Good morning, and welcome to the HCP, Inc. Second Quarter Conference Call. All participants will be in a 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 Andrew Johns, Vice President of Finance and Investor Relations.

Please go ahead..

Thank you, operator. Welcome to HCP's second quarter financial results conference call. Today's conference will contain certain forward-looking statements. Although, we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.

A discussion of risks and risk factors are detailed in our press release and are included in our SEC filings. We do not undertake any duty to update these forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this call and Exhibit 3 of the 8-K referenced with the SEC today.

We reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. We've also provided a reconciliation of these measures to the most comparable GAAP measures in our quarterly report on Form 10-Q, which has been filed with the SEC today and is available on our website at www.hcpi.com.

I will now turn the call over to our President and Chief Executive Officer, Tom Herzog..

Thank you, Andrew. And welcome to HCP's second quarter earnings call. Joining me on the call today is Pete Scott, our CFO.

Also in the room and available for the Q&A portion of the call are Mike McKee, Executive Chairman; Senior Managing Directors, Jon Bergschneider, Life Science; Tom Klaritch, MOBs and Kendall Young, Senior Housing, and our General Counsel, Troy McHenry.

Q2 was another active quarter for the company, during which we continued to make progress, executing on our previously stated strategic goals. We remain on target to meet our full year FFO as adjusted and companywide cash HCP guidance.

For 83% of our business, which includes MOBs, Life Science, and Senior Housing Triple-Net, same property performance exceeded our expectations, while our SHOP performance which constitute 17% of our portfolio, underperformed our expectation.

So, again despite a reduction in SHOP, in the aggregate our cash SPP guidance is unchanged, which highlights the benefit our well diversified portfolio. Across the senior housing industry results have been challenged by outsized new supply, higher compensation cost and a bad flu season.

Our SHOP portfolio consists primarily of assets managed by Brookdale and during the second quarter, our Brookdale occupancy fell more than we had expected.

In discussions with Brookdale senior leadership in addition to new supply and the bad flu season, we believe the root causes for the higher than expected decline in occupancy, included delays in sales and marketing spend, and the above the average sales director turnover.

In our view, both of which were exacerbated by distraction of Brookdale due to their current process of evaluating corporate strategic alternative. Brookdale has been responsive to our concerns and is executing corrective measures.

Regardless, due to the sharp drop in Q2 results, our guidance includes assumption that are more conservative than forecasts provided by Brookdale. There is no reason that over time our Brookdale SHOP portfolio, which as much less exposure to AL should not perform at or above that NIC averages.

The Brookdale senior management team agrees and is working to recapture normalized SHOP operating results. Of note, as we've consistently stated, we're continuing our efforts to identify ways to reduce our Brookdale concentration to 20% or less.

In the last 12 months, we have sold or transferred 67 Brookdale properties, a 40% interest in RIDEA II and are currently marketing another 27 properties. Despite the current challenges, we continue to believe HCP is positioned to take advantage of the upcoming demographics that will fuel the senior housing industry for years to come.

Turning now to our other two core businesses. In the first half of the year our MOB platform continued its strong and steady performance with 87% tenant retention, better than expected leasing and 92% occupancy.

Note that our MOB portfolio benefits from our high proportion of on-campus properties, which naturally contributes the strong retention and ability to backfill space as it becomes available. Our longstanding portfolio and management team have some of the best relationships in the sector.

And we have recently added UTHealth, Virginia Mason Hospital, and Baptist Health in Louisville to our existing key relationships. Our life science portfolio continues to perform extremely well and we currently enjoy 97% occupancy. To-date in 2017, we've been able to backfill space quicker in a better rents than we initially projected.

Additionally, through development projects and strategic transactions including value-add acquisitions, we're able to add properties in certain of our existing campuses, which is core to our life science strategy. In South San Francisco, the Cove Phases I and II are 100% leased and construction is underway on Phase III.

We're encouraged by leasing traffic on Phase III and are seeing interest in Phase IV as well. We are also advancing our pre-development activities at our next premier waterfront site, Sierra Point, a future 600,000 square foot multi-building life science campus near the Cove.

The healthcare real estate transaction market has recently been very competitive in terms of pricing for high quality assets. Although we have participated in all or most of the relevant transactions, we've been careful to not overreach on pricing.

During the first half of the year, we have closed or been awarded approximately $200 million of acquisitions and development transactions. Our current estimate is that we will close or commit to transactions in the range of $500 million to $750 million for the year.

This is below what we consider a normalized transaction pace, but we think that caution is justified under current conditions. Consistent with our strategy to exit our mezzanine debt investments, in late June, our HC-One loan was repaid in full.

When combined with our four season sale last quarter, we've generated over $500 million of proceeds by exiting substantially all of our UK debt investments. We've also announced this morning that we recorded a $57 million write-down on our Tandem investment and entered into a definitive agreement to sell Tandem for $197 million.

Pete will address this further in a minute. Importantly, Tandem is our last remaining, highly leveraged mezz debt investment and our last pure SNF exposure. We have continued to take actions to further strengthen our balance sheet with the goal of achieving triple BBB plus credit metrics over time.

Included in these actions, was a successful tender offer of $500 million of our 2021 debt that was completed last week. As a reminder, we have no major debt maturities until 2019.

Finally, last week our board adopted corporate governance enhancements for our shareholders by opting out of the Maryland Unsolicited Takeovers Act or MUTA, as it is commonly referred to. Additionally, our board reduced the requirement for shareholders to amend the bylaws from a super majority to a majority standard.

These topics have been in focus and our actions are consistent with our commitment to good governance practices. With that I'll turn it over to Pete.

Pete?.

Thanks, Tom. Today, I will cover four key areas. One, our second quarter financial results; two, an update on our recent investment, redevelopment and development activities; three, an update on our balance sheet; and four, a review of our full-year updated guidance. Let me start with our financial performance.

We reported FFO as adjusted of $0.48 per share. Additionally, our total portfolio delivered year-over-year same-store cash NOI growth of 2.1% driven by strong performance in the majority of our portfolio, although offset with underperformance in the SHOP segments. Going into more detail in our major segments.

Medical office reported same-store cash NOI growth of 2.6% driven primarily by contractual rent steps. In the life science, our same-store portfolio is 97% leased and delivered year-over-year cash NOI growth up 3.7% driven by lease escalators and leasing activity.

For our senior housing triple-net portfolio, same-store cash NOI grew 2.6% which was in line with our expectation. Now let me turn to SHOP. As Tom mentioned, our portfolio was adversely impacted by industry-wide headwinds and year-over-year cash SPP declined 1.6%.

Our assisted living and independent living portfolio declined by 0.5% and our CCRC JV portfolio declined 9.1%. I will provide more details on these two distinct portfolios in a minute.

Overall, while our SHOP portfolio had strong rate growth in the aggregate of 4%, our operating results were negatively impacted by above-average expense growth, especially in our CCRC JV portfolio and year-over-year occupancy declined 190 basis points, which was heavily concentrated within a small group of underperforming assets.

Let me spend a moment going into detail on the two components of our same-store growth in the SHOP segment. The assisted and independent living portfolio, which comprised 88% of our cash SPP NOI this quarter and the CCRC JV portfolio, which comprised 12%.

We have added additional disclosure in our supplemental on page 34 and page 35 on each component to help investors better understand the drivers of our SHOP results. As I mentioned previously, these portfolios are distinct and experienced vastly different SPP growth this quarter.

One important reason for this, in our SPP calculation, we exclude the net revenue impact from the non-refundable entrance fees collected at our CCRCs while fully burdening the SPP NOI with the property operating expenses.

This results in very high SPP operating leverage, which magnified the impact that CCRCs have on our SHOP SPP, which could be positive or negative depending on the performance.

The evidence of this volatility is clear as we've disclosed year-over-year cash SPP growth ranging from a high of 27.2% in the fourth quarter of 2016 to a decline of 9.1% this quarter.

We believe an important benefit of separating out the CCRC JV portfolio is that it allows investors to see how our more traditional AL, IL portfolio is performing on a relative basis. We will continue to include CCRCs in our reported SHOP FTP and guidance range. Now moving on to our investment, redevelopment and development activities.

We have spent considerable time building out our investment pipeline and we are starting to see results in our flow (12:28) business.

On the acquisition front, in our Life Science segment, we acquired the Wateridge Corporate campus, a two building office campus comprising 124,000 square feet in the Sorrento Mesa submarket of San Diego for $26 million.

Campus is located proximate to our current Sorrento Summit and Directors Place campuses and fits squarely within our Life Science strategy of acquiring and owning assets within our core clusters. Shortly after closing, we commenced repositioning one of the buildings, comprising 50,000 square feet into Class-A Life Science space.

You'll notice this project was included in our redevelopment schedule this quarter. In our medical office segment, in July, we closed on a three-asset portfolio of MOBs located in the Fort Worth and Austin markets for $49 million. These multi-tenant properties include tenants such as UnitedHealthcare and Baylor Scott & White.

Moving on to development and redevelopment activity. During the quarter, we entered into two senior housing development joint ventures for an aggregate cost of $62 million, with our share being $54 million. In our redevelopment pipeline, we added three projects with a total spend of $62 million.

On the disposition side, let me briefly touch upon the previously announced Brookdale 25 process. We are under contract to sell five assets for $31 million and expect the transaction to close later this year. We continue to market and assess the remaining 20 assets and expect to sell or transition them by the end of the year.

Let me spend a moment on Tandem. For the quarter, we continue to receive our regularly scheduled interest payment. However, as you can see from our supplemental, the performance of the underlying collateral continued to decline and as part of our quarterly review process, we took a $57 million impairment charge on our $257 million loan investment.

Subsequent to quarter end and the aforementioned impairment, we reached an agreement with the borrowers, subject to customary closing conditions, to sell them our loan for $197 million. The purchase price approximates our adjusted book value and our agreement requires a closing on or before December 31, 2017.

Pending the closing, the borrowers are required to continue to pay us our full interest payments based on the $257 million original loan balance. Moving onto the balance sheet activities for the quarter.

In May, we repaid $250 million of senior notes on maturity and subsequent to the quarter end, we completed the repurchase of $500 million of our 2021 5.38% senior notes through a tender offer.

The bond tender supports our deleveraging plan and we remain on track to achieve our target of low-to-mid 6 times net-debt to EBITDA and financial leverage in the 43% to 44% range by year end. As of the end of July, we had total liquidity of approximately $1.7 billion. Now turning to our full year guidance.

We are reaffirming our full year 2017 cash SPP NOI growth guidance of 2.5% to 3.5%. In terms of individual segment forecasts, we're benefiting from a diverse portfolio across the private pay healthcare sectors with several of our segments outperforming through the first half of the year.

Accordingly, we're increasing cash SPP NOI growth guidance for Life Science, Medical Office and Senior Housing triple-net. For Medical Office, 2.5% to 3.5% from 2% to 3%, for Life Science 3.5% to 4.5% from 2.5% to 3.5%, for Senior Housing triple-net, 5% to 6% from 3.9% to 4.9%.

As it pertains to SHOP, we are revising our full-year 2017 cash SPP NOI growth guidance to a decline of 3% flat from 2% to 3%. The top end of our range lines up with Brookdale's current forecast for our SHOP portfolio. We are taking a more conservative approach and widening our range.

Importantly, as we reviewed performance from last quarter, we identified a half a dozen properties that contributed approximately 100 basis points or about half of the occupancy decline. We intend to vigorously asset-manage this portfolio and if we don't see an improvement in performance, we may look to reposition or dispose of some or all.

If we were to remove these half a dozen assets from our SPP portfolio, our SHOP guidance range would be about 150 basis points higher. Moving on to our per share metrics. We are reaffirming our full-year FFO as adjusted per share to a range between $1.89 and $1.95.

Note, we have already taken into account the anticipated Tandem mezzanine loan repayment as part of our reaffirmation and assume a closing in the fourth quarter. We are decreasing our full-year NAREIT FFO per share to range between $1.73 and $1.79, down from $1.99 to $2.05.

This decrease is primarily the result of the Tandem impairment and debt extinguishment charge from the tender offer, which we will book in the third quarter. These items are not included in our FFO as adjusted.

Page 48 of our supplemental provides the major assumptions and other miscellaneous items embedded in our 2017 guidance, along with the comparison to the guidance provided in conjunction with our first quarter earnings call in May. With that, I'd like to turn the call back over to Tom..

Operator, we're ready for questions..

Thank you. We will now begin the question-and-answer session. Our first question comes from Michael Knott of Green Street Advisors. Please go ahead..

Hey, guys. Can you give us some color on just sort of the process of setting SHOP guidance? It sounds like Brookdale is expecting or guiding it to zero. For the full year on SHOP, it sounds like you guys are widening that a fair bit.

Did the prior range reflect just solely Brookdale's input and so can you give us just some color on that because the – I think at 3% – a negative 3% for the full year would imply something like a negative 3.5%, I think for the second half of the year? So, just curious if they can really get that negative or not..

Hey, Michael. It's Tom Herzog. Yes, as we had set guidance last quarter, we've certainly had utilized some of the assumptions that we had worked together with on Brookdale and as it played out during the quarter, obviously across the industry, the NIC data showed that the results were down more than expected due to supply in full.

But HCP's SHOP portfolio for Q2 declined further than we had expected, but I would note that that was partially offset by favorable rate growth. So when you look at the decline in the occupancy versus the uptick in the rate, revenue guidance is down about 100 basis points in total and expenses is unchanged.

When you couple that with the operating leverage, it puts us at about 400 basis points down in projected NOI for the year. So as to how we look at the guidance is, we utilized what information we had.

We considered some of the things that we determined through meetings with Brookdale that had caused the decline things like sales director turnover, delays in sales and marketing and a variety of other things.

And feel that there – that we – it's possible that we're being a bit conservative, but we felt it appropriate to guide down in the occupancy further than what their projections are as we set our guidances for the balance of the year..

Yeah. Based on recent track record there, that's probably not a bad assumption.

Can you talk about CCRCs and I know this was sort of – a little bit of an emphasis of the some of the prior regimes at HCP, does this sort of help you think about whether you want to continue to own CCRCs in the future or what's sort of your stance on that today given that 10% of the SHOP portfolio sort of really screwed up this quarter and the outlook for the year?.

Yeah. Let me just touch for a second, Michael, it's Pete here on the CCRCs. We did have a decline of 9.1% year-over-year and when including the non-refundable entrance fees that decline obviously comes down substantially to minus 3.4%.

We don't include as I mentioned those non-refundable entrance fees when calculating our SPP growth and that was really originally intended to reduce volatility, but for what was left actually ended up increasing the volatility there, creating these low margins and these high operating leverage numbers.

We actually did experience, if you look historically, some pretty robust growth within this portfolio, positive 27% as I mentioned in my prepared remarks.

But as we look at that generally, and we think about the amount of NOI that's in our SPP, the decline was really just $500,000 year-over-year and we'd experienced in fact some increases in prior quarters as well. Occupancy within this portfolio is flat. The entrance fees are flat.

The expenses obviously went up and that's something we're going to work with Brookdale on, but I don't think the $500,000 decline just year-over-year when you compared to the quarters is making us say, oh! My gosh, we need to get out of these assets right now. We'll think about these CCRCs alongside our entire Brookdale position..

Okay. And then maybe just last one for me.

Why would – halfway through the year, why would a triple-net portfolio guidance go up so substantially?.

Yeah. Hey, Michael, I'll touch on that again. That really has to do with Sunrise and I think what we've disclosed for that there is some add run component to the Sunrise lease. There was some positive performance in the first half of the year that resulted in us taking it up. So it was really just a result of Sunrise..

Thank you..

Yeah..

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

Thank you. So, good morning out there. My first question really comes back to the SHOP portfolio. I guess the CCRCs your – obviously an important piece, but I'm looking at your same-store portfolio, as it relates to just the assisted living and independent living.

And occupancies are down 240 basis points year-over-year, split 150 basis points sequentially. And you've obviously as a result made a pretty significant revision to the guidance.

And looking at relative to what Brookdale is guiding, it seemed that your confidence level in either Brookdale or these numbers overall, would be relatively low, is that a fair statement?.

Jordon, I would say this. Brookdale has been in the middle of a process that's widely known as they consider their strategic alternatives and with that, obviously there is some distraction that can occur, that can exacerbate the results that we're seeing.

And as we looked at the numbers and had conversations with them, it's not that there is not a game plan around how to correct some of the slides that we saw, but we didn't feel it appropriate to factor that into the guidance that we wanted to create this quarter.

So rather we took a more conservative approach in that guidance and in the second half, we're going to focus very hard at a senior level frankly at how to turn these assets around or deal with them appropriately. So as far as confidence, we know they're in the middle of a process.

We know that they have a lot going on and they are working hard together with us to seek resolution for this, but again, we felt that's appropriate to add some conservatism to the numbers..

I appreciate the answer.

My next question is a follow-up is just really, they're in a difficult position given the – what they're working through, but they're not a captive, they're a partner of yours and it's obviously got to be pretty frustrating that it's taking this much time as you have to work through some other challenges as well as a new management team.

I'm curious, are they at risk of reaching some covenant or issue within the management agreement and then, what would you like to see out of this strategic process?.

First, no, they're not at risk of reaching any covenants at this point. So that's not an issue. I mean we're in a position where we need to work together as partners to a resolution. As to what we're seeking – or what we would like to see out of the process, I think in a number of different directions and I won't speculate on that topic on this call.

But I will tell you that regardless of what direction it goes, that we will be proactively working to improve our position over time. So that much I can tell you..

Okay. I'll hop back in the queue. Thanks for answering..

Okay. Thank you, Jordan..

Our next question comes from Juan Sanabria of Bank of America. Please go ahead..

Hi, good morning, guys..

Hello, Juan..

Hi, Juan..

I was just hoping you could talk to within the new guidance for the RIDEA portfolio, what are the assumptions behind the top and bottom in terms of occupancy rate or expenses and whatever you can say there? And if you could give us any sense of kind of trends in the third quarter to-date?.

Yeah. Hey, Juan. It's Pete, let me take that question. So, the revised guidance assumption here, these are all compared to full year 2016. We have occupancy decreasing 200 to 300 basis points, RevPAR increasing 3.5% to 4.5% resulting in overall revenues up 1% to 2%, but expenses up 2% to 3% and that's what translates into the negative 3% to flat.

As I mentioned and as I've said a few times, the high end of our guidance which is flat is in line with Brookdale's forecast while the bottom end as I mentioned of those numbers would be conservatism that we've modeled in.

I think one of the things I would just say generally about the guidance is, obviously we hope Brookdale is right and they hit their numbers.

As we think about our assumptions, we assume another 80 basis points of average occupancy declines from where we ended the first six months, we have an 87.5% average occupancy number for the first six months and that's been our supplemental.

So, our assumption sort of at a midpoint is down to 86.7% at the end of the year, so that 80 basis points there. We're confident that our initiatives for Brookdale will have a positive impact on performance, but there is a lag time associated with the ability to actually get that performance.

And then lastly, the widening of the range, I think it's important to just point out that we widened it because of the CCRC volatility before we had a much more narrow range. We thought that it was appropriate to have a wider range as long as we have the separate disclosures too, which we thought would be helpful.

With regard to your second question on what trends are we seeing? I think it's too soon at this point in time for us to have really any numbers to report.

I would say that in July, we may be experiencing through the first two weeks some additional declines in occupancy and that is part of what's led us to believe to widen out our range and be more conservative..

Okay. Thank you for that..

Yeah..

And then just on the seniors housing triple-net side, given what we're seeing and what you're saying about Brookdale's performance on the RIDEA side, I mean how comfortable are you there, the pro forma coverage on an EBITDAR basis would be kind of the targeted 1.2 times and any risk there?.

This is Kendall. If you look at the information that's in the supplemental that's one quarter in arrears, so you can imagine that the triple-net portfolio will perform consistently with how the RIDEA portfolio performed in the second quarter.

So we would expect to see a dip in that coverage in the second quarter, but if you look at our Brookdale, our coverage is on a relative basis at 1.3 times, 1.4 times EBITDAR coverage, we think that's an adequate coverage..

Okay.

And then, just lastly if you could just – I think you made allusion to the, what's remaining at the non-core Brookdale assets at 25 and your confidence in being able to sell those and kind of what the appetite has been for those assets and I think, you alluded to maybe looking at some more dispositions, kind of – if you can give us more color on that?.

So we have – of those 25 assets, 5 of those are under contract with a hard deposit. We're out marketing in a few portfolios the remaining assets and we have a few of the properties that we would likely transition to new operators.

Of the assets – remaining assets we're trying to sell, we've had a – I'd say strong interest in those properties and we're moving on into the second rounds of our sale processes in those assets..

I would add to that that of the Brookdale 25, for the 20 of that we still have that we're marketing, we are assessing some of those assets as to whether we prefer to retain them and transition them to other operators. So whether we sell or transition, those are both alternatives that are under consideration..

And any color on what's expected beyond the 25, I think you kind of alluded to that in the prepared remarks?.

Yes. Not at this point. That depends on conversations that we'll be having with Brookdale over the coming months..

Thank you..

Yes. Thank you..

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

Thank you.

So just on the IL, AL, RIDEA growth, the negative 0.5%, can you give us the breakout what, what – how did IL perform versus AL?.

So, if you look at the – that breakout, they performed roughly the same on an occupancy basis.

I think if you look at our the bottom performing assets, so Pete talked about the six bottom performing properties and roughly half of that are majority independent living and half are majority assisted living, so they're performing roughly in line with each other..

That's on a year-over-year basis – just to be clear, that's on a year-over-year basis, whereas if you look it at it sequentially, you'd see something different, just to avoid confusion on that..

Okay.

So you're saying that IL same-store NOI and the AL same-store NOI year-over-year was very similar?.

I think if you look at the – on an occupancy basis, they were roughly the same. If you look on an NOI basis, just because of the margin, the assisted living performed slightly less than the independent living..

Okay.

And then just in your guidance going forward, are you assuming any different trends between the two poles? Are you assuming just both perform against similarly?.

Yes. As far as guidance at this point, Vikram, we're blending them rather than breaking them out separately..

Okay. And then just on your Senior Housing triple-net, in the – on your expiration space, there is a pretty big chunky expiration coming up next year.

Can you give us a bit more color on that expiration and sort of where are you in the discussion?.

Well, which expiration are you looking at specifically?.

Yeah. On page – if I go to where you give your expirations. If you look at 2018 on the triple-net side, so page 25..

Yeah. Hold on just one sec. We're looking into that, we'll come back to you on that..

Okay. And then just on the MOB side, if I look at the expiration, the $57 million, or sorry, the $37 million for this year versus the table below which includes purchase option, the $45 million.

Is there a purchase option in there and can you just give us more color?.

Yeah. We have several purchase – this is Tom Klaritch, we have several purchase options that have been in the money for a number of years. We don't anticipate anybody exercising on those, but they're out there and we adjust those accordingly. But at this point, we have no indication that there will be anybody exercising those purchase options..

And is there a specific date when they have to give you a notice?.

Well, there's a number of them, they're all different. Like, for example, there are several that are in the money right now, actually six of them and they were exercisable anywhere from 2007 to 2013, and again, we've not seen those – any interest in exercising those. We do have some more that will be coming up, most of those are beyond 2020.

So we have several in 2021 and 2022 and then some more further out from there..

Okay. Got it. You're....

They're all generally at fair market value..

Okay.

And did you want me to follow offline on the triple-net expiration?.

No, well, actually we can answer that..

So, there is a couple of things going on there. On the Brookdale side, you have the 25, the Brookdale 25 where we reset the expiration to 2017 and then the – in 2018, you have predominantly our Sunrise MA3 C lease that we expect them to extend..

Okay. Got it.

And so just quickly clarifying on the medical office, you said they're in the money, but you don't expect them to exercise?.

That's correct. As I said, some of them have been exercisable since 2007 and 2008 and there's been no indication of interest in exercising on those..

Okay. Got it.

And just to clarify, is there a fixed price to that or to most of that?.

No, no. They're all generally at fair market – the greater a fair market value or in many cases the original cost, but it's usually the greater and the fair market value is normally what we'd look to..

Okay, great. Thank you..

Thank you..

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

Hi, thanks. I was just wondering on Brookdale, they've been changing their approach to spending as they go through their process either in terms of the property level spending or their overall marketing expenses..

So, look, I can only speak to our portfolio and not Brookdale's portfolio. We've developed some initiatives with some action plans with Brookdale to improve performance and one of those is to increase our marketing and advertising spend.

We were lower in the first half than what we had budgeted and we know that those types of expenditures generate leads. And so, we are increasing our expenditures in the marketing and advertising side in the second half..

Okay.

And then just broadly, could you talk about any changes that you've seen in terms of interest in foreign capital as it pertains to senior housing?.

Look, we know there are – there is foreign capital in the market and we've met with them as others have and we know they have interesting transactions. We've heard of some deals that they have invested in, but so far I think it's – I'd call it more of a strong interest level than having executed on a large share of the transactions..

Okay. Thank you..

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

Yeah.

Tom, can you talk a little bit about your desire to reduce your exposure to Brookdale? What's the exact strategy here? Is this going to be more one-off sales or are you willing or able to complete a large portfolio sale to achieve that goal?.

Michael, again it's Tom. It's a good question. It's not one that I can speak to with specificity on this call though, because again Brookdale is in the middle of the process.

I have been in conversations with senior management at Brookdale and it would be premature for me to speak to the proactive measures that will be taken over time to reduce the exposure. It's a fair question, but not one that I can answer right now..

Okay. Great.

And then, Pete, maybe can you give us some color on the Tandem loan sale? When will that close, can you remind us who the buyer was and did they already receive financing to buy that loan?.

So good question, Mike. So as we announced, it's a $197 million purchase price. The buyer, who is the borrower, which is a real estate private equity firm that focuses on the post-acute space, they posted a $2 million non-refundable deposit. They have until October to close.

They will post another non-refundable deposit, August 1 and then, if they had not closed by the end of October, they had the ability to extend by posting additional hard money and/or paying the loan down by at least $50 million and then they have to close by the end of December.

I think it's important to note that this buyer or the borrower is also part of the ownership group of Consulate and that's why we felt like it was the appropriate person to enter into an agreement with. They're working through appropriate person to enter into an agreement with. They are working through the qui tam settlement and lawsuit on their side.

So they're going to get some recapitalization initiatives completed and work through the Consulate, I should say, qui tam lawsuit and then they anticipate closing sometime before the end of the year. So that's the construct for why we accepted hard money today, but we anticipate closing in the fourth quarter..

Okay, great.

And did they have funds to close that deal already or did they need to raise more capital?.

They would need to raise more capital, but they are a pretty savvy private equity firm that is in discussions with a lot of partners now and they were willing to put money hard up because they felt like they were confident they could go out and raise the money..

Okay, great. Thank you..

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

Hi. Thanks for taking my questions. Looking at the MOB portfolio, you bumped guidance by 50 basis points there and I noticed retention in leasing spreads were a bit higher than in years past.

Could you just talk about what's driving the improvement there and maybe your expectation of this trend now that healthcare reform is going to have the spotlight or at least move to the sidelines in D.C.?.

Sure, Jonathan. We've – as you've indicated, we've seen better retention this year. We've been able to exercise early on certain renewals in the portfolio.

Our average occupancy has been better than last year, it's tightened up a little bit in the second quarter as you can see from the difference between first quarter and second quarter results, but certainly ahead of where we expected it to be and we've actually had some good results on saves.

I would assume healthcare reform has something to do with that.

Doctors are a little more comfortable staying where they are and they're signing a little more longer term on their leases and with the consolidations and purchasing of group practices, we're seeing more and more hospital tenancy, so you tend to get more stickier tenants, better retention and the more likelihood to sign longer leases..

Okay. That's fair.

And then just one more, what was the cap rate on the $49 million of MOBs closed in July and where do you see pricing on high quality medical office assets in the post Duke sale era?.

Yeah. I'll take this one, and Tom Klaritch, you can add on if you like. That cap rate came in roughly at a 6%, just slightly above that and as you've seen, high-quality MOBs, it's not uncommon to see 5%-cap deals, portfolio deals in the mid-4s.

We're seeing all over the range and we've been in the middle of a number of – all the major transactions we've looked at and have had to exercise some discipline because the pricing has gotten pretty heavy based on our underwriting and we're willing to put capital out, but that's kind of the range of what we're seeing out there for MOBs..

Was that a relationship deal or was it marketed?.

It was the marketed deal, but we did have a relationship with the seller, we had purchased another building from them two years ago. So, that helped with us getting the deal..

And presumably maybe better pricing?.

Probably similar to what we would have expected..

Okay. That's it from me. Thanks for taking my questions..

Thank you..

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

Hi, good morning..

Good morning, Chad..

Hey. So you really widened out occupancy assumptions on the SHOP portfolio.

Is that something that DKT is relating to you or is that (46:29) internal or more conservative estimates?.

That's internal more conservative estimates and recognition that there is a wider range of potential outcomes based on how things go in the second half. So again, we just felt it appropriate to be a bit more conservative, plus widen the range some, recognizing that we could have some upside, but wanting to be conservative on the downside..

All right.

And then if I'm right, if you're assuming both AL and IL are down, same-store NOI about the same, then does that infer that your assumptions for AL just got much weaker than your assumptions for IL?.

I think they're roughly in line with each other..

All right.

And then just thinking about the 25 senior housing assets that you either have sold or are being shopped, what types of buyers have largely been interested?.

So, it runs the gamut, private equity, operators, there was a very strong interest. We see more NBA's than any other deals that we've marketed. So there's a lot of money out there interested in transactions. So it kind of runs the gamut of the private equity and operators..

All right, then last question for me, so what kind of cap rate did you actually sell those buyed assets for?.

Yeah. It was a mid-6% cap rate..

All right, thanks for taking the questions..

You bet..

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

Thanks. Peter, I just want to go back to your explanation as to why you had this big guidance raise for the Senior Housing triple-net portfolio. So more additional rent from Sunrise. That means Sunrise is performing better and that's translating into bigger rent payment to you.

Is that the mechanism?.

Yes. That's exactly the mechanism..

Okay..

What I would say, Rich, just to add on that, I think we've talked about this on a few prior calls too. I mean, this is an inherited structure from the CNL acquisition in 2006 and the actual rent, as you just discussed, is subject to a waterfall that determines how cash is distributed.

To the extent that there is positive performance at Sunrise, there is more within the waterfall and that's that add rent component. So that's a driver of the increase; that's basically the driver of the increase. When you look at the rest of it and you say, well, 5% to 6%, that's awfully high for triple-net.

We agree, there is some noise in there from the rent reallocation of the Brookdale 25, which is actually hurting us a little bit the first few quarters. But then as the Brookdale 25 comes out and I think I had this in my prior prepared remarks, that has an impact of about 1.8% of the midpoint range of the 5.5% there.

So when you look at the Sunrise add rent as well as the Brookdale 25 which will cycle its way through this year, you get to much more traditional 2% to 3% growth as you would expect on just general lease escalators in triple-net..

Okay.

So I mean, that's kind of a lead-in question to why Sunrise is exceeding expectations and I understand what's going on with Brookdale, but is there anything else that explains the polarized performance of those two operators? Is there a geographical issue or an asset quality issue? Is there anything you can point to outside of just the issues going on with Brookdale?.

No, it's probably more the issues going on with Brookdale and Sunrise, what the portfolio we had did see some upside and based on that waterfall formula, that allows them additional income to flow our way.

So some of it had been – it results in being deferred and once the performance occurs, then we get an outsized add rent bump and that's sometimes why you see it look quite – more negative on the Sunrise side and then more positive as that waterfall..

Okay. And then last question, the kind of irony with HCP is you are the anti-SNF large cap healthcare REIT, and yet Tandem impacted your numbers. CCRCs, which include SNFs, impacted your numbers for 2017.

So I'm just curious if you're addressing Tandem, is there any idea, since you basically have RIDEA exposure to skilled nursing by way of the CCRCs, have you considered just altering that structure to a net lease situation? Is that something that's potentially on the table for CCRCs?.

Again, this comes back to the conversations that we're having with Brookdale. The CCRC is a joint venture of 15 assets that we have with Brookdale and we're working through with them right now what we might do proactively going forward. And CCRCs are part of that discussion, but we have to wait and see, it's way too early for us to speak to that..

Okay. Thanks very much..

Thank you..

Our next question comes from John Kim of BMO. Please go ahead..

Thanks. Good morning..

Hey, John..

You reiterated that Scott Brinker will be joining you as Chief Investment Officer in January.

I was just wondering, given the ongoing litigation he has with his former employer, do you expect to have any litigation costs as part of this process?.

This is Mike McKee, John, let me speak – answer to your question, but also say since we have the opportunity that we are – continue to be delighted that Scott is going to join us.

When we extended an offer to him, we had done extensive diligence talking to people he used to work for, used to work with, people that knew him from the clients and tenant side, just extensively did a review and it led us to a strong belief that he would be a tremendous asset to our team.

When we started the interview process, we wanted to protect him from the situation that he finds himself in now. And so, we indemnified him from any liability arising from us extending the offer and him accepting it. That doesn't include any bad acts that he might have taken, if he did, in terms of exiting his performance or his employment.

But it does cover just some of the litigation costs here and maybe all of them protecting himself from this lawsuit as long as there's no merit in the lawsuit. I will say since we have followed this closely and although we are not a party, we're certainly obviously involved.

We're very aware of the discovery and the process to-date and as we expected and as we know what, as the recipient or the employer to be, we're pretty aware of the process that went on here. And as far as we can tell, there is no (54:49) there.

There may be, at the end of the day, some – what I would call immaterial cost to bring him over and go through this litigation. But we think that is a cost that we were willing to bear to bring what we think is very a special person on to our team.

I would also say that frankly, and I'll just say this personally, I continue to be very disappointed and frankly dismayed as the process worked out and as we know the fact better than most, that Scott is having to go through this situation, but he will get through it. There is a trial date in November.

In his recent pleadings, he's brought a countersuit for malicious prosecution and defamation. Whether that makes or not, there is a pretty good basis it appears, according to the lawyers. That's not just a frivolous counterclaim.

But at the end of the day, the dollars here are quite de minimis and we think that we're not sure quite what the endgame is on the other side, but we know that come January, he will be on our team and we will be better off for it. So hopefully, that helps..

Sure. Thank you. I guess the costs are de minimis for your company, but for Scott, it could be pretty significant.

I was just wondering if you had guaranteed his garden lease (56:30)?.

Well, if by chance and we don't think this is going to happen, but if the litigation were to succeed from the Welltower's perspective, they would get his severance payments reimbursed. That's the damages that they're claiming. And so, we will make him whole for that, that was part of what we thought was the right thing to do and that's what we did.

We didn't know whether Welltower would take the action that they did, but we're not naïve in terms of how we look at the world. And so we really felt that he was such a special talent that the small risk of us having to write a check was worth it.

But I would also say and emphasize that as we went through the process and he did, we had counsel review his non-compete agreement very carefully line-by-line and we set up processes and procedures to respect that relationship.

I think he's been in our office about three quarters of a day for interviews and none of those interviews were asking for any confidential information.

Other than that, we've had only social phone calls and he and his wife have been looking for housing in Southern California and we've had lunch with them and so forth in that process as we introduced them to California.

But in terms of any competing or sharing of information or commenting on deals or relationships, anything like that, there has been none of that conversation. So, at the end of the day, this will all come out in court, he'll have his chance to tell the story.

And as I said, I just – so far, I can't find anything and I've been doing the things around this a long time, this one is completely inexplicable to me. And I don't think there is a bear there, but....

Okay. And then related follow-up.

Is there anything on hold in terms of major acquisitions for HCP? The majority of your investments year-to-date have been on the development front, I'm just wondering if that's – you might get your balance sheet in order or are you just waiting for Scott to start?.

We have – it's Mike McKee again, we have an active process and pipeline, there are several deals that are in the $200 million to $1 billion range, some of those are off-market, some of them are marketed deals. Our understanding from some of the broker community that more will be coming in the third and fourth quarter, so we'll remain active.

We were a little slower, as I think Tom mentioned in the first half based on discipline, some of those larger transactions like Duke, just – we thought got too pricy and the risk reward we didn't think was there.

But I think we do expect that through the year, we likely will come out between $500 million and $750 million is our current internal thinking of where transactions will lay out, both stabilized and development, that would be lower than we would think as the run rate, but we think that's the market we're in in 2017.

I think you're finding, as you look around some of the other big – the larger diversified REITs, they're slower than their normal pace as well. So that's more of the market we think than our interest in being in the market..

Okay, great. Thanks for the color..

Our next question comes from Drew Babin of Robert W. Baird. Please go ahead..

Hi. Thanks for taking my question. Question on Life Science, looking at our Q2 performance, it looks like occupancy was down quite a bit off of a tough comp, but also renewals and new leases signed below expiring rents.

What specifically gives you confidence to raise the Life Science guidance for the rest of this year? Is it just leasing performance in past quarters or is it something you expect to kind of boost the occupancy in the near term?.

Yeah. Hey, here is Jon Bergschneider. Generally, occupancy is down, really as it relates to timing of a chunk of expirations and subsequent leasing that transpire between Q2 and Q3 of last year. And then expirations this year, bulk of that space has already been re-leased.

So we're going to see both occupancy and growth feather back into the portfolio over the course of the remainder of the year.

Our mark-to-market on the quarter of down 18%, excuse me, was really driven by a fairly significant lease on South San Francisco that came off of about 15 years with 4% annual growth, so when we renewed that tenant with no downtime, excuse me, obviously we're going to see downward adjustment that's reflected in the negative mark-to-market.

But we have several offsetting increases to date which then again are newer to the benefit of the growth and occupancy in the back half of the year, so we feel pretty good about that guidance number and the leasing that's coming ahead of plan..

That's helpful.

And I guess, taking that and rolling it forward some towards next year, would you expect that retention rates next year will look kind of similar to what they are year-to-date plus or minus and might there be a little more volatility given the amount of leases that are expiring next year?.

Yeah. Generally, we've got about a 1 million square feet expiring next year. We are generally at about 10% below market for 2018 expirations. Our retention rate does oscillate from quarter-to-quarter and year-to-year because the spaces are fairly large. The retention rate itself is not an easy number to get your head around.

But that being said, where we sit with our expirations, a good chunk of those are in the Bay Area. We don't have any major known move-outs at this point right now.

The market is strong even if we do see somebody come to vacate a space, we feel good about where our real estate is positioned relative to market and rents that we would release this space at..

That's helpful. Thank you.

And one question just on – to the extent that SHOP assets are sold, the use of proceeds, would you be more likely to diversify away from Brookdale by redeploying within other Senior Housing operators or outside of Senior Housing entirely?.

The answer is yes. We wouldn't intend to increase the Brookdale concentration. Our objective is to decrease it over time and it easily could have – moving some of those doors away from Senior Housing and diversifying more to MOBs and Life Science is also very much a possibility over time..

Great. Thank you very much..

Thank you..

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

Hey, guys. This is Austin Caito on for Tayo. Thanks for taking the question.

Most of them are probably answered, but the last one I had was just, can you just discuss why adjusted FFO per share guidance is unchanged? You kept HC1 guidance the same, but you have higher dispositions now with the activity around HC1 in Tandem?.

Yeah. Well, I'd say just generally about our guidance. We did have some benefits this year, Ron, talked about last quarter, we had the Brookdale 25, which we, in our previous guidance, had assumed that it would be off our box a little bit sooner than it ended up being.

Same thing with HC1 as well for this quarter, we had actually assumed it would have been repaid much earlier, it ended up getting repaid a couple months after. And so the aggregate of those two have been helpful to our overall FFO as well as FAS..

Great. Thank you. That's it from me..

Thank you..

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

Yeah. Hi. A couple of quick questions here. On the $500 million to $750 million of acquisition, I guess, the guidance for 2017. Just want to confirm that's not in the numbers and then, is that all operating properties that can be acquired? I know development was thrown in there.

Is some of that development spend or properties that are bought that ultimately can be repositioned?.

This is Mike McKee. The $500 million to $750 million, one of the things that's in the numbers now is what we've closed or under contract. So, if it's not under contract, it's not on the numbers. It is an aggregate number. So if we have a development project under contract, that would be in that range that I gave you.

Obviously I think the weighting should be towards stabilized properties, but there will be some development in there..

Okay. But this does not have development spend in there.

So if we go to the development pages on the SHOP, this doesn't include normal spend on that redevelopment and new development pipeline?.

No. This is new third-party projects..

Got it. Okay. And then, just one other question on SHOP occupancy.

I guess, two questions, the 86.7% that was thrown out there, was that a full-year average as of year-end or is that an ending?.

That's a full-year average..

That's a full-year average. Got it. Okay.

And then, the last one if I could slip it in there is, do you know the second quarter occupancy deceleration? Did it feel like it accelerated through the quarter? Was it relatively flattish or just kind of what was the pace as you exited Q2 and went to Q3?.

So the – I would say that in the second quarter in the latter months, you're typically trending up in occupancy. We did not see that significant lift that we had in previous years. So we're still trending down a little bit and we factor that into our second half estimates and our full year estimates..

Okay. That was it. Thank you..

Thank you..

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

Hi. Thanks for staying on. Mike, you mentioned some of the portfolios out there.

When I kind of look at your cost of equity, doesn't seem like it could support some of the market cap rates we're seeing on portfolio deals, but your development and redevelopment yields and their spreads over to – over stabilized assets seem a little more accretive right now.

How do you guys look at your cost of capital right now relative to the in-place stabilized portfolios?.

Thanks, Todd. I want to kick this to the cost of capital king, Herzog, he's across the table, go ahead..

Todd, the way that we look at it, is we would think in terms of allocating new capital, where we go out and raise capital on a blended basis equity and debt, and assess the cost of that capital relative to what we're acquiring.

We'd look at it on a yield basis to see what it does to FFO and FAD, but even more importantly, we look at where we're trading relative to NAV so that we can determine that if we are issuing new equity that it's going to be accretive to NAV per share, if we put money out.

What makes our case a little bit different right now is, as I think you all know, we have gone through quite a transformation, that involved the spin last year, but even when you look at all transactions this year and removing all the non-core assets that we have, it's going to sum up to somewhere in the vicinity of $2.5 billion.

And with that, we've had a number of uses and have used some of that to delever and for different purposes, but it also leaves us the ability to have cleared out our revolver quite significantly, taken down an additional $500 million of debt through tenders, but we'll leave us some additional capital to invest in deals and so as we look at opportunities as they come in, there is a recycling aspect that's currently in place that we're fully aware of, but from a pure cost of capital perspective, it's the way I described..

Sure.

It just would seem like the proceeds coming in from the debt in your Brookdale assets are yielding higher yields than what you could deploy it at now and do you have any plans to raise new equity over the next six months?.

Well, not at the moment and you're right. Let me just first take you first comment, yeah, you're right that the – when we received sale of the Tandem or an HC1 or a Brookdale sale in the mid 6's, that of course when we reinvest, we'll reinvest in higher quality stuff and that's dilutive, that's in our guidance.

So, that's been taken into account already in the way that we thought about our numbers and then we felt the necessary part of repositioning to the company that we want to own and operate in the future.

As it pertains to the second part of your question, the reallocate – the recycling of capital is, there is quite a big capital for us to reinvest in additional deals as we go forward.

Did I catch the second part of your question by the way?.

Yes.

Just if do you have that included in guidance or are you assuming an equity raise?.

Yeah. There is no equity raise assumed because we do have additional proceeds that would be coming in, that would be around..

Okay, got it. Thank you, Tom. Thanks for the explanation. And one just final one from me. I'm not sure if I missed this, the HC1 now was paid back for $367 million, but when I look at the balance as of Q1, it was $395 million. I wondered – just want to see what the difference was there..

Yeah, the only difference could have been FX Todd..

Okay..

Where we report, that was a UK-based loan. So at the end of every quarter......

No discounts or no reduction of the loan, nothing like that?.

No..

Okay..

No. I would say it was all paid back at par..

Thank you. Appreciate that..

Thanks, Todd..

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

Oh! Thanks. Just want to go back to the six problematic Senior Housing assets. Seems like they had a very big impact as you talked about in the occupancy.

What was the actual occupancy decline for those assets?.

It averaged 11%..

Okay and where are these assets located?.

So they're primarily in Florida, and Miami and Sarasota, Chicago and one in Rhode Island..

Okay. And I know you talked about trying to asset-manage these properties, but do you think that these – and that's a pretty big occupancy decline.

Are these assets that are heavily being impacted by new supply nearby?.

Yeah. So there is a combination of factors. It's new supply and then as Tom had mentioned in his script, a loss of the sales directors which has a significant impact on the performance of the property..

Okay..

And on top of that, there was also – there was intended sales and marketing spend that ended up being delayed, we followed it up and Brookdale is all over that now. But as Kendall indicated, there's – maybe it was from Pete – there is a lag in recapturing some of that.

So again, this is getting a lot of focus right now, but we're still in the middle of making these assessments. So there is going to be a lot of work done over the coming quarter on this..

Yeah.

I guess, just finally here, I'm just trying to understand the impact here from supply because I mean there have been – I mean if you go around, there are examples around the country of how some communities and new supply that haven't been able to lease up, they're offering three-year rate locks and it's really hurting occupancy at some communities.

And I'm just wondering if that situation played out here and what's the risk that this happens even to other pieces of the portfolio at this point?.

The new supply is a concern, it has been and continues to be. I think if you look at starts and under construction, we see that declining, but over the course of the next quarters, there is a fair amount of new supply that will be hitting the markets. We know where that supply is coming.

We ready our properties for that new supply, whether it's investing CapEx, making sure that our team, especially our sales directors, they're not poached. So we put these plans in place to ensure that we're going to compete against that new supply coming into the market..

And just to be clear, these – I mean these directors where you lost directors, is this where they left the Brookdale portfolio altogether or is there, did any of them get moved around to other Brookdale communities?.

Yeah, the ones we're talking about are ones that left and look, you can see the – you look at the lead generation and lead execution in our portfolio and we're down over last year.

And most of that's due to – some of this is due to the spending that we talked about, the lack of the lower than expected spending on advertising and marketing dollars, but it's also due to the departure of these sales directors and they are the ones that are responsible for the lead generation as well as more importantly the lead execution..

Okay. Thanks, everyone..

Thank you..

Our next question is a follow-up question from Smedes Rose of Citi. Please go ahead..

Hey. It's Michael Bilerman.

Just going back to the litigation costs, are the $5 million year-to-date and just the over $3 million in the quarter, is that all dealing with Brinker or is there other litigation going on?.

There's, I guess, it's actually other, but most of it is actually not Brinker, most of it is actually the shareholder and derivative suits, that's the majority of it. I would say it's about 75%, 80% of it, the rest is Brinker..

And can you just give us an update on the shareholder and derivate lawsuits and are they settled and how much more is there to go?.

Yeah, Michael. This is Troy McHenry. As you probably know, these lawsuits stem from ownership of our HCR ManorCare assets that are no longer part of our portfolio as a result of the spin. And they are in their early stages with limited activity at this point. So it is going to take some time before they're ultimately resolved.

In fact, for the class action, the next step is for the judge to select a lead plaintiff and then thereafter, we would file our motion to dismiss against the amended complaint. So, in this interim period, what we're doing is we're vigorously preparing our defense and we believe that these allegations are without merit..

Okay.

And then just going back to Brinker, I guess what was the need to, I guess, was there a competing offer that you had, that you have to lock it up today to have triggered all of these back and forth lawsuits net of having just not filled it right away and announced it next year?.

Well, this is Mike McKee again. That was a determination that we made when we began talking to him, and as you know, we announced prior to talking to him that Justin would be leaving to go to HC1 in London, so we had that role open up.

I must say that a number of people, as we talked about Justin's leaving the company, Scott's name was raised a number of times, some of you that have participated on this call today were free with the advice that that would be an excellent place to turn.

So, we also were aware that he was a highly regarded person and I don't want to speak for him, but in conversations, he was having a number of parties reach out to him. We didn't get into a bidding war, so to speak. We felt that he was a natural addition to the team that we're putting together here and taking him off the market was to our benefit.

So that was a pretty easy calculation to make. And as I've said earlier, I don't think it's going to cost us anything or much, but whatever cost there is I think will be well worth it..

And then just talking about market cap rates and development returns because there may be differences in opinion as to where market cap rates are, where do you sort of ping market cap rates for Life Science in San Francisco currently, which is three quarters of your development pipeline?.

Well, the cap rates in general, if the person were acquiring a high quality asset, you're probably in the high 4%s. If we're going to develop an asset there, you're probably in the – somewhere in the mid 7%s or something like that or maybe even 8%.

So and that has been borne out by our development of The Cove, as you know, we've received or are receiving that type of a development return on that asset..

Sure. I'm just trying to – is there any reason why you won't actually put a yield on the developments in aggregate in your supplemental on page 20 on the $850 million of costs? You should have the footnote 150 to 200 over respective market cap rates. Is there any reason why....

Yes. We can, but I've been reluctant to do that because yields can change over time, cap rates change over time. 150 to 200 is a pretty safe range. We've been outperforming that and on each of the deals that we've underwritten, Michael, we have been underwriting spreads that are higher than that.

So we could increase that, but my inclination is at least, again, a bit of conservatism and ability to outperform what we're guiding to, so that's how we'd left it..

Right. I just would say, just give us the aggregate yield, the lease percentage, some actual data behind it rather than giving to us spread to market, which obviously is a variable number and in the eye of the beholder, so just give us what you're developing to rather than a spread..

Yeah. That's something, I'll think about that. That is something – we could include, I find that most oftentimes companies don't because that again, as you go through the process, you've got a number of variables that end up moving that number.

So it's something I got to think through before we – once we start doing that, it's something we'll continue to do permanently, so I just – I want to pretty thoughtful about it. Just looking at it, for your benefit for this call, just as we look at development yields down the list, and I won't get specific with them.

But in general, the return on cost numbers that we're looking at are – can be roughly probably, probably call it, 7.75% range on average. So, that's what we've underwritten to when we've underwritten our deals and you can see the locations of them, and you can, from that, ascertain roughly what the cap rates would look like.

So, the spreads are quite high, they're higher certainly than 150 to 200, but I mean it takes time to get those completed, in the meantime, the markets move. So that's why we've been conservative in the range that we've provided..

Right. I mean just take a look at Alexandria's supplemental and business closure that they have on the development or redevelopment and it's probably a reasonably guide to what investors would want to see..

We'll give that a look, Michael..

Okay. Thank you..

Appreciate it. Thanks..

Our next question is a follow-up from Jordan Sadler of KeyBanc Capital Markets. Please go ahead..

Thanks. I have a similar, but different question instead of developments, I'm kind of curious on the acquisition side. It looks like MOBs have been a – or could be a focus, Life Science as well on development side and maybe to a lesser extent Senior Hosing.

So as you look at the inside guide for $500 million to $750 million for this year, would we see you guys buy MOBs at 5% caps?.

Look, it depends on the quality of what we're looking at. MOB values obviously have increased. Cap rates have moved in the market. If you've got a very high quality asset that we believe produces good growth with a great hospital anchor, perhaps on campus, we wouldn't rule it out.

So we'd have to take that on a case-by-case basis, Jordan, it's a fair question. And as we look at these deals across Senior Housing, Life Science and MOBs, these are things we talk about in our Investment Committee process is what is appropriate pricing and what does it do to the NAV of our company and the overall yields.

We have to take into account what it does to FFO as adjusted and FAD as we would like to grow cash flows, but also as we seek to recycle capital, we'd like to have a high-quality portfolio that centers in these three private pay segments that the pricing of those – with high-quality assets, the pricing of those asset categories has just become more expensive.

At the same time, we are taking great action to be disciplined and seek to not overpay and it's kind of thus a step away from some of the high profile deals of some pretty good portfolios that we just decided the pricing got too high for what we wanted..

Okay. And then, I have one little strategic one for you, just marking your half-year anniversary a little bit more.

So, congratulations on that in the CEO seat, but you've worked for REITs that have been focused on one property type for quite a while or at least have in your history and now you're back at a SHOP where you have these three segments, a couple of which, if not all three, could each be pretty operationally intensive, maybe not for HCP if you've got a triple-net structure.

But we're – or an external RIDEA contract, but certainly you're exposed in terms of RIDEA and certainly you're exposed in terms of Life Science and Medical Office.

And so as you look at HCP, I mean, does it make a lot of sense for HCP to be this diversified?.

Well, you know what I think about is it's the way we're setting the company up going forward, it's diversified in three segments. Two of them are Specialty Office segments and then Senior Housing. Senior Housing more of an operating business and then of course the two office segments.

Diversification among these three all private pay actually fits together pretty nicely, in our view. So we – and everybody's got a different view on the strategically different companies, I mean. We definitely had concluded at some point that we wanted to exit SNFs. Hospitals are a small part of what we wanted to do, mezz debt.

So, we are trying to focus on, like I said, the high-quality private pay segments of Life Science, MOBs and Senior Housing, and we do think that over time, all three of those are great places to be and produce a nice diversification..

Okay. Thanks for the answer..

You bet. Thanks..

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Herzog for any closing remarks..

Okay. Well, thank you everybody for attending. Appreciate your time and your interest in HCP. I will say that I'm pleased with our ongoing progress on our corporate goals and we'll continue to work diligently. Look forward to talking to you all soon. Thanks..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..