-quarters of the pool, and Brookdale representing about 75% of that core portfolio. I mentioned that occupancy trailed off in the second half of 2018. We actually see the core portfolio occupancy being down in the 150 to 200 basis points year-over-year. Best guess. It's a small pool. That could change. From where we sit today, that's our best guess. We do have some new supply impacting our local markets. The transition portfolio is likely to be more flat year-over-year, given the current trends.
All right. How should we think about the difference between same-store NOI between that core and transitional portfolio? You think that transitional is dragging down the overall performance?
Yeah, a bit. We said 5% at the midpoint, keep in mind that the core portfolio is roughly 70% of that pool, 70%, 75%. I would expect that the core portfolio would do a bit better than the 5%, with transitions a bit worse, but with very large differences from quarter-to-quarter. Transitions will likely start out pretty negative on a year-over-year basis get better throughout 2019, hopefully show a nice positive number by the end of the year. Whereas core is more likely to be just sort of low single digits down throughout the year. Again, I'll keep saying that both of them are very small pools. There's just a lot of variability, if something changes, we'll let you know.
Got you. Just one final question on that. How should we think about that trend throughout the year? The normal seasonality would be a dip in the first half and then recover in the second half. Should we expect that following, or should we expect a kind of faster ramp-up in the second half?
It is seasonal, and occupancy does tend to fall in the first quarter. At the same time, from an NOI standpoint, the first quarter is usually quite good for senior housing because there are fewer days in the quarter, and you pay most expenses on a daily or hourly basis, whereas rates are paid monthly, usually. We usually see the first quarters being quite strong on NOI, even though it's weak on occupancy. It's somewhat counterintuitive, but I just wanted to point that out, that you aren't necessarily going to see the first quarter be a terrible quarter. If anything, it actually might be okay.
All right. I'll hop back in the queue, thanks.
Yeah.
Our next question comes from Tayo Okusanya from Jefferies. Please go ahead with your question.
Hi. Yes, good afternoon, or morning in Denver, California. Still want to focus on the SHOP portfolio. The transition piece that you talked about, this idea of moving from $4 million of cash NOI in Q4 2018, and again, correct me if I'm wrong, but you said when this is all kind of said and done, you could potentially be making $25 million in NOI in a quarter, or was that an annualized number?
Yeah, let me clarify, because there are different components. We transitioned 38 properties.
Right
Roughly 14 of those are in the same store pool. There are 24, roughly, properties that are not in the same store pool. The annualized NOI today out of that pool is around $10 million in the fourth quarter. If you annualize it's closer to $40 million, and we think there's up to $25 million of upside from there.
The $10 million a quarter is both for the same-store plus non-same-store.
Correct.
Okay. That is $40 million a year, then the upside gets you to $65 million a year for the whole portfolio.
Yeah. Rough numbers, correct.
Okay, excellent. Could you just talk a little bit about what has to happen to move from $40 million to $65 million? Is this 500 basis points gain in occupancy? Is this reducing OpEx? What is that trigger?
Yeah, it is mostly eliminating the transitory expenses, including the ones I mentioned earlier in the call, then recapturing occupancy. That portfolio is down roughly 1,000 basis points from two years ago. When we talked about the $25 million of NOI recapture, it was primarily from recapturing the lost occupancy and eliminating the transitory expenses.
Got you. Okay, thank you. On the HCA side of things, again, it's great to kind of see a project starting off with them. Could you kind of remind us again about the relationship itself and kind of how big this could potentially become over time?
Sure. This is Tom Klaritch again. The relationship goes back many, many years. If you look back in the '90s, for example, HCP did a lot of development work for both HCA and HealthTrust. In 2000, we acquired MedCap Properties, which was HCA's kind of spin-off medical office building portfolio. Personally, I've been both an HCA CFO and then helped put together the MedCap property. I've been kind of affiliated with the company since the late '80s. It's a very good relationship we have there. If you look at the projects, what started out when we were first talking about it was about a $200 million potential pipeline. That's actually grown since then.
We would anticipate, given the projects that we're working on right now and what's in the pipeline, probably to be $60 million-$100 million a year in spend on that program over the next three to five years.
The next three to five, okay. All right, that's it for me. Thank you.
Thanks, Tayo.
Ladies and gentlemen, once again, if you would like to ask a question, please press star and one so that everyone may have a chance to participate. We do ask that you please limit yourselves to one question and a related follow-up. Our next question comes from Daniel Bernstein from Capital One. Please go ahead with your question.
Hi. I'm just trying to reconcile a little bit. You gave me your senior housing guidance combined SHOP and triple net, which implies to me you're kind of indifferent to the structures versus the longer-term positivity you're having around 2020, 2021 fundamentals for seniors housing. Are you truly indifferent to one structure versus the other? If we went out two or three years, are we going to see the mix of RIDEA versus triple net very different for you guys versus where it is today? Do you want to be a little bit more like your peers, 30%-40% RIDEA, or would you rather stick to triple net?
Hey, Dan, it's Scott. I'll start. I think Tom has some comments as well. I wouldn't say we're indifferent. I would say that if we have a high-quality real estate property and an operator we have high confidence in, we're happy to do the RIDEA structure. We think it does typically align interests more between the owner and the operator, and we think that can be a very successful investment structure over a long period of time. We would be happy to put those same properties and operators into a triple net structure as well, if that was of interest. It's usually not to the operator, but if it was, we'd be happy to hold senior housing assets in a triple net.
I think the real distinction for us in terms of ownership structure is on the more Class B properties and older assets, maybe operators that we don't have as much confidence in, that those would be more likely candidates for triple net. I think Tom wanted to make a comment more about the guidance and combining the two.
Just reporting and the guidance. I'll tell you, Dan, how we think about that is when we run the business from a management team perspective, it really is across the three lines of business, life science, MOBs, and senior housing that we've been talking about for the last two, three years. We did want our reporting to reflect how we look at the business, how we drive the business. In senior housing, we asset manage, we look at it from a capital allocation perspective, et cetera, along those three lines of business. We did want to have some reporting that reflected that. At the same time, we did not want to have you lose any information for your modeling purposes or your understanding of the components.
Of course, we left that all in place in addition to adding some additional disclosure to give you quarterly information between the three buckets of core transition, and of course, you have triple net, and we've guided it the same way. That is how we came to the conclusion that we thought that would be more useful for somebody that wants to look at it from a little higher vantage point, and look at it the way that we have a tendency to manage it around profitability of our company as we continue to grow it, and those that prefer to continue to look at it with a little bit more detail. All that information is in there.
Okay. I appreciate that. I think in the interest of time, I'll hop off. Thanks.
Thanks.
Our next question comes from Todd Stender from Wells Fargo. Please go ahead with your question.
Hi. Thanks. Just a quick one from me. What returns are you forecasting? When you look at the Torrey Pines and the South San Francisco assets that you just acquired, you took out the joint venture partner interest. Can you kind of compare what you were earning on a yield perspective? I imagine there were some management fees tucked in there versus what your going-forward yield's going to be.
Yeah, I'm happy to take that one. We thought this was a great use of capital for HCP. We're happy to consolidate and own 100% of these four assets. The two in San Diego are largely stabilized, so there's really no change in returns. The two in San Francisco had been undergoing redevelopment for the past year or so. They're now 75% leased and 100% committed. When we talked about the 6% stabilized cap rate, that should be fully in place by 2020.
Okay. Thanks, Scott. You had some management fees, I imagine, tucked in that you'll lose. Any real change there? It doesn't sound like there is.
Yeah. Hey, Todd. No, that actually was a joint venture that was set up even before HCP bought SLAB about 20 years ago, there were not really any asset management fees associated with that of note.
Okay, got it. Thank you.
Thanks.
Our next question goes to Michael Mueller from JPMorgan. Please go ahead with your question.
Thanks. Just a quick one. Just curious, did putting Medical City Dallas in the MOB bucket for 2019 have any material impact on the 175 to 275 same store guide?
This is Tom Klaritch, Michael. It didn't have really a material impact on it at all. I think it was just around 10 basis points. That was it.
Okay.
Mike, moving that is more around putting it within the, we think, the appropriate segment from a cap rate perspective. In fact, it might actually garner a better cap rate than a Class A medical office building. Tucked away in our hospital segment, it typically was getting a cap rate that we didn't think was appropriate for that type of integrated facility. We moved it over there. It didn't have anything to do with same-store growth and how that would impact it in 2019.
Okay.
It's a pretty unique and special structure. If it's not one that you're familiar with at a future investor conference, we should take a few minutes and talk about that one. It's one of the gems in our portfolio that's worth understanding.
I was asking because I think when you were talking about the 2018 same-store rundown for other, you flagged that one as having very good performance.
Yeah.
Okay. Thank you.
Thanks.
Once again, if you would like to ask a question, please press star and one. Our next question comes from Lukas Hartwich from Green Street Advisors. Please go ahead with your question.
Thanks. Hey, guys, just one for me. The total SHOP portfolio, the 93 assets, how far below peak NOI is that portfolio?
Don't have that handy. I can tell you that the 46 assets in same store are about 4% below 2017. The balance of that 93, about 47 assets, a lot of those are triple net to SHOP conversions, and that portfolio performed generally consistent with the SHOP-to-SHOP conversions that are in the same store pool. There are a number of redevelopments in the balance, and those would be very misleading to look at current NOI. The balance are assets that were actively being marketed for sale. That's the best I can do off the top of my head, but we can follow up with more specifics, Lukas.
Great. Thanks.
Ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
Thanks. Thank you all for your time today. Much appreciate your continued interest in the company, and we look forward to talking to you all soon. Bye-bye.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.