Good day, ladies and gentlemen, and welcome to the First Quarter 2014 HCP Earnings Conference Call. My name is Danielle, and I will be your coordinator today. [Operator Instructions] As a reminder, this call is being recorded. Now I would like to turn the presentation over to your host for today's conference, John Lu, Senior Vice President.

You may go ahead, sir. .

Thank you, Danielle. Today's conference call will contain certain forward-looking statements, including those about our guidance and financial position and operations of our tenants. These statements are made as of today's date and reflect the company's good faith beliefs and best judgment based on current information.

These statements are subject to the risks, uncertainties and assumptions that are described in our press releases and SEC filings, including our Annual Report on Form 10-K for the year ended 2013..

Forward-looking statements are not guarantees of future performance. Actual results and financial condition may differ materially from those indicated in these forward-looking statements.

Future events could render the forward-looking statements untrue, and the company expressly disclaims any obligation to update earlier statements as a result of new information. .

Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these measures to the most comparable GAAP measures in our supplemental information package and earnings release, both of which have been furnished to the SEC today and are available on our website at www.hcpi.com. .

Also during the call, we will discuss certain operating metrics, including occupancy, cash flow coverage and same-property performance. These metrics and other-related terms are defined in our supplemental information package. .

I will now turn the call over to our CEO, Lauralee Martin. .

Good morning. Welcome to HCP's 2014 First Quarter Earnings Conference Call. Joining me this morning are Paul Gallagher, Chief Investment Officer; Tim Schoen, Chief Financial Officer; and John Lu, Investor Relations. .

We had a solid start to the year on all fronts, including operations, financing and accretive investments. We are pleased to share the details with you this morning. Let me turn the call over to Tim to start with our first quarter results. .

Thank you, Lauralee. Well, let me start with our first quarter results. For the quarter, we reported FFO of $0.75 per share and FAD of $0.63 per share.

Our FFO and FAD per share growth year-over-year of 1.4% and 1.6%, respectively, were negatively impacted by a one-time gain of $0.02 per share from the sale of marketable securities in the prior year period. Excluding this gain, FAD per share increased 5% compared to the first quarter of 2013..

Our same-property portfolio generated a strong 4.2% cash NOI growth year-over-year, driven by contractual rent increases and performance from our senior housing RIDEA portfolio.

The results also included a 30-basis-point benefit due to the timing of ad rents from our tenant hospitals recognized this quarter, which is one quarter earlier than prior years, as we transitioned to the newly extended leases. Paul will discuss our results by segment in a few minutes..

first, we raised $350 million of 10-year bonds at a coupon of 4.2% in February. Net proceeds, together with available cash from year end, were used to repay scheduled debt maturities in the quarter, totaling $560 million.

In addition, with the support from all existing relationship lenders, we upsized our revolver capacity from $1.5 billion to $2 billion, improved the pricing by 17.5 basis points and extended the term by 2 years to March 2018..

Our strong balance sheet further improved during the first quarter. Financial leverage was reduced to 38.5%, down from 39.2% at year end, and our secured debt ratio declined to 6.2%, representing a 60-basis-point improvement sequentially.

Scheduled debt maturities for the remainder of the year total $105 million, and we have $2 billion of immediate liquidity from our undrawn revolver. .

Now turning to our investment activities. During the first quarter, we executed on $136 million of investments, including the acquisition of a $32 million medical office building in Dallas and a $51 million commitment to construct a new 180-unit senior housing community in suburban Chicago.

Last week, we closed on the acquisition of 2 on-campus MOBs in Miami for $26 million. .

As previously announced, we entered into an agreement with Brookdale to form a new $1.2 billion continuing care retirement community joint venture. Upon closing, we will own a 49% interest in a venture via our contribution of 3 wholly-owned properties and $334 million of cash to be used by the JV to acquire 4 additional CCRCs.

As part of this transaction, Brookdale agreed to cancel all existing Emeritus purchase options on 49 of our senior housing properties in exchange for amending the leases related to 202 properties currently operated by Emeritus..

Finally, our 2014 guidance. Our portfolio continued to perform in line with our business plan, with projected full year cash same-property performance growth unchanged at 3% to 4%.

We are also reaffirming our 2014 FFO and FAD per share forecast and continue to expect FFO to range from $2.96 to $3.02 per share, and FAD to range from $2.47 to $2.53 per share. .

The full year guidance is based on our existing portfolio under the current Emeritus leases before taking into account any impact from the pending Brookdale CCRC JV and Emeritus lease amendment transaction. .

As previously announced, our pending transaction with Brookdale is subject to the closing of Brookdale's merger with Emeritus, which requires the approval of each company's shareholders.

We will provide updated guidance that reflects the entire transaction with Brookdale when we conclude our third-party valuation work and have more clarity regarding the timing expected to clear all closing contingencies. Upon closing, we expect the transaction to be $0.02 per share accretive to our FAD on an annualized basis. .

With that, I will now turn the call over to Paul.

Paul?.

Thanks, Tim. Now let me review the portfolio's first quarter performance. Highlights include continued robust leasing momentum in our medical office, life science and RIDEA portfolios. .

Senior housing. Occupancy for our senior housing platform was 86.8%, a 10-basis-point increase over the prior quarter and the prior year. Same-property cash flow coverage for the portfolio was 1.11x, unchanged from the prior quarter.

The same-property population now includes the Emeritus flagstone portfolio, which is performing in line with underwriting..

Same-property performance increased 4.7%, driven by contractual rent steps, including higher rents for assets transitioned to new operators and growth in our RIDEA portfolio, where year-over-year occupancy is up 190 basis points. Rates are up 4.4%, driving same-property performance of 7.8%. .

As Tim noted, we announced an agreement with Brookdale to expand our relationship to create a $1.2 billion joint venture that will own and operate entry fee continuing care retirement communities and to amend the triple-net leases on our 202 communities currently operated by Emeritus.

The transaction includes the termination of purchase options on 49 Emeritus and 3 Brookdale communities, resulting in the elimination of approximately $1.3 billion of reinvestment risk over time. .

The triple-net leases on the 202 communities leased to Emeritus will be split into 2 portfolios. The first portfolio is comprised of 49 non-stabilized communities, which will be operated under our RIDEA structure in an 80-20 partnership with Brookdale.

These 49 properties have an average occupancy of 80% and were selected for the RIDEA portfolio as they have the highest potential for growth. .

Cash payments from Brookdale totaling $34 million and a favorable interest rate on ATP financing to the JV will bridge the near-term cash flow shortfall when compared to the in-place triple-net rents. Thereafter, EBITDAR, net of recurring CapEx generated from these communities, is expected to exceed the status quo rent levels. .

This portfolio represents our second RIDEA venture with Brookdale. EBITDAR growth on our existing RIDEA JV was 7.6% in 2013, evidencing that Brookdale is a best-in-class operator, delivering both high-quality care and strong financial results..

The remaining 153 properties will be in a triple-net master lease, with an average initial term of 15 years and current cash flow coverage of 1.15x. The 2014 annual base rent will remain unchanged at $158 million, with rent escalators of 3% to 3.5% in years 2 through 4, and a greater of 2.5 or CPI with a ceiling of 5% for the remaining term.

Rents will be reduced by $6.5 million in 2016 and $7.5 million, thereafter..

The overall transaction is expected to be immediately accretive, driven by the investment in the CCRC JV and the funding of up to $100 million in capital improvements on the triple-net lease portfolio at an initial lease rate of 7%.

More importantly, the CCRC JV and the new RIDEA JV are expected to be platforms for further accretive acquisitions and growth. Additional details about the transaction can be found on our website..

Post-acute/skilled nursing. HCR's normalized fixed charge coverage for the trailing 12 months ended March 31, 2014, was 1.14x, a decline of 2 basis points from the December 31, 2013's coverage of 1.16x discussed on the last call. .

HCR's coverage now reflects a full year of sequestration, which went into effect April 1 last year.

Skilled nursing centers improved significantly during the first quarter compared to the fourth quarter, but still remained below prior year levels due to weaker hospital volumes, shorter average lengths of stay, driven by industry shift towards managed care and weather impacting hospital admissions..

As we mentioned in the fourth quarter conference call, we expect HCR's coverage to improve in the latter half of 2014 once it realizes the full impact of cost savings initiatives that were implemented in late 2013.

HCR continues to invest over $100 million per year to maintain, upgrade and expand its facilities, including 10 expansion projects totaling over $20 million of an investment in HCP's portfolio. .

HCR ended the quarter with $170 million of cash on hand, up from $142 million at the end of December. Same-property performance for our post-acute/skilled nursing portfolio was 3.6% for the quarter, driven by rent steps on the HCR portfolio. .

Turning to our non-HCR post-acute/skilled nursing portfolio. Cash flow coverage was 1.70x, a decrease of 4 basis points over the prior quarter. Same-property performance for the non-HCR portfolio increased 4.2%, driven by rent steps and additional rent on capital improvements at our covenant care facilities..

Hospitals. Same-property performance increased 10.2%, driven by the modification and extension of our 3 acute care hospital leases with Tenet Healthcare that changed the timing of rent recognition over the year.

The lease modification is expected to result in a decline in same -- hospital same-store performance of 5% to 6% in the second quarter, but will have no impact on the full year guidance. Cash flow coverage declined 12 basis points to 5.28x, driven by lower inpatient volumes at our Tenet hospitals..

Medical Office Buildings. Same-property performance increased 4.3%, driven by rent steps and a one-time revenue adjustment that occurred in the first quarter of 2013. Occupancy for our total medical office portfolio declined 70 basis points from the prior quarter to 90.0%, driven by a redevelopment asset placed in service at 19% occupancy.

That asset is now 72% leased..

During the quarter, tenants, representing 429,000 square feet, took occupancy. The average term from new and renewal leases was 60 months and the retention rate was 69%. We have 2.1 million square feet of scheduled expirations for the balance of 2013, including 441,000 square feet of month-to-month leases.

We have executed a total of 360,000 square feet of leases that have yet to commence and have an active leasing pipeline of 1.1 million square feet..

Executed leases, including new 11-year lease for a 51,000 square feet with the University Medical Center of Southern Nevada that anchors 85% of our Las Vegas redevelopment project. The lease was signed in February 2014. .

In March 2014, the company acquired an 88,000-square-foot medical office building located in Dallas, Texas for $32 million, yielding 7.1%. The property constructed in 2009 is 96% occupied with an average remaining lease term of 90 months. The building represents one of the most comprehensive ophthalmology centers in the United States. .

On May 1, 2014, we acquired 2 MOBs totaling 148,000 square feet for $26 million with a yield of 7.7%. The property is located in the historic Coconut Grove neighborhood of Miami on the campus of HCA's Mercy Hospital, and are 82% occupied. .

Life science. Same-property performance grew 2.5% in the quarter, driven by rent steps.

Occupancy for our total life science portfolio declined 70 basis points from the prior quarter to 91.7%, driven by a 160,000-square-foot office tenant in Redwood City, whose lease expired in January, offset by new leases in the Bay Area, including a 63,000-square-foot lease with Genentech and a 69,000-square-foot lease with CardioDx that took occupancy this quarter.

For the quarter, tenants representing 411,000 square feet took occupancy with average lease terms of 66 months. .

Leasing remains strong. In February 2014, we executed a new 11-year lease for an entire 51,000-square-foot building at our Hayward, California life science campus. In March and April, we executed 3 new 7-year leases totaling 85,000 square feet, which fully leases our South San Francisco Oyster Point life science campus..

The life science portfolio has 167,000 square feet of scheduled expirations for the balance of 2014, 30% of which has already been leased to new tenants. Additionally, we have executed 265,000 square feet of new leases expected to commence within the next 12 months. .

Life science development pipeline consists of 2 projects totaling 230,000 square feet that are 100% preleased and 1 78,000-square-foot project that is 63% leased. Total remaining funding requirements for the development pipeline are $27 million..

Sustainability. During the quarter, we received another 4 ENERGY STAR certifications for a total of 134 ENERGY STAR certifications as of March 2014. With that, I'd like to turn it over to Lauralee. .

Thank you, Paul. Paul has highlighted our investment portfolio's continued strong organic performance, demonstrated by cash same-store growth of 4.2%. Year-to-date leasing activity further strengthened both our life science and our medical office portfolios, as well as continued our success in reducing non-stabilized assets.

And the announced lease amendments with Brookdale will improve lease coverage and the credit quality of our operator. All of these actions position us for a very solid organic growth this year and into 2015..

On the investment front, in addition to the $334 million accretive new investment with Brookdale expected to close later this year, the $51 million commitment to construct a new senior housing community in suburban Chicago, we also completed the 2 medical office investments Paul described totaling $60 million.

Both of these investments were sourced through existing relationships and have initial cash yields of about 7%. .

The focus of my comments this morning will be on our increased commitment to our operator relationships to help further drive external growth. We know that supporting our operator's financial success increases the growth opportunities of HCP. .

In conjunction with their merger, Brookdale announced that their acquisition of Emeritus could provide an opportunity to monetize Emeritus' purchase options.

Market commentary speculated that operator consolidation across the health care state could result in a more owned versus leased business model, making REITs as a capital source less valuable to the resulting stronger operators.

Our announced transaction validates that HCP remains a very valuable source of capital to Brookdale and a key component in their business strategy..

We extended our triple-net lease relationship and also structured 2 new partnerships, an 80-20 senior housing RIDEA partnership and a $1.2 billion continuing care retirement community joint venture. With these partnerships, HCP benefits from an aligned operator manager and is solidly positioned to grow with Brookdale.

Brookdale benefits from increased real estate ownership, while retaining HCP as a reliable capital source. .

The elimination of purchase options, while at a cost of modest future rent reduction, allows us to focus our acquisition resources on investments to accretively expand our asset base after having retained the cash flow from our existing assets. .

Our new CCRC JV platform enables us to expand our senior housing investment mix to a consumer seeking long-term security and continuity regarding housing and health care, while at the same time representing an attractive entry point for HCP, as CCRCs continue to benefit from the housing market recovery. .

We like the CCRC asset class, a property type with a premium yield and high barriers to competitive entry. And we like investing alongside Brookdale, the best-in-class senior living franchise with 35 years of success, marketing and operating CCRC facilities.

We're very proud and pleased to have been selected as the largest capital partner to the largest senior living operator. .

We remain disciplined to our investment hurdles in a marketplace where asset and portfolio pricing is aggressive. Our strategy continues to focus on long-term cash flow growth and value creation, particularly when interest rates are kept artificially low.

Even after putting deals through this opportunity filter, we are pleased with the increasing size of our transaction pipeline..

Let me close by saying we are proud of a solid quarter performance and remain positive on the balance of the year. Operator, we are now happy to take questions..

'.

[Operator Instructions] And our first question comes from Josh Raskin from Barclays. .

Here with Jack Meehan as well. So my first question, just -- and I think Lauralee, you mentioned a little bit in your prepared comments, but as we think about the diversity from an operator perspective following the Brookdale Emeritus transaction, your 2 largest tenants are going to represent 1/2 of basically total revenue.

So I'm just curious if there's a feel -- do you feel like there's a necessity to sort of diversify away from that? Or is it we pick the 2 best operators, and I heard your comments on Brookdale, we pick the 2 best operators and sort of that's the strategy going forward?.

Well, they are 2 tremendous operators and we're very pleased to have them in our portfolio. I would also say that relative to the Brookdale portfolio, with what we've done in terms of positioning the portfolio with the leases, we have tremendous diversification in terms of the assets underlying what is now an even stronger operator.

So we feel like we have diversity within that portfolio, but we're very comfortable with Brookdale as an expanded concentration within our portfolio. .

And this is Jack. Just maybe for Paul, just want to follow up on the HCR ManorCare coverage, I think 114, you mentioned. What's the progress on the operational improvements you previously talked about? I think it was 1/3 done at year end.

And when should that be complete?.

Yes, let me kind of go through it. When you think about it, their coverage continues to reflect the previous headwinds on reimbursement, sequestration and reduced hospital volumes. This first quarter's numbers include a whole year of sequestration.

The second quarter's going to have our 3.5% rent increase, that represents about 1 basis point a quarter of impact to coverage. That said, in March, despite the low hospital admissions due to weather, HCR's census was above prior year for the first time in quite a while.

Additionally, in October, we anticipate positive rate increases on the reimbursement front. In the fourth quarter, we expect to see full year impact to the cost savings that were initiated in the fourth quarter of 2013. And their hospice and home health continues to do very, very good, with year-over-year growth of 12%.

So we're still looking at fourth quarter starting to see some traction with respect to the coverage. .

Got it.

And then just last one off that, as you put all those things together, what do you think the coverage is that when you get to year end? And then could you just remind us what's the component that's coming from home health and hospice and EBITDAR?.

Do you have that, John?.

Yes, the home health care business is about 10% of the business. .

And then as you roll that forward, just what do you think the coverage got still?.

We expect to see traction in the second half of the year. .

And our next question comes from Tayo Okusanya from Jefferies. .

A quick question. On the acquisition front. Your name has kind of come up in a couple of really big transactions internationally in the media. Just again, curious about your interest in doing more internationally versus domestically, and also whether we should be thinking about acquisition activity more like what we saw in one quarter.

And then first quarter, onesies and twosies versus doing a deal of a substantial size. .

Well, there's a number of questions in there, so let me see if I can break that down. First of all, we like both domestic and international. If we go back to the last quarter call, I mentioned we are very comfortable in the U.K. and on the continent in the developed markets like France and in Germany.

We spent a lot of time over there with our debt investments both underwriting, as well as asset management, and feel it's a marketplace where we understand reimbursements and we actually like the stability of the reimbursements in those markets. So we don't comment on market rumors of transactions.

But I can tell you, we are very active in the marketplace. I think you had a question on onesie, twosies as well. We don't see ourselves as a retail aggregator, if that's what you mean by onesie, twosies.

We will do smaller transactions like we did this quarter with relationships where they're actually the retail aggregator and we're supporting their growth.

We do think that we have a combination of sophistication both around the real estate assets, but also the structured finance that makes us have significant opportunities into midsized and large portfolios, and we will continue to seek those opportunities. .

Okay, great.

And then I may have missed this in your opening comments, but did you talk about what the ManorCare coverage is at the facility and the corporate guarantee level as of March 31?.

We've talked about the fixed charge coverage March 31 at 1.14x. .

Okay, so it's very similar to what we had in the fourth quarter?.

Yes, that's right [indiscernible]. .

And our next question comes from Jeff Theiler from Green Street Advisors. .

Can you talk a little bit more about the CCRC joint venture you're doing with Brookdale? Entrance fees CCRCs haven't really been the preferred investment choice for REITs. And in recent years actually, many of them converted to rentals.

Can you talk a little bit more about why this is the right time to get into that business and what your near-term and long-term NOI growth projections are?.

Yes, Jeff, let me take a crack at that. We've actually looked at the asset class for several years. I would say prior to 2008 valuations, in our opinion, were rather lofty cap rates for these assets. They typically traded at lower cap rates than traditional senior housing.

And what we saw was the lion's share of the entry fee was mostly refundable, if not 100% refundable. When the market took a downturn, we looked opportunistically to try and buy some of these assets. It was difficult to kind of figure out where the bottom was in the housing market.

And it was difficult to turn on kind of where entry fee prices would end up stabilizing at. And then when you looked at it, the operators ended up having large amounts of liabilities to pay out without a lot of new entry fee coming in. Really what's changed is the housing market has recovered. Entry fees are less refundable today than where they were.

They're now probably about 50% nonrefundable. They get you a much more durable cash flow stream. The occupancies today in the CCRCs are lower, so from an opportunistic standpoint, it allows a good entry point and upside. So that when the vacant units are sold, you don't have to pay out a refund.

And we were able to buy these things at what is now a premium to where senior housing assets trade at. So we thought of this as a good opportunity.

I think if you were to look at it on a static basis, that we're going to see outsized growth for a couple of years as these things go from 80% to the low 90s, and some of the independent living components of these things can get up over 95% occupancy.

They will then stabilize out, but we look at this venture as the ability for us and Brookdale to work together to help consolidate the space. And hopefully, we'll have more accretive transactions that take advantage of that upside over time. .

Okay, so just in the near term, what kind of NOI growth rate would you be underwriting for this venture?.

On a 6% to 8% range as occupancy increases over time, Jeff, in the next couple of years. .

Okay.

And how big would you anticipate this venture getting over the next few years?.

We don't have a size limitation on it. Whatever the opportunity brings. .

Okay, great. .

This is Tom [ph]. I just had a quick question on the SNF cap rates. There's been some chatter from some participants that cap rates could be starting to tick down.

I just want to know, is there a point in which the cap rates could fall substantially to warrant more active recycling of that SNF portfolio? And then what are you seeing in terms of pricing in the marketplace today?.

We're seeing lower cap rates across the board on all asset classes. .

Okay.

And any color on the SNF portfolio in particular or how you think about that?.

If the price of SNF gets to the point where we can't justify the risk-adjusted return, then maybe we'll sell those assets. .

And our next question comes from Emmanuel Korchman from Citi. .

Just looking at the Brookdale Emeritus deal both for the CCRCs and the changes to the senior housing assets, what sort of made you comfortable -- taking on the RIDEA assets in that structure, especially since it's been one that HCP traditionally has not been as active in?.

Well, the assets that are in the RIDEA structure, Manny, are ones that -- first of all, we were able to choose and put those assets on the RIDEA structure. Second, those -- the rent payments associated with those -- the triple-net lease payments associated with those assets had a coverage of sub-1.

So that's one of the reasons we chose to put those assets into the JV -- into the RIDEA JV plus we like the growth opportunity of those assets. 1/3 of that portfolio was the Blackstone JV. Legacy Blackstone JV assets that were in lease-up. And those we've just started to put capital into, so we think those are in attractive growth profile.

As you'll recall, we could actually do a rent reset on those lease-up assets, so we still retain the benefit from those. And then the other 2/3 of them are Sunrise assets, and we like the quality and location of those assets as well. .

Yes, I think from a standpoint of not wanting to do RIDEA in the past, I think where we were was we didn't see the right risk-adjusted return to go out and buy assets and put them into a RIDEA structure.

In these particular assets, we have assets that were part of our Sunrise transition, where we had some modest CapEx that were spent, and we saw some significant lift in the rents and the NOI of the properties. And we've seen in the Blackstone portfolio what's happened with spending capital and the upside associated.

And if you look at it, Emeritus has been pretty much underspending on the capital side for the past couple of years.

So we really had the benefit of kind of going to school on the portfolio to see which assets -- which are good assets that needed capital that had both the rate and the occupancy play, where if you spend capital, you would get outsized returns.

And we were able to basically craft a portfolio to our liking that we thought hit the risk-adjusted returns in order to be able to put them into a RIDEA structure. .

And the final note, Manny, on those RIDEA assets, we're looking to replicate the success we've had with RIDEA 1, where we were transitioning an operator as well. .

My other question is, have you seen any other tenants or relationships come to you following the sort of very public rent reset and say, "Hey look, we're looking out over the next 3 or 5 or 10 years, and our rent bumps look really high, too.

How can we renegotiate with you?.

No, we haven't. .

And I think Michael Bilerman has a question for you as well. .

Yes. As you think about the transaction overall with Brookdale, there obviously was value both ways. They talked about the purchase options having a value of $130 million to $160 million, which I don't want to say fictional, but it requires a transaction to be done and has to be purchased and capital to be raised and is over time.

And so there's a lot of uncertainty to them even achieving that value but we'll put that aside. They've sort of said $130 million to $160 million on a discounted basis.

The rent reductions, the elimination of the escalators, the elimination of the fair market value resets, any reasonable cap rate would be far in excess of that $130 million to $160 million.

So I'm just curious how you thought about the value that you're giving up on that side, and how much value you attributed to the reinvestment risk than getting those assets stripped away, number one; and number two, to getting into this new joint venture.

So how much of value did you put on that?.

Well, looking at -- I'll just -- I'll take the numbers answer. I guess Paul can take a more qualitative approach to it. But if you look at the amount of rent reduction we have over time, again, some of those were rent payments that were above -- or had -- didn't have coverage or had coverage below 1, first of all.

But secondly, call it 9% -- $9 million annually, put a cap rate on that of 6.5% or 7%. Put a 7% on it, that's roughly $130 million. You put a 6.5%, it's roughly $138 million. That's how I would answer it numerically, Michael. .

Yes, I think kind of more simplistically, I look at the rents that we structure for Emeritus, we did a really good job of -- for HCP shareholders of getting very good, very high, very strong rent payments from a good-quality operator.

And those rent steps over the next couple of years will have stepped up to a point that may or may not have been sustainable to property. I don't know, it depends on how much capital Emeritus would have put into those particular assets.

And I compare that to the need to put up $1.3 billion of new investment over time just to make up for assets that get called away from me, and in return balance that with kind of what I think is almost perfect knowledge as to how the assets are going to be -- respond in the RIDEA scenario after spending capital.

We know how they've performed in the past 2 or 3 years both on our Sunrise and on the Blackstone assets. So when we put all that mix together, we actually think that we come out ahead on the trade without taking into account the CCRCs.

But we want to give ourselves a little bit of cushion because they are RIDEA, and they may not hit the exact numbers that we underwrote, but we think that it was a very good trade. .

But doesn't that call to question a little bit when you think back to when a lot of these deals were originally announced, the company made a big deal about the fair market value resets on the rents, the high escalators in terms of the effect of straight-line impact, the -- and eventual cash flow growth.

There was a lot of things that were talked positively about, and it just seems that -- I guess, this is coming from the question what else may be underneath from all the other transactions that you've done that you may have to figure out a different way of restructure. .

I look at it very differently from that standpoint. I look at it as we advertise that we were able to take a less risky position than RIDEA and get outside market rent steps and had a fair market value rent reset. There would be some negotiation around what the fair market rent reset is.

Having experienced what happened with our Sunrise assets after spending capital and after experiencing what happened with our Blackstone assets, as we spend capital, we now know how these assets performed.

We think that the upside over and above what we have with those outsized rent steps and fair market value rent reset far exceeds what we would have gotten in the structure that we had a year ago. .

Yes, and the only thing I would add to that is the 34 assets, Michael, that had a fair market value rent reset to them. 17 of those are in the RIDEA structure, so we'll get the upside in those assets as they stabilize. And again, we chose those assets to go into that RIDEA structure because we think those are the better 1/2 of the 34. .

And our next question comes from Juan Sanabria from Bank of America. .

With regards to the Brookdale transaction, can you give us a little bit of background about how the discussions originated, who approached who? Did Brookdale originate the transaction?.

In all of our relationships, we always go through and determine what things we would like out of the relationship. We do that with all of our senior housing operators, our skilled nursing and our tenants and our MOB and life science.

And there was a situation where there was consent, we negotiated a consent, and they asked us if we would entertain certain things, and we pulled out our list, they pulled out their List and we cut a deal that worked for everybody. .

Okay, great. That's helpful. And for the seniors housing RIDEA assets, the new ones, why have those assets lagged? I know you mentioned sort of it's underinvestment of capital.

Anything else you can point to other than maybe underinvesting and any geographic focus that you could share with us on those -- on that portfolio?.

Well, again 1/3 of that -- 1/3 of those assets are coming out of the Blackstone JV where there hadn't been a lot of capital invested. So those are still in the process of being turned around. The other ones are -- the other opportunity we like is what Brookdale brings to the table in terms of their operating capabilities.

Again, I'll draw the analogy to RIDEA 1, whereas Paul just mentioned, we had 7.5% growth last year. So we like the operating skill set that Brookdale brings to the table, including their ancillary revenue platform and ability to attract tenants with a better marketing campaign. .

And any geographic focus?.

No. .

No. .

Okay. Just one thing. That's -- it's 49 properties in 22 states, just to give you a factoid there. So... .

Okay, great.

And then on the CCRCs, can you just give us a sense of the market opportunity and whether you think the 50-50 JV will stay in terms of the split or whether Brookdale may want to be diluted down over time?.

I would expect it to stay 50-50 over time. .

Yes, they've expressed that they like this vehicle for their growth as well. They see it as an industry that's going to have tremendous consolidation. And same reasons we like it, premium yields, barriers to entry and an expertise that Brookdale has. .

A blend of it, HCP's attractive cost of capital and Brookdale's operating expertise. .

And our next question comes from Michael Carroll from RBC Capital Markets. .

With regard to your investment activity, can you talk about how you're approaching new investments, especially given the amount of competition coming in the space? Have you seen more competition and has that caused you to change your strategy at all?.

Well, there's no question there's a lot of money out there. I think that there's been a great deal of activity, particularly in the sort of retail aggregator space, which we don't play in, however, it is setting pricing expectations that are moving over into a more institutional market.

What we're doing is making sure that we're going to the places that need capital, so that's one of the reasons we should talk about international. Staying close to our operators as they look at what their growth opportunities are going to be. And in particular, we know that we can bring things to relationships if we just think about medical office.

And the way hospitals are thinking about that space. The 2 that we talked about was because we had relationships with hospitals where they know that how we manage those properties, helping them with doctor relationships, et cetera, is going to bring more value to their strategy. .

And from a pure underwriting discipline, there's been no change. We're still looking at risk-adjusted returns versus the various different asset classes and where we're at in the capital stack. .

Is there any other property types that you're interested in expanding into, I guess, similar to the CCRC joint venture you set up?.

How we look at the CCRC is as just an extension of senior housing. .

Is there any other property types that you're looking at?.

I'm sorry?.

Is there any other property types, I guess, that you're looking to be active in? I know in the past few years, you've been very active in senior housing and medical office buildings.

Is there anything else that intrigues you?.

We try to be active in all of our 5 asset classes. .

And our next question comes from Rob Mains from Stifel. .

I may -- Paul, you may have implied this in your comment, but I didn't get it. From the first -- fourth quarter to the first quarter, there is about a $3.5 million sequential drop in senior housing rental income.

Was there something one-time that either I'm forgetting about in the fourth quarter that we should be thinking of in the first quarter going on there?.

Yes, Rob, I'll take it. There's ad rent -- there's more ad rent in the fourth quarter, so there's some seasonality on that portfolio. .

Got it. And then on the same -- sort of same -- on the same topic kind of straight-line was up $3 million sequentially. Anything going on there because I know that you had said $42 million for the year. I was kind of looking through the way there. .

Yes, it's still a good number for the year. It goes down throughout the year, Rob, as we get rent steps underneath their leases. So it's a little higher in the first quarter, but $42 million is still a good number for the year. .

And our next question comes from Mike Mueller from JPMorgan. .

My questions were answered. .

And our next question comes from Vikram Malhotra from Morgan Stanley. .

Just one quick follow-up on the acquisition pipeline. Lauralee, you mentioned that -- I know it's tough -- pricing is -- it's tough to kind of get very aggressive, but you did mention kind of an expanding pipeline.

Can you just kind of give us a little more color, the types of opportunities you're seeing that would grow the pipeline?.

We're seeing activity pretty much across all the product types. So I would say that with the focus we have in the organization to be out in the marketplace on an aggressive basis, it's across all the product types, and it's both domestic and international. .

I'm not showing any further questions. I would now like to turn the call back to Lauralee Martin, President and CEO, for any further remarks. .

Well, thank you, all, for joining the call. Again, we think we had a terrific first quarter, and we remain very positive on the balance of the year. Thank you. .

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