Good morning and welcome to the HCP, Inc. Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Lu, Executive Vice President, Corporate Finance & Investments. Please go ahead..

Thank you, Carrie. Today's conference call will contain certain forward-looking statements, including those about our guidance and the financial position and operations of our tenants. These statements are made as of today's date and reflect our 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. 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. We have posted additional presentation slides that accompany today's conference call on our website.

I will now turn the call over to our CEO, Mike McKee..

Thank you, John. Welcome, everyone. And thank you for joining us today.

On our last earnings call, I gave you five goals that we were focused on – to execute the spin-off of HCR ManorCare's portfolio, to reduce and improve our Brookdale concentration, to improve our balance sheet metrics, to become a leader in transparency and clarity, and to establish the next generation of leadership for HCP 3.0.

As you know, we are very pleased to have completed the spin transaction yesterday, creating a new publicly-listed company called Quality Care Properties or QCP. QCP's primary holdings are the real estate facilities operated by HCR ManorCare.

QCP's principal objective at the outset will be to take the necessary steps over time to realize the embedded value in these assets. Value that we believe has not been recognized in recent months and years in the stock valuation of HCP. We wish Mark Ordan, QCP's CEO and his team the very best as he launches this new company.

We're also delighted that QCP has a world-class board of directors to oversee its business strategy and governance.

Joining Mark on the board will be Don Wood, CEO of Federal Realty; Glenn Cohen, CFO of Kimco Realty; Paul Klaassen, Co-Founder and Former Chairman of Sunrise Senior Living; Kathy Smalley, a partner at the law firm of Locke Lord and the former General Counsel of Trammell Crow and Catellus; Phil Schimmel, recently retired from KPMG having served as Lead Audit Partner for such clients as Apple, General Dynamics, and Tenet Healthcare; and Jerry Doctrow, well known to many of you from his days as a leading healthcare analyst at Stifel and Legg Mason.

QCP will be in excellent hands. Yesterday, we repatriated from QCP to HCP the net proceeds from the $1.75 billion financing we recently raised. We also have announced that we are under contract to sell 64 Brookdale properties to a venture formed by Blackstone and Columbia Pacific for $1.125 billion.

We are also well on our way to completing the previously-announced RIDEA II transaction with Columbia Pacific and the sale or transfer of 25 other Brookdale triple-net properties.

In the aggregate, we have taken a major step in reducing our Brookdale concentration from 35% immediately post spin to 27% and of note to 10% concentration for the triple-net assets.

I am also pleased to report that when these transactions close, the aggregate lease coverage of the remaining Brookdale triple-net assets held by HCP significantly improves to 1.21 times on a pro forma trailing basis. Our current objective is to further reduce our Brookdale concentration to between 20% and 25% over a reasonable period of time.

The combined proceeds from QCP financing and Brookdale transactions will be used by HCP to pay off our line of credit and substantially all other debt maturities through the end of 2018. Once completed, this will result in a much improved balance sheet profile.

As we will explain in greater detail, these actions have stabilized our balance sheet with metrics solidly in the BBB territory and provide a clear path ahead to return to BBB plus. And as to our fourth goal around transparency and clarity, you see today a revamped and enhanced supplemental report for the third quarter 2016 and moving forward.

This is one tangible expression of our commitment around providing improved transparency. As to our fifth goal, establishing the next generation of leadership for HCP 3.0, I will be prepared to be very specific about our plans in the coming weeks and certainly before year-end.

It has been a complex and multifaceted journey since we announced a general direction along these lines last May.

With the completed spin, the successful spin financing, the announced asset sales and the team that is being assembled, we have reset the company with a stable foundation and an ability going forward to grow prudently and in an accretive manner.

HCP moving forward is in the strongest position it has been in for years – 94% private pay, a vastly improved balance sheet with plans in place for further improvement, crown jewels in our life science and medical properties portfolios, and an improving and more diversified senior housing platform.

It is no surprise that all of these achievements have come with a cost. To position HCP for the future and create QCP to realize value over time, we have incurred costs, fees, prepayment charges, dilutive dispositions of non-core assets, and the like.

We've incurred these costs in order to achieve this one-time reset and to come out of this process with the strongest HCP possible, HCP 3.0.

So, today, we will be giving a preliminary outlook for 2017, we will provide details on how we have reset our dividend and metrics as the foundation for moving forward, we will do our best to provide as clear a picture of how all the actions we've taken come together in a complete picture.

Let me turn the call over now to Tom Herzog to begin that discussion..

Thank you, Mike. For the third quarter, our portfolio performed in line with our expectations, reported FFO as adjusted of $0.72 per share and NAREIT FFO of $0.65 per share. These results included a $0.01 gain in the quarter from monetizing a participating development loan in our senior housing segment.

NAREIT FFO is impacted by $0.04 per share of spin transaction-related costs and $0.03 per share of previously-announced severance-related charges. Note that we're no longer reporting or providing guidance for FAD on a per-share basis in light of the SEC's recent focus on FAD per share as a liquidity measure.

Although we are no longer reporting FAD per share, we will continue to provide total FAD and its related components.

For same-store performance, beginning this quarter, we are now including the pro rata contribution from unconsolidated joint ventures in our same-store reporting convention to provide increased transparency in our portfolio performance. For the quarter, HCP generated solid year-over-year same-store cash NOI growth of 3.1% excluding the QCP assets.

Now turning to our full-year 2016 guidance. We're updating our guidance to reflect the spin transaction closed yesterday. Accordingly, it represents 10 months of HoldCo and two months of RemainCo post spin. The net impact of the spin for the two-month period equates to approximately $0.15 per share and is reflected in our updated guidance.

We continue to have strong performance from all our core segments and expect our full-year FFO as adjusted per share to range from $2.69 to $2.75 inclusive of the $0.04 of year-to-date gains from monetizing three senior housing development loans.

We expect full-year 2016 NAREIT FFO to range from $2.35 to $2.41 per share, impacted by $0.34 of one-time costs, of which $0.18 relates to spin transaction costs, $0.10 of debt prepayment costs resulting from the spin, $0.03 of other transaction costs and $0.03 of previously-announced severance-related charges.

Also, excluding QCP, we are projecting full-year 2016 same-store cash NOI to range from 2.75% to 3.75%. Finally, our upcoming dividend. Today, we announced that our board of directors declared a quarterly cash dividend of $0.37 per share to be paid on November 25, 2016. The new dividend reflects our outlook, which I will discuss in a few minutes.

Now, I will turn the call over to Justin to take you through our Brookdale transactions and operating highlights..

Thank you, Tom. I'll start with a few more details on our strategic Brookdale transactions. Then, I'll review our recent investments and third quarter performance. And lastly, I'll provide a preliminary outlook for our 2017 same-property performance for each of our sectors. Starting with the Brookdale transactions.

This morning, we announced that we entered into definitive agreement to sell 64 communities that are leased to Brookdale for $1.125 billion to Blackstone and Columbia Pacific Advisors, representing a trailing 12-month lease yield of 8%, and we expect it to close in the first quarter of 2017.

The portfolio had an occupancy of 85.2% for the third quarter and lease coverage of 0.81 times for the trailing 12 months through September. In addition, we will sell or transition 25 triple-net assets that are non-strategic to both HCP and Brookdale within the next 12 months.

These assets had an occupancy of 79.9% for the third quarter and lease coverage of 0.52 times for the trailing 12 months through September. Also in Q4, we expect to transfer eight expiring Brookdale leases to RIDEA structures, four with Brookdale and four with a new operator.

We are pleased to announce the asset sales and lease restructure as key components of our transition to HCP 3.0.

These combined initiatives were mutually beneficial while enabling HCP to address several important strategic priorities, including reducing our Brookdale concentration, improving the lease coverage of our triple-net senior housing portfolio, and diversifying our operator relationships.

Additionally, we were able to achieve market pricing on the 64 assets validated through a competitive bidding process. The transaction significantly improves the overall quality of our retained portfolio. Specifically, we are reducing a major tenant concentration from 35% immediately post-spin to 27% once these transactions are complete.

I'll also note that our triple-net exposure to Brookdale reduces from 16% of our total portfolio of concentration to 10%.

The lease coverage for our Brookdale triple-net portfolio will improve by 19 basis points on a pro forma basis to 1.21 times on a trailing 12-month basis, and the quality of our Brookdale triple-net portfolio will improve significantly, with occupancy increasing by 260 basis points to 89.1%.

Furthermore, the retained Brookdale portfolio is located in stronger markets, represented by a better overall demographics profile as shown on slide 4 in our presentation deck. We value our relationship with Brookdale and look forward to our continued work together positioning our portfolio for success.

Additionally, we will diversify our relationships by adding two to three new operators in conjunction with transitioning communities from Brookdale.

Moving on to our investments, in September, we completed the previously-announced acquisition of seven private pay senior housing communities for $186 million, welcoming a new operator partner to our SHOP platform, Senior Lifestyle Corporation. This marks the sixth new relationship that we've added to our senior housing portfolio this year.

Now let me highlight a few things on our third quarter performance. We continue to see growth in our SHOP platform, which delivered same-store cash NOI growth of 3.3% for 120 communities, bringing our year-to-date growth to 6.4%. This was driven by an 80 basis point increase in occupancy versus prior year and 2.9% growth in rates.

We also experienced a 40 basis point increase in sequential occupancy while the industry remained flat. Our overall triple-net portfolio coverage will improve to 1.34 times on an EBITDAR basis and 1.13 times on an EBITDAR basis with the sale and transition of Brookdale communities mentioned previously.

The overall senior housing industry continues to be impacted by new supply in many markets, and in the case of Brookdale, there is the added complexity of their scale of still finding sea legs one year post integration and two years post merger while navigating oversupply.

Based on a new inventory peak in 2016 and declining construction starts, 2017 should bear the brunt of the supply pressure. It's important to note that with the planned asset sales and Brookdale lease restructure mentioned earlier, we have significant cushion to absorb any impact of the lease coverage.

Also, the Brookdale triple-net portfolio that we retain following the asset sales will have far less exposure to new supply. Almost 60% of our SHOP portfolio is represented by independent living in CCRC communities, which are far less impacted by new supply. In summary, HCP is very well positioned relative to the new supply issue.

As Mike mentioned, we have enhanced our supplemental with additional disclosures across each of our segments. For senior housing, we have included a new supply schedule related to our triple-net portfolio similar to the SHOP schedule.

And we are now disclosing new supply for independent living and CCRCs separate from assisted living for both SHOP and triple-net. We have also added an affordability metric and a qualified caregiver percentage by market, both of which we view as key demand drivers.

Turning to life science, our same-store portfolio is 97% leased and we are proud to announce another strong quarter of same-store cash NOI growth of 8.8%. Yesterday, we made an exciting announcement regarding the Cove development, which is located at the epicenter of South San Francisco's life science cluster.

Phase I is now 73% leased, and we have preleased half of Phase II to AstraZeneca who will join the campus in the fourth quarter of 2017. They are leasing 116,000 square feet, allowing the company to consolidate operations and research throughout the Bay Area.

In response to our leasing success for Phases I and II and continued strong demand from life science users in South San Francisco, we are commencing the development of Phase III, which adds two Class A buildings totaling up to 336,000 square feet. Construction will commence next year with planned deliveries throughout the second half of 2018.

The total cost of the project is estimated at $211 million. Upon completion, the Cove will be a 1 million square foot, pre-certified LEED Silver fully integrated, waterfront, life science campus with seven buildings. Our medical office portfolio maintained strong occupancy of 92% with cash NOI, same-store growth this quarter of 3.1%.

95% of our portfolio is affiliated with over 200 hospitals and health systems, and 83% is located on-campus. As a result, tenant retention remains high at nearly 78%. We currently have four on-campus ground-up MOB development projects underway, which are 63% pre-leased.

Now, let me give you a preliminary 2017 outlook for cash SPP for each of our reported segments, which have been redefined. We expect overall same-store cash NOI growth to range from 2.5% to 3.5%. For senior housing triple-net, 3.25% to 4.25%, driven by contractual rent escalators and rent on capital expenditures.

For SHOP, 4% to 5%, driven by rate increases and growth from capital investments. For life science, 1.7% to 2.7%, which is primarily driven by contractual rent escalators, partially offset by projected rent abatements and downtime on expiring leases. For medical office, we expect steady performance in the 2% to 3% range.

And lastly, our other segment, which now includes hospitals, our UK real estate and all of our debt investments. For cash SPP, which would only include hospitals and UK real estate, we are expecting 0.75% to 1.75% growth, reflecting a contractual rent reduction for one of our acute care hospitals.

Overall, we have a healthy performance outlook for the near-term across our segments. Now, I'll turn the call back over to Tom to walk you through our preliminary 2017 outlook for the overall company..

Thank you, Justin. I will now discuss our post-spin company and outlook. Please reference the presentation we posted on our website. Starting on slide 1, as Mike mentioned earlier, we have made substantial progress towards accomplishing all of our near-term strategic priorities.

Turning to slide 2, post the spin, HCP is a 20-plus-billion-dollar enterprise, generating $1.3 billion of income from our diversified portfolio with four core segments, senior housing triple-net, SHOP, medical office and life science.

We believe our upgraded portfolio mix, which is 94% private pay concentrated in top 50 MSAs supported by above average population growth is one of the best in the sector. On to the next slide, slide 3, we have highlighted our key relationships and the portfolio strength of each of our core segments.

Slide 4 outlines how we're improving our Brookdale triple-net portfolio with higher coverage and improved portfolio quality, as Justin just took you through. Turning to slide 5 and 6, earlier I talked about our 2016 guidance, which includes 10 months of HoldCo and two months post spin, which is summarized in the first column on slide 5.

In the second column, we have provided the 2016 pro forma FFO's adjusted run rate of $1.92 per share. As you can see from the bridge on slide 6, it is computed from our 2016 guidance, adjusted for the following items as if they occurred on January 1, 2016.

The QCP spin, the sale of the 64 Brookdale triple-net assets and the RIDEA II transaction, offset in part by the use of proceeds principally to pay down debt.

The 2016 run rate of $1.92 per share represents a good jumping off point to compare to our 2017 outlook, and represents an earnings reset, in exchange for a vastly upgraded portfolio reinforcing stability and organic growth with 94% private pay revenue sources, reduced Brookdale concentration, a strong coverage levels and more diversified relationships and an improving investment-grade balance sheet with ample liquidity and no significant debt maturities through the end of 2018.

Back to slide 5. In the far right column, we have provided our 2017 preliminary outlook for FFO as adjusted of $1.92 per share at the midpoint, which is flat to our 2016 run rate. Please now turn to slide 7. This slide provides a summarized roll forward of our FFO as adjusted from our 2016 run rate to our 2017 outlook.

You'll note the roll forward includes, SPP NOI growth of $0.05 per share, combined with $0.02 per share of development earn in from existing committed projects, results in projected organic growth and development earn in of $0.07 per share.

This growth is offset by various items including incremental drag from commencing the co-Phase III and other planned redevelopments, the exercise of purchase options by Genentech and Tenet and several other small items.

I will note the outlook is preliminary, as we're currently going through the process of developing our detailed budget for 2017 and will provide our finalized guidance on our next earnings call in February.

And our preliminary 2017 outlook assumes a quarterly dividend of $0.37 per share, consistent with our fourth quarter 2016 dividend announced this morning. Turning to slide 8. This slide summarizes the anticipated use of gross proceeds from the three transactions that will generate approximately $3.35 billion.

First, $1.75 billion of financing proceeds associated with the spin. Second, $470 million of proceeds from the RIDEA II transaction which is on track to close this quarter. And third, $1.125 billion of Brookdale asset sales that are expected to be completed during the first quarter of 2017.

With these proceeds, we plan to pay down $3.15 billion of bonds, mortgage debt and revolver balances with a blended rate of 5.2%. The remaining proceeds will be used to cover the spin transaction and debt prepayment costs totaling $200 million.

Turning to slide 9, upon completing all these transactions, HCP will have a much stronger balance sheet with minimal debt maturities through the end of 2018. As highlighted on slide 10, we're on track to outperform our financing plan, set forth upon announcing the spin in May, and are now targeting better credit metrics than initially anticipated.

By the end of 2017, we anticipate a target net debt to EBITDA in the low to mid six times ranges and a target financial leverage in the 43% to 44% range. In October, S&P reaffirmed our BBB ratings, and Fitch also reaffirmed our BBB rating, while improving our outlook to stable.

We have the goal of reducing leverage further and regaining Baa1, BBB plus ratings over time. And finally, slide 11 provides our key takeaways and what differentiates HCP 3.0. We have a higher quality of private-pay portfolio, strongest coverage levels on our triple-net portfolio and improved tenant concentration.

We have an investment grade balance sheet, backed by an upgraded portfolio with ample liquidity and no significant near-term debt maturities. In our improved senior housing portfolio, premier life science, and on-campus medical office platforms will continue to generate strong and steady returns.

So in summary, we have made enormous progress on multiple fronts and are truly excited about our future prospects. I'll now turn the call back to our operator for the Q&A session.

Carrie?.

We'll now begin the question-and-answer session. Our first question comes from Juan Sanabria of Bank of America. Please go ahead..

Hi, guys. Good morning out there. Congratulations on getting all this stuff done. Just wanted to ask about the Brookdale sale to Blackstone.

That 8% cap rate is, is that including any of the transferred rent from the senior housing portfolio or how should we think about that moving piece?.

Juan, this is Justin. There's a little bit of I'd say about $3 million of that transferred rent, that's including in that cap rate..

In that 8%?.

Yes..

Okay. Okay, great.

Just on the 2017 guidance on the life science portfolio, what's the main reason for the year-over-year decline expected in 2017 versus 2016?.

Sure. In 2016, our same-store growth was exceptionally high primarily due to rent steps with leasing activity that was very active and then we had the burn off of free rent. We're projecting a few large expirations with downtime in 2017.

There was – the leasing just kind of a reminder of the marketplace, the leasing volumes in the life science segment have been very strong in recent years. We've had occupancies up in the high 90%s, over 97% for same-store.

Moving forward, we would expect more of a steady state occupancy and would expect growth in our same-store to be around 2.5% to 3.5%..

Okay. And then, I was just hoping you could remind us about the cap rates and the timing of I guess, in particular, the Tenet purchase option in 2017 and the cap rate there.

And is no piece of the Genentech purchase option that is happening, this I guess, next month or this month, is any piece included in the 2016 adjusted run rate, the $1.92?.

No. It's not the $1.92. Tenet was coming in at like 18% and Genentech at about 8%..

Okay. And (33:49) okay, great. Thank you, guys..

You bet..

The next question comes from Michael Knott of Green Street Advisors. Please go ahead..

Hey, guys. Thanks for the whirlwind of activity and information here. I appreciate it..

Thanks, Mike..

Tom, based on slide 10, Tom or Justin or Mike I guess, slide 10 implies that there will be further work to do reducing the Brookdale concentration from 27% to something lower perhaps given the 30% to 35%.

General target there for top three, just curious how we should think about that and what timeframe?.

Yeah. Michael, this is Mike McKee. Thanks for the question. With what we've announced today, we're moving to 27%, so we're getting closer to the top end of that 25% range. We don't have any current plans to dispose of further assets.

We've really with the three larger transactions and one smaller one that we've been discussing today, we've taken a pretty comprehensive look at where we are and we've improved the general profile of what's remaining.

I think there will be some denominator effect that's in play here in the coming months, as we allow – as we move to some growth in other areas. So it's naturally going to come down in that range, I think anyway. But we're going to monitor that portfolio very closely, as we have been.

We're in almost daily communication with the team at Brookdale and that will continue. But I think that just the natural flow here coming out of what we've just accomplished and moving forward is going to naturally reduce that concentration. If we see some other things we need to do, we'll do that..

And then just on senior housing triple-net valuation backdrop, generally just curious if you can elaborate on Justin your comments, that you've provided just in terms of the interest that you saw and obviously talking with investors in recent weeks, all the folks were sort of nervous about the 8% cap rate that you guys printed today.

I'm just curious how you think that that market looks for the rest of your triple-net portfolio going forward and how people should think about the valuation of what's left?.

Sure. If you look at what we sold specifically were underwater leases that had about 1.8 cover. So, there is a little bit of discount priced in relative to a lease rate. If you want to look through to the NOI, is about a 6.5 cap on the NOI.

If you want to look at what's remaining in the portfolio, you'll note on slide 4 some highlights of the performance of the assets that we kept, the type of markets they're in. There's an upgrade we think in terms of just performance in regards to what we're keeping.

I'll even share some market commentary with you, if you want to look at a recent market comp would be the transaction we just closed with Mid-Atlantic. That was purchased at on a T12 basis at a 5.8% cap. We're expecting about a 6.6% in year one, year three could be an 8% cap based on our projections.

Class A senior housing is mid to high 5%s and B plus is around a low 6%s. So, if you consider all of that feedback and take a hard look at, what we've kept and versus what we've sold, I think that helps you to rationalize the pricing..

The other thing I'd add Michael is that – it maybe goes without saying, but we're delighted with the counterparty of this transaction Blackstone and Dan Baty at Columbia Pacific.

These are folks that know this space very, very well and they're shrewd investors and I think it shows a confidence over time in the senior housing space that they would be stepping up to this.

It's been quite a constructive collaborative process and although they won a modified auction, they certainly were not the only ones interested in these assets. So, it's an important point that I think shouldn't go unnoticed..

Okay. Thank you..

The next question comes from Vikram Malhotra of Morgan Stanley. Please go ahead..

Thank you, and congrats guys as well. I know there were lot of moving parts and you've been at this for a while, so congrats getting all of this done.

Justin, if you can provide a little more color on the additional 25 assets that you plan to sell or transition, kind of what's the thought process behind and what would cause you to sell versus transition, I'm assuming to a separate operator, if you can give a little more clarity?.

Sure. And this is Justin, again. And this is a portfolio that we talked about earlier this year, it's really the start of some discussions we had with Brookdale and we sat together and agreed on 25 assets that were nonstrategic to Brookdale, generally nonstrategic to HCP, so the majority of those assets will sell. They're underwater.

They've about a 0.5 cover. There's a few we may keep where it wasn't a core market for Brookdale, but it fills in for a different operator, primarily some regional operators. We may add one to two maybe three operators from this portfolio and from the portfolio of eight assets that we mentioned as well. So, it was a win-win we think.

It cleared off some assets that were not performing as well for Brookdale. We've retained some rent. We'll sell the assets, we're estimating could be $160 million, $170 million in total value and that's how we get to our low 6% cap rate range on those assets.

So, there's some flexibility in terms of what we do moving forward, but I think, I've stated our general intentions..

Okay. That's helpful.

And then just on the SHOP guidance for 2017, the 4% to 5%, can you give us a bit more granularity, what's the breakup between occupancy, rent growth and then expense growth?.

Sure. What I'll tell you is that that this is an outlook for 2017. So, it's not formally guidance, and we're in the process of budgeting. But I'll give you some metrics to think about to just to give some support to that outlook.

And the first part I'd point to is the Brookdale portion of SHOP and that includes independent living and assisted living, and we're projecting a 3.9% rate growth in that portion of the portfolio. Our CCRC joint venture, we're projecting 2.9% rate growth.

Then, we have a joint venture with MBK that's included in SHOP, and that's about 5.5% rate growth. I would also point to – there is about 190 units that were out of commission in 2016, they were being repurposed.

They will open in 2017 and they'll be repurposed in some cases to independent living, memory care, assisted living, even a little bit of subacute. And so that's – the benefit of filling those units is being factored into that SHOP forecast as well, and that's about 25% of that forecast..

Okay. Okay. That's helpful. And then just last one if I may. One of your peers announced some management agreement changes with Sunrise. I'm wondering if you have been contemplating or anything on the cards in terms of changes to any agreements with your operators..

We certainly – if you haven't noticed, you'll continue to notice that we're pretty active asset manager. We're always looking at our relationships and structures and certainly markets and asset classes. Sunrise is one of our tenants. They wouldn't be excluded from but I only think it's specific to point two..

Okay. Thank you..

The next question comes from Nick Yulico of UBS. Please go ahead..

Oh, hi everyone. Couple questions.

First on the outlook for 2017, the senior housing triple-net cash same-store growth you cite here, does that include the effect of the Brookdale lease amendments?.

Yes, it does..

Okay.

And so it assumes that the amendments just started, I guess, at the beginning of the year are in place for the whole year or...?.

Yes..

Okay.

And then can you just remind us where the lease escalators are now for that whole senior housing triple-net portfolio? I mean is it lower than that 3.25% to 4.25% same-store growth number you guys have in your outlook?.

It's right around 3%..

3%. Okay. That's helpful. Thanks. Just one other question is on leverage. You said it is a bit higher, even next year on a debt to EBITDA basis than your target.

Are you likely to deleverage further through additional asset sales or is it more so let's say via an equity raise that was tied to an acquisition? And how should we think about, after you've gotten through this whole period of dealing with a lot of dispositions, lease amendments and a spin, how are you now thinking about being able to fund acquisitions?.

Hey Nick, it's Tom Herzog. Yes, we would intend to delever carefully over time, primarily through over equitizing acquisitions that we would make.

So, as we think about dispositions or some of that that there would be obviously some recycling that occurs every year, but as far as future growth, it's going to be based on us looking at our cost of capital, making sure that we have identified asset acquisitions or portfolio acquisitions that fits squarely into our strategy and that we have the proper funding to get that done on an accretive basis.

And it would be our intent to over-equitize those purchases, which would then bring our credit metrics back toward BBB plus over time. And we'll do it patiently. We're thinking that could be a 2, 3 year period, but it could be longer or shorter, we'll see, but that's how we intend to go at it..

Okay. That's helpful, Tom.

And then just one follow-up there is, I mean, how should we think about the pipeline of potential acquisitions you might be looking at today or into early next year so as we can think about some possibility for acquisitions in 2017 versus what's your preliminary outlook here is, which assumes no acquisitions?.

Yeah, Nick, Mike McKee here. I think we want to stay pretty general on that for a reason. We spent an enormous amount of time in the last few months or more getting to today. This is an important day. It's a chance now to pivot to investments, growth and so forth.

We have been frustrated as a management team for quite some time that our cost of capital wasn't conducive to being as active as some of our peers in the market. We hope and expect to earn the market's trust to reflect a multiple in our stock price that turns us loose now to growth.

We certainly have some relationships embedded in our portfolios, whether they're large networks or other providers in the spaces that we're highlighting that we're anxious to start to renew our cultivation. We have the relationships, but they know that we've had to be very cautions.

So, I think the emphasis that you're going to start hearing from us is more about pipeline, more about investment thesis, strategic direction. We won't be talking about HCR ManorCare and some of the things that we've had to deal with in the past.

But I think that's probably more suited for a few more weeks from now, while we kind of get stabilized here and then can give you something that's pretty tangible.

I think, the overall feeling is quite positive in-house, because of the conversations that have been ongoing, but they have been conversations that have had to wait until we accomplished some of the things that we've announced today..

Makes sense. Thanks, everyone..

The next question comes from Smedes Rose of Citi. Please go ahead..

Hi. Thanks. And along with everyone else congratulations, you obviously got – or have been very busy.

And I wanted to just ask you sort of bigger picture, with Brookdale still clearly facing some challenges, as you pointed out in your opening remarks, why is moving towards 20% or so concentration sort of the right number? I'm wondering is that going to still just remain an overhang on your stock, and why not take your exposure to Brookdale lower over the next year or so..

Well, I think what we've done, as I said earlier – this is Mike McKee – the first 20% to 25% range had some magic to it in that when we talk to our rating agencies for any concentration, that's sort of the area which they think it's tolerable to impact ratings.

I think we noted earlier, a strong priority as we manage our capital raises, our balance sheet and our investments is to migrate as quickly as possible back to BBB plus and we've got a clear path to do that.

So one thing in picking those numbers wasn't to set that as hard and fast, but it was an objective to kind of line up the various guidelines that we need to talk with the rating agencies about. So I don't want to put too hard and fast a point on that range.

Having said that, as we consummate the deals that we're now under contract with and moving forward, the quality of what we've got here is pretty good and senior housing is a space that all of the healthcare REITs are going to be invested in and senior housing, as you know, has a number of different segments to it. So, we're very focused.

One of the things that we've emphasized in the past, as we've had Justin join our team, Kai Hsiao and others that are deep and wide in this space, we've got to be very wise about what parts of the senior housing space we invest in and what we hold in our portfolio.

But, right now, we feel good about where we are and we can still work around the margins. We're much more influenced now by RIDEA and triple-net. And that gives us a seat at the table in terms of CapEx and operations and the like that triple-net doesn't.

And so some of that management talent that we've invested in can kind of go to work under that umbrella. So, again, more than almost anybody in the world, we're going to be monitoring and working closely with Brookdale for obvious reasons, but we feel pretty good where we sit today..

Okay. Thank you. Justin, I wanted to ask you, you spoke a little bit about the rate growth expectations for the SHOP assets next year. But in the third quarter, it looks like expenses grew faster than revenues did.

And I was just wondering if there's anything on the expense line that may be you can point to that particularly is moving more quickly maybe or starting to accelerate.

I mean is it just labor costs or is there something else in there that you're seeing?.

Sure. There's is labor costs, there's healthcare costs, which is a labor-related expense. It tracks similar to Brookdale's overall performance, a little differently in our SHOP, but overall similar. You heard some comments from them earlier, if you follow Brookdale.

I won't say though that in our portfolio we've seen the rate growth largely cover expense growth. There's a little disconnect in recent trending.

But as we look forward into 2017, we're comfortable with the growth expectations outlook at this point, and given the rate growth expectations and then, of course, I mentioned the units that are coming online again..

All right. Thanks a lot. Appreciate it..

The next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead..

Thanks. First a comment, I just wanted to note that the disclosure enhancements are exemplary and unique to Tom Herzog's financial leadership, so I thank you for that.

As far as first question, my question is where are we troughing in terms of the FFO growth ex-forecast or outlook for 2017? Which quarter are we bottoming in? If I look at sort of the presentation, it seems like some of the debt is being been paid off in 2Q.

And so I am kind of guessing that it looks like 2Q might be the bottom, but is there any way where you can give us sort of the 4Q run rate FFO for 2017?.

Well, as far as an actual 4Q 2017, for - (54:32)..

Yeah, I guess, I'm trying to get to a pro forma number. I appreciate the $1.92, but there are some moving pieces there in terms of timing on your debt repayment, right, on page 8.

And so, if you were to pay-off all the debt, if you were to basically take a pro forma look at 2017, the same way you did at 2016, what would it look like?.

Yeah. We're really running fairly steady per quarter based on the way that after having gone through the reset with the debt repayment and the HCR ManorCare assets coming off, Brookdale assets coming off, we've got a couple of schedules in the deck that provides the timing of the different items coming off.

But as you see the quarters roll out, they'll be fairly consistent per quarter across the year. So it's not going to – you probably see it dip a little bit in Q2 and then start to rise toward the end of the year by a couple of pennies.

So if I was looking at the quarters, which I'm, that's a little bit higher in Q1, dips a little in Q2 and then it rises some in Q3 slightly and then a little bit more in Q4..

Okay. Sorry, that was a longwinded question to get the 2Q trough..

That's okay..

And then, as it relates to the levering of the CCRC JV with the proceeds going to Brookdale, is there any impact to HCP? Will you also be receiving some proceeds or will you be reducing your stake? How do we think about that?.

Now, what we've done with that one, Jordon, is we didn't desire additional debt as you can imagine at this point. Inside of HCP, we were seeking to bring debt down post the spin.

So there will be a third-party debt on behalf of our partners that will be put in place, and similar to what we talked about, I think, last quarter on RIDEA II, we will have intercompany debt, I will call it intercompany, it's really intercompany, it's debt from HCP going into the joint venture at essentially the same rate, which of course then we eliminate our share and it effectively acts as we have not put a debt in place.

So it's economically neutral to the JV and to us, but it allows our partner to receive a more highly levered position to take more cash out of the JV, which is what they were seeking to do.

So the same execution we had on RIDEA II, and it's really only the two JVs at this point that we are planning to do that with, but this was step two in the process that we had spoken to last quarter..

Okay.

Lastly, how should we be thinking about the other bucket, hospitals, UK, et cetera? Is that a burn-off portfolio?.

No. This is Mike McKee. I wouldn't say that. We've held those hospitals for quite some time. They're well covered, really great assets. We get asked from time to time whether they are disposition candidates and that's not the case at all.

But they are different assets, and we wanted to put a clear view on MOBs, because we think that's going to be an area of growth more than hospitals where I'm not saying we're done with hospitals, but it would take a pretty good profile or underwriting to go there. We're more interested in the ancillary part and the private pay part of the business.

In terms of international, we're just being cautious at this point. The couple of relationships we have over there are strong. Brexit and the sterling and so forth are certainly things to watch, labor costs and even the nursing shortages.

It's pretty well documented that there are challenges over there, but on the other hand the demographics are even better than in the U.S. and the healthcare system in the UK is not as segmented or stratified as it is here. So if you're not in the hospital and you're not home, there is not a lot of intermediate opportunities.

So we think that there is a lot of activity going on over there. It's going to sort out over time, but it is an early stage market when it comes to some of the kind of things that we invest in. So we really have it on a watch, if you will, and we thought we should isolate it in other just as we were for that reason.

If we see some stabilization and decide to go more active over there, we can always separate it out..

Okay. Thank you, guys..

Thanks, Jordan..

The next question comes from John Kim of BMO Capital Markets. Please go ahead..

Thank you. Looks like you got a good price on the Brookdale portfolio on a per-unit basis.

Can you just elaborate on how many other bidders were interested in this portfolio? And also maybe if you could elaborate on what you think Blackstone sees in these assets that you don't?.

Sure. There was – this is Justin – at least half a dozen other bidders in the process.

In terms of, certainly I would hate to speak for Blackstone and Brookdale, but I've noted their commentary on their venture and they see assets that have performed better at an earlier stage in the cycle, looks like they're going to put some planning in place to realize some upside.

So I think they saw an underperforming portfolio that has a better future ahead..

And the composition of the other bidders, were they other REITs, private equity firms or what kind of buyers were they?.

Yes. Yeah, it was primarily private equity and there were also some REITs at the table..

Okay. So on the senior housing front, triple-nets, there are still some low rent coverage tenants that you have and Blackstone just cut the rents for Brookdale.

What is the game plan for these remaining tenants and is that contemplated in your guidance for next year?.

We have – if you kind of focus on our under 1.0 cover category, there is half a dozen operators that we're focused on. There is one that's just simply improving. We have two that we're in the process or have already transitioned to new operators. We had an underwater lease mentioned in this Brookdale transaction with eight assets.

Four of those are going to joint venture with Brookdale in the RIDEA joint venture. Four are going to a new operator. Those are operations in Florida. There is a Florida regional operator that's a good fit for those assets. We have a portfolio that's still in lease-up.

It's one we closed on earlier this year that was new construction that's still on lease-up. So I think that in a nutshell, we're taking action where it's needed and it's a high priority focus, but most of the actions are already underway..

And is the rent reduction part of that game plan?.

No, there is no rent reductions in any of those scenarios I just shared..

Okay. And then finally on the MOB side, looks like Community Health is your fourth largest tenants.

Can you provide some color on performance of their assets with you?.

Sure. Yeah, we have very stable performing assets with Community Health. Our assets tend to look towards the local hospital hospitals. In some cases, we have a corporate guarantee as well as an add-on credit support, but we're very comfortable with the status of those assets..

Great. Thank you..

Our next question comes from Rich Anderson of Mizuho Securities. Please go ahead..

Thanks. And Justin, you just said that there is no rent reduction in the assets that you just described, but you also described them as underwater and you're going to transition them to a new operator in the case of four. I am just curious how is that possible..

Yeah. So to be very technical, there will be no rent. This is going to a RIDEA structure. In some cases, they'll start out with a little lower income of course, but these are assets that, in the right hands, we feel, have potential and our pro formas reflect that..

I mean your revenues will come down is I guess the question..

It would be in a initial, in a few cases, some of them are 1.0 cover, some are just under that and in few cases, you might start at little lower, but as I mentioned, we're projecting some growth over time..

Okay. So you mentioned the 8% percent lease yield on the 64 Blackstone sold assets. On the 25 that you will transition, I think you mentioned a 6% cap rate on the $170 million. So two questions there.

What's the lease yield, is it different from the Blackstone sale? And also, do you get all that $170 million in proceeds?.

Yeah. So let me tell you how I got to those cap rates. By removing the 25 assets, we're reducing the rent by $10.5 million. $9.1 million stays in place in the triple-net portfolio. It's reallocated to other assets.

So if you take the $10.5 million and think of us owning the assets free and clear, and we can sell them or we can transition them to a new operator to realize any upside that might be available, we're estimating and we have indicative market pricing from brokers that have reviewed the portfolio.

It takes $160 million, $170 million of proceeds of selling the assets, use the $10.5 million of reduced rent, that's your low-to-mid 6% cap rate..

Okay..

And don't forget, they are 0.5 cover. So they are way underwater. So I think the right way to look at is just the end game, which is combining all the moving parts..

All right. Okay. And, Mike, you just kind of threw a block on the conversation about UK and sticking with that for now.

But do you have any comment what the transaction market is there in those types of assets and to what degree you're waiting for the right time to be a seller and what the pricing might be because I think the UK is maybe the left – one of the left pieces of question marks in the portfolio. I'm sure there are others, but that are very obvious.

And so wondered if you can comment on asset pricing in the UK..

Well, I think – and Justin just got back a week ago. So he is – and we've talked. Generally the market over there is a 6% to 7% cap rate market for the kind of care homes that we're in. I think you have to look at the market kind of again in its different segments. There is the super prime luxury that is not a segment that's performing well.

I think some people overbuilt and overshot in terms of what their strategic focus was. And then some of the smaller mom-and-pops are not doing well, and it is a market where there is a significant number of smaller players.

And the reason that they are not doing as well – but the middle segment where Maria Mallaband and HC-One are in, it's what we call the prime market.

So, that's a nice, solid, good product to an upper-middle class type of constituency, and not only is the private pay market able to do well in that segment, also the local authorities who supplement some of the costs have targeted the prime market that upper-middle type of market. It's not a value market.

It's a prime market, but it's not super prime, but the reason that the local authorities think of counties and states here but are willing to support it, is because they think they get good value and get good return for supporting it.

And they think that some of the smaller players aren't as efficient and don't give them the best value for the their regulated dollar. So our focus has been in that prime market. We still think that it's the place to be.

So like any segment in any country or region, you kind of got to go down a little bit to put a value on it and I think the short answer to your question, Rich, is it's a 6% to 7% cap rate market, but we would say some segments are certainly doing better than others and some of the segments, especially the prime, are able to absorb the labor cost and some of the issues because they're getting good support not only from a fairly affluent country with not a lot of options in the continuum of care and they're getting good government support, so that's our view..

Okay. That's good. I did have one quick question back on Brookdale. You mentioned you get an improved 1.21 times coverage.

What's the range of the RemainCo Brookdale portfolio and to what degree do you still have some sub-1 times stuff in the portfolio that may be considered non-core longer term?.

I don't have the range off hand, Rich. I can tell you that we're comfortable with the portfolio that we're keeping. As mentioned earlier by Mike, we'll always be keeping a close eye on our assets or particular markets and our operators, Brookdale is one of those.

They've shown that they share our priority of being in the right assets and in the right markets, and so we found them to be great to work within that regard. So we'll certainly stay focused on that. I'd also just point out this as well that of the Brookdale concentration that 27%, 10% of that is triple-net – a well covered triple-net, 17% of SHOP.

Within that SHOP, 58% of that is independent living and CCRC. So you have hardly any impact from new supply expected. So if you can combine all those attributes, we're not going to sit still, we're going to stay focused from an asset management standpoint, but we feel very good about where we're situated today..

Okay. Thank you..

The next question is a follow-up from Michael Knott of Green Street Advisors. Please go ahead..

Hey, Justin, I think you touched on this a little bit in your remarks earlier and throughout the call, but I just wanted to see if you could offer a little more commentary on HCP's outlook for new supply in the industry generally, and do you feel like construction will continue to increase and then just any commentary you and the operators, Brookdale, are seeing on the wage growth issue at the property level within senior housing?.

Sure. I'm going to give you a few highlights that Nick has pointed to actually and then I'll relate that to our view and our portfolio. The third quarter occupancy was at 89.8%, so the three-year average, but within that, independent living was at a seven-year high. Construction starts were slowing in the second half of the year.

Rent growth is the highest it's been since 2007. And there's been a little less transaction volume overall, as you know. So if you think about that and look at the backdrop, you would expect in the sector that there would be, in 2017, some absorption occurring within assisted living.

It seems like that 2017 could carry the brunt of the new supply issue as it pertains to assisted living, as it pertains to markets that actually have a new supply impact.

And when we stepped back and looked at our portfolio, one thing just by simply reducing the size of our triple-net, we've reduced exposure within our triple-net portfolio the new supply. Our triple-net portfolio is 70% assisted living. The remainder is independent living and CCRC. So there is less impact in those asset classes.

I mentioned the SHOP exposure we have and so we feel that will be less impacted than the general industry because of the segments that we're in, independent living, CCRC, and then some impact in assisted living but it's all been factored into our outlook..

Okay. And then, two other quick ones from me. One would be the hospital rent cut that you mentioned earlier. Could you just give a couple comments on that if you could.

And then the other question would be just on capital allocation, as you guys think about, how your strategy comes together, just curious if you guys will think about the loan aspect and whether you will continue to allocate capital toward loan investments.

Obviously one of your peers just did a large transaction and I know HCP in the past has done that structure, some in the UK, et cetera. So just curious on that generally..

Sure. Let me start with the second half of your question first regarding loan investments. HCP has used some in the past. There's been some high yield loan investments, there has been investments made with intent on pursuing real estate ownership. Moving forward, we'll be more geared towards – in the event we use debt, to gear towards onto real estate.

It could be development loans. We've a participating development loan, and we can own the real estate. There could be some other subordinated debt used as well, but it's not going to be a primary focus. It will be substantially less than it was in the past, and the goal and intent moving forward is to be an owner of high-quality real estate.

In regards to the – there was – in regards to the hospital rent cut, there was a contractual rent cut that had been in place for a number of years. Our team was able to renegotiate that and spread it over a three-your period, so lessened the impact.

They did a good job now, so we're able to pursue a little bit of development with that hospital as well. So I'd say it was something we saw coming for a long time, and we planned appropriately for it – our medical office team did a great job planning for the impact of it..

And that's a 2017 event?.

It's initially a 2016 event..

Okay. Thank you..

Sure..

Our next question comes from Michael Carroll of RBC. Please go ahead..

Yeah. Thanks.

Can you guys give us some color on the $57 million of interest income that appears to be pre-payable in 2017? Is that related to the Tandem or HC-One loans that are out?.

Yes. That's correct..

Is it related to both of those, and if so, what does the borrower plan on prepaying those?.

It does pertain to both of them. And the borrower – we'll have to see what the borrowers decide to do on those. Both of them are looking at different alternatives. They are keeping us in the loop as to what their considerations are. And there will be more to come on that, but we will see where it goes..

Okay. And then can you give us some details on HC-One? I know that they were talking about, I guess, recapitalizing that business and in part paying down some of the debt that you have out there.

Is that related only to the debt that's pre-payable in 2017 or are there other debt investments that they could prepay?.

This is Justin. I hate to relate their business plan on the call, but I can tell you that as we look at our HC-One portfolio, we have a lease portfolio, we also have a loan investment. We have 2.3 times cover on our loan. We have 1.3 times or so cover on our lease portfolio. Good solid performance.

I think due to the solid performance of their company, they have a lot of options they can pursue. And certainly, we expect that they will look to pursue those. My understanding is they are looking to grow. And they are well positioned to do so..

Okay. Great. Thank you..

The next question comes from Chad Vanacore of Stifel. Please go ahead..

Hi, guys. Thanks for putting me in.

So, thinking about your target of 20%, 25% for Brookdale exposure down from the 27% pro forma and assuming some additional acquisitions in 2017, does that suggest that an additional 5% to 15% of pro forma Brookdale could be targets for restructuring over time?.

Chad, as I mentioned earlier, we've scrubbed this pretty good and we kind of like what we have here. We're going to continue to monitor it, but we really don't have an active list of other properties that we would try to transact on with Brookdale.

We do think, as you've noted, that the growth that will come from other segments or even in senior housing will bring that concentration further down.

But part of what we've done here with at least three transactions, RIDEA II, the 25 and 64, has been quite intentional in terms of what we think might be better in other people's hands and what might be good in our hands.

So we don't really have a target list, but as Justin said several times, we're pretty active in our asset management, we'll continue to be, and we're glad that we've got a good working relationship with Brookdale, which even gives us further insight than just being a landlord or in some cases a partner in the RIDEA..

All right. Thanks. Mike. And then, Justin, you talked about this earlier about the rent reallocation on the 25 assets that were leased by Brookdale. Do I have this right in understanding that rent reduction is $10.5 million, however, $9.1 million gets reallocated to other assets in the master lease, so net reduction that's down $1.4 million.

Am I thinking about that right?.

No, the total rent was the $10.5 million, the $9.1 million combined. And so you have $10.5 million is the actual reduction and the $9.1 million stays..

All right. And then just one more because I'm not sure I caught it earlier.

Given your assumptions for SHOP growth, what was the assumption on expense inflation in 2017 that's factored in your models?.

We actually didn't give the expense forecast, but I mentioned some of the rate forecasts. And then Brookdale, for instance, it was about 3.9% in the Brookdale portion of SHOP, 2.9% in the CCRC and then 5.5% in MBK..

All right. Thanks. That's it for me..

Sure..

Our next question comes from Todd Stender of Wells Fargo. Please go ahead..

Hi, thanks. This is for Justin.

As you packaged the Brookdale assets for sale, how are they grouped? What made you package those? Is it geographies, newer facilities? And as the buyers looking at these to see where the attractive growth potential could be, how did you package those?.

Well, I'd say the first priority quite frankly was coverage ratio because we had an idea in mind in terms of what we wanted the remaining portfolio to look like from a credit standpoint. Then we looked down to some of the other metrics that we mentioned in the presentation.

And that would be their location within a growing, aging demographic, their performance in terms of what we kept. It was something that had stable performance or growing performance, and remaining portfolio that had good coverage.

And so there was a mix, but we led with the existing performance of the assets, which would lead them to have negative lease coverage. And then, we filled in with some other markets and moved several assets in and out of pool until we settled on the 64 communities..

Thanks. And just as a reminder, you've got looks like about 78 remaining.

Is that all in the triple-net, if that's the 1.2 times rent coverage?.

That's right, yes..

And any changes to the leases and how many master leases do you have?.

We have a few leases in place and the average maturity on those are about 12 years..

Any changes to rent escalators up or down?.

No..

Okay. Thank you..

You bet..

Our next question comes from Tayo Okusanya of Jefferies. Please go ahead..

Yes. Good afternoon. Let me also add my own congratulations. Major surgery, but the patient's looking good..

From your mouth the God hears..

A couple of questions.

The 25 assets Brookdale – that are being either sold or transitioned, could you just talk a little about if you're expecting that to kind of be just one-off type deals, if you think a portfolio deal can actually get done? What kind of buyers are you kind of expecting for that stuff?.

That's a great question. We've tested that. We did some early marketing, talking to operators directly. As I mentioned earlier, we got several brokers' opinions and it looks like it's going to go in pieces. It's geographically diverse and it's diversified in terms of just the asset type and the size as well.

So there seems to be a lot of interest, but it's going to go to a handful of different operators it seems..

Okay.

And maybe one on a piece-by-piece basis, do you feel very confident about the kind of low 6% cap rate?.

Yes. Yeah, feel good about the low 6% cap rate and tested that from a variety of different perspectives..

Okay. That's helpful. Then, this one's kind of for Mike.

In regards to the thoughts around a permanent fee, could you just give us an update on the current surge and when we can kind of expect some more news about that?.

Yeah. Just to emphasize what I said earlier, I think you can take it to the bank or expect that in the next weeks ahead we'll have some very definitive news on that, and it will certainly be before the end of the year.

So, of all our five goals, that's the one that – although we have done a lot of work, we haven't become definitive, but you won't have to wait very long now..

Okay. That's helpful.

And then the dividend payout – the new dividend, the prorated dividend, could you just talk a little bit about how you guys arrived at that number? How you felt comfortable with the idea that a 74%, 75% FFO payout ratio in 2017 was kind of the appropriate number?.

Yeah. Tayo, we looked at where we had been historically. And I guess, from a FAD payout perspective and we're not providing FAD per share, but let me just take a moment, so we had paid out at about a 85% FAD payout ratio in the past.

And as our board reviewed our forward-looking numbers for this quarter and as we look into 2017 as an initial estimate, felt comfortable that approximately an 85% payout ratio continued to make sense. So, that's how we arrived at the $0.37 a share..

Got it. Okay. And then the last question from me is around QCP again, since HCP shareholders are still basically holding QCP shares.

I don't know if Mark Ordan's on the call, but is there a way to get a sense of ultimately what kind of – how QCP is going to be thinking about the dividend and how QCP is going to be thinking about the appropriate rents to ManorCare?.

Yeah, Tayo, this is Mike McKee. Mark is not on the call. This is the first day in almost six years that I haven't been a fiduciary of a company heavily invested in HCR ManorCare. It's kind of a different experience.

I think in a general sense, what Mark has said is that he will and his board will be talking about their dividend right away and be announcing where they want to come out.

I think you signaled that you should look at it as a modest dividend in the early quarters because they think it's prudent to take some of the rent that they collect and create some cash reserves and balance just to be in a stronger position as they can be.

But he totally recognizes he is a REIT and dividends are important, but it will be, I think, a process that occurs not right out of the gate, but it will build up as they work through. And I think he's also signaled that he expects to have a pretty active dialog and possibly negotiation with HCR ManorCare in the early days of his company.

So, all of that will play in. It will be a time where I'm sure, as he has already said on his road show, that he can't be pretty definitive at this point, it would be like going into the Super Bowl and given your opponent, your defensive and offensive game plan before you play the game.

And so I think you're going to have to be a little patient with some of that. His board that I mentioned in my earlier remarks is a very seasoned board.

They will look out for their shareholders very well, a good bit of REIT experience on that board, and people that I think you know and trust will be doing the right thing, but we don't know the answer to that. It's up now to their board. So we'll kind of have to leave it at that and wish them well..

All right. And thank you very much..

Our next question comes from Michael Mueller of JPMorgan. Please go ahead..

Thanks. Hi. Hate to be an hour and a half into the call, and ask something on CapEx, but here it goes. The $90 million that you're budgeting for 2017, couple of questions here.

One, can you break that down between the property types? And then also further down the subs, you talk about overall CapEx of about $500 million and can you break that down? How do you get there because it looks like in terms of new development spend, redevelopment, what's left to be spent including 2016 spend is maybe $250 million or so – $250 million, $275 million, so what else is in that number?.

Hold on. I'm just trying to get to my CapEx schedule, Michael..

Yeah. I'm looking at page 40 of your....

Yeah. I'm trying to get to my detailed schedule. Bottom line, I'll just do it from memory. The recurring CapEx is going to stay fairly stable. You probably see just a little bump in that, because we've got some lease-up.

The first gen revenue-enhancing type CapEx you're going to see decline, from memory might have been from about $150 million to probably $80 million because a lot of the Brookdale CapEx expenditures and MOB expenditures that we had planned for 2016 are primarily completed, but we still do intend to spend money on some high IRR-type expenditures and we promise to you more analysis around that in the future.

And as to development, you will see that bump up a little bit with The Cove and we have some additional redevelopment on what we believe to be some quite lucrative redev projects on on-campus MOB properties that probably are about 30 plus years since they had redevelopment completed, have been out looked at those properties and see some real upside.

So when you get into the different buckets, that's what you're going to see. I'm just giving it conversationally instead with details because I couldn't get to my schedule quick enough, but that would make those numbers..

That's going to say for the $90 million the $0.20 for more the AFFO-type deduct.

What are the property-type breakdowns, how does that go between senior housing, life science and...?.

Now, I'm back to my long list of schedules in front of me and I guess I should have a shorter list, so I could get to it quicker. I've got it. Oh! Here it is. Hold on. I've got it, but you know what, I tell you what I prefer to do rather than lay out the details of those right now.

This was based on our first look forecast so that we could provide you guys a set of numbers for a jumping off point post spin. And so I don't want to get quite so specific and I really would rather hold that specific question anyway for our early February call and we're going to come back with a lot more detail.

So, why don't I punt on that one for now and come back with more detail after we go through our true budgeting process..

Okay. Thank you..

Our next question comes from Jonathan Hughes of Raymond James. Please go ahead..

Hey. Good afternoon. Thanks for taking my questions. It's been a long one already. So just two quick ones.

On the Brookdale assets sold, how long have these been underperforming and what was the trajectory there? Was it more rapid deterioration over the past two years in the face of the supply and integration challenges? I'm just trying to understand if the other 78 assets could face something beside supply and integration issues..

Sure. This is Justin. As I recall, there has been – this isn't perfect across every asset, but by and large, there has been decline over the last two and a half years, three years. These were properties that came from a variety of different sources.

You had some that came legacy Emeritus and came to them from legacy Sunwest, which was a troubled operator that Emeritus was involved with, probably never did find stabilization, performed pretty well, but then went through another merger.

So there has been a lot of disruption, I'd say, within that portfolio, probably is opportunity over time and with a little more focus, but I don't relate those assets to the assets that we've kept. There is a difference in terms of the performance.

We've kept more of a stabilized portfolio to characterize the portfolio we sold as more of a turnaround portfolio..

Okay, that's really helpful. Thanks for that.

And then last one, given MOBs and life science is now over 40% of HCP 3.0, what's the biggest headwind or potential risk to the asset classes? We know they're incredibly stable, but I mean I'm just trying to get a sense of any downside risk you may not be thinking of, is it supply, regulatory risk, election results, any color there would be great..

Well, I think the regulatory risk is mitigated quite substantially by getting out of the skilled nursing area and 94% private pay.

I think that the primary risk is the one that senior housing is going through now, which is more of a cyclical risk of normal real estate fundamentals of supply and demand, and we're at a pretty high point in terms of life science, but we're very concentrated in the very best markets with the very best properties.

So I think that's going to be very stable and it's going to be – we're setting some almost kind of really nice precedent with this Cove development that we've got going.

I think that you're going to see maybe that as an innovation that we'll want to duplicate and probably others as well where you see more of the life science and research properties more on campuses than spread out, where they can get a lot of amenities and synergies.

So we feel like we're in a pretty good place here and I think the simple answer to your question is real estate is always a cyclical business. We can't help that, but that's better than having fundamental problems with an asset class..

Okay. Thanks for the color..

This concludes our question-and-answer session. I would now like to turn the conference back over to Chairman and CEO, Mike McKee, for any closing remarks..

Thank you very much. Let me just conclude by giving some thanks to our board of directors, who have monitored this whole process throughout. We've had great legal advice from Skadden, Arps and Paul, Weiss, and their professionalism and wise counsel is very much appreciated.

Our financial advisors at Barclays and Morgan Stanley have done a great job, but I really want to mostly thank our team here at HCP. This is an effort that takes days and nights and weekends of hard and complex work, and they've been unwavering in their focus to complete all these transactions.

And I certainly want to thank you on this call for working through these issues with us, for your good questions, your patience and your support. So we hope to see a lot of you at NAREIT in a couple of weeks and have a good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..