Good afternoon and welcome to the HCP, Inc. Third Quarter 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 Andrew Johns, Vice President of Finance and Investor Relations.
Please go ahead..
Thank you, operator. Welcome to HCP's third quarter financial results conference call. Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurances that our expectations will be met.
A discussion of risks and risk factors are detailed in our press release included in our filings with the SEC. We do not undertake any duty to update these forward-looking statements. Certain non-GAAP financial measures will be discussed on this call.
In an Exhibit of the 8-K we furnished to the SEC today, we have reconciled our non-GAAP financial measures with the most directly comparable GAAP measures in accordance with Reg G requirements.
We've also provided reconciliations 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. Additionally, we have posted an investor presentation on our website at www.hcpi.com with further details regarding today's announced transaction.
I will now turn the call over to our President and Chief Executive Officer, Tom Herzog..
Thank you, Andrew, and welcome to HCP's third 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; Tom Klaritch, Chief Operating Officer; Kendall Young, Senior Housing Senior Managing Director; and our General Counsel, Troy McHenry.
We had an active third quarter and made progress on several fronts, including the announcement of an important transaction with Brookdale, the sale of our remaining investment in RIDEA II, the acquisition of a life science campus in Boston, and the formal launch of a sales process for our remaining UK holdings.
Today, we're reaffirming our aggregate cash SPP guidance of 2.5% to 3% and increased our FFO as adjusted guidance by $0.02 at the midpoint, primarily due to the timing of transactions. This morning, we announced a multi-faceted and win-win agreement with Brookdale that creates a plan to right-size our portfolio.
I'll give you the headlines and then Pete will take you through the details. First, the benefits of the transaction once fully executed will include the following.
For HCP, the benefits will include a clear path to reduce our total Brookdale exposure of the portfolio we are pleased to own long-term, improve our Brookdale triple-net EBITDAR coverage to 1.28 times and EBITDARM coverage to 1.48 times, and will further de-lever our balance sheet.
For Brookdale, the transaction reduces lease leverage and exposure to underwater triple-net leases. It will increase their pool of owned assets, shrinks their portfolio of managed assets and is a step towards simplification of the company. The transaction modifies certain rights for both parties.
It eliminates HCP's sole and absolute change in control consent rate right, which offers Brookdale more flexibility around any future entity level transactions they may entertain. In exchange, in the event of a change in control, we now have certain rights to exit all SHOP and CCRC assets.
Plus, for our triple-net assets, we received financial and lease coverage covenants. Additionally, outside of a change in control, we received rights at any time to terminate our remaining SHOP management agreements upon a payment equal to three years of management fees.
Prior to these transactions, we owned a full or JV interest in 199 Brookdale communities and now have a path to sell or transition 120 of these and we will retain with Brookdale 79 higher quality communities.
With these actions we will reduce our Brookdale concentration from 27% today to approximately 15.7% and our top three tenant concentration from approximately 40% to 29%.
Although the exact mix and timing of sales, transitions, and operator selection is still in process, we've been in contact with certain major operators and have a good preliminary plan. Moving on to our repositioning, our strategic repositioning during the past 12 months has been intentional and rapid.
Although there were a number of issues to address, we believe the steps taken were necessary to create the long-term company we envisioned.
As you will recall, restructuring actions during the last 12 months include the spin-off of HCR ManorCare and our SNF business, the sale of the Brookdale 64 portfolio and the first sale of a 40% interest in RIDEA II, the sale of our Four Seasons mezz debt investment, the repayment of our HC-One mezz debt investment, the significant prepayment of debt, and also last quarter we announced our upcoming discounted payoff or sale of our Tandem Mezz investment, our last high yield debt investment.
As you may have noted in our earnings release and separate press release, in addition to the Brookdale transaction, this morning we announced the sale of our remaining investment in RIDEA II to Columbia Pacific, consisting of 49 communities, 46 of which are with Brookdale, including a number that have SNF exposure; the acquisition of the Hayden life science campus in Lexington, Massachusetts which provides us a re-entry into the Boston life science market; a formal launch of a sale process of our remaining UK holdings which are operated by Maria Mallaband and HC-One.
This is a portfolio of good assets that will be widely marketed and based on discussion with market participants will garner much demand. Our rationale, we concluded that after tax leakage, Brexit considerations, and foreign currency risk, these assets were non-core to our strategy. We estimate the sale to be completed in Q1 or Q2 of 2018.
And in conjunction with these transactions, over the coming quarters, we will use the majority of the proceeds to prepay debt, which is expected to result in a sub 6.0 times net debt-to-EBITDA ratio. This further de-levering is consistent with our goal of re-establishing BBB-plus debt metrics.
Also, as Pete will quantify and explain further in a few minutes, on a pro forma basis, once completed, these transactions will result in a reduction of run rate FFO as adjusted due to the sale of higher-cap and lower-quality assets and the dilutive nature of reducing debt.
Of note, we will continue to have a solid cash flow base to cover our dividend. Turning to our senior housing asset management platform. During the quarter, we spent a tremendous amount of time working side by side with the Brookdale team to assess the root causes of our recent performance issues.
In certain cases, we concluded the issues were property or location-specific and accordingly identified planned sales of a number of these communities. Others were operationally challenged and for those we developed initiatives to improve our future performance. These initiatives were described in our September investor presentation.
On a personal note, Brookdale has always been known to put care first which is very important to me. Their team did an outstanding job in keeping our senior safe during an unusual and dangerous period of natural disasters which included two hurricanes plus the California wildfires.
There are a number of community evacuations and accounts of personal heroism where Brookdale team members went way above and beyond. This was quite incredible and inspiring. And to those folks, I want to extend our thanks and appreciation.
Within our senior housing platform at HCP, we're in the process of improving our infrastructure which has included various additions and enhancements to our asset and portfolio management team and to our systems. Our early results are quite encouraging but there is still work to do.
What does HCP look like going forward? We'll be differentiated from our peers with a higher diversification between our three private pay segments of MOBs, life science and senior housing. All three of these segments will benefit from the future baby boomer demographics, but without the bumpy ride of government reimbursement.
After the asset sales and transitions announced today are completed, we will be roughly 54% specialty office, half in primarily on campus MOBs and half in an outstanding portfolio in the three major life science markets of San Francisco, San Diego and Boston; 39% senior housing with a good blend of IL, AL and memory care; with 20% SHOP and 19% triple-net with strong coverage; and 7% in a handful of irreplaceable high quality hospitals with average 6.1 times EBITDAR coverage.
We do not intend to grow our hospital portfolio, but we like the assets we own today and plan to retain them for the foreseeable future. Of course, we'll have no remaining mezz debt, SNFs, or international holding.
As to future growth, we will continue to actively underwrite deals in all of our three core sectors, but we'll maintain discipline such that deals are funded either through capital recycling or through externally funded growth, but only when accretive to NAV. A couple of team updates.
During the quarter, we also had important updates to the HCP senior leadership team, including Tom Klaritch was promoted to Chief Operating Officer, and our MOB and life science businesses report to him. Shawn Johnston was appointed our new Chief Accounting Officer. Shawn is well known to me due to our time working together at UDR.
And, finally, in two months, we look forward to Scott Brinker joining our team as Chief Investment Officer. Lastly, I'd like to express my sincere appreciation to our team at HCP who worked tirelessly for many months to get us to this pivotal point.
Also, thank you to Andy Smith, CEO of Brookdale, and his team for the collaboration and cooperation that helped bring this transaction together. Now let me turn it to Pete to provide more details on the quarter and our recent transactions.
Pete?.
Thanks, Tom. I will start with a review of our third quarter results, and then go into detail on the transactions we announced this morning. For the third quarter, we reported FFO as adjusted of $0.48 per share and our total portfolio delivered year-over-year same-store cash NOI growth of 3.2%.
Going into more detail on our major segments, medical office reported same-store cash NOI growth of 2.5%, driven primarily by contractual rent steps. For life science, our same-store portfolio delivered year-over-year cash NOI growth of 4%, driven by lease escalators and leasing activity.
For our senior housing triple-net portfolio, same-store cash NOI grew 2.7% which was in line with our expectations. SHOP SPP for the quarter grew 5.3%. This performance was driven by strong rate growth and the benefits of some expense timing, partially offset by a decline in occupancy. For 2017 guidance, we still expect 2% to 3% expense growth.
During the quarter, we recorded a $9 million charge related to the hurricane. The charge is primarily due to property damage and costs associated with preparing for and cleaning up after the storms, partially offset by expected insurance proceeds net of tax. This charge has been added back to FFO as adjusted.
As it pertains to our previously announced Brookdale 25 portfolio, during the quarter, we sold two senior housing triple-net assets for $15 million and recognized a gain on sale of $5 million.
Since quarter-end, we closed on another two and have one asset remaining with that same buyer expected to close in November which is forecast to net $16 million of proceeds and $6 million in gain. We're making good progress on the balance of the portfolio and expect to either sell or have a transition plan on the remaining asset in early 2018.
As it pertains to these remaining 20 properties, we recorded an impairment charge of $23 million on 11 assets based on the expected sales proceeds from these transactions. Note these properties will transition to SHOP on November 1 when their interim one-year leases expire and will be removed from our triple-net same-store population.
Moving to our investment and development activity. In October, we entered into definitive agreement to acquire the Hayden Research Campus for $228 million. Hayden is a 400,000-square-foot life science campus located in the Boston suburb of Lexington, Massachusetts.
The transaction is expected to close in December with HCP acquiring assets in a joint venture with Cambridge-based King Street Properties, a developer, owner and operator of life science real estate. The Hayden acquisition allows HCP to re-enter the Boston market with immediate scale and align with a high-quality local operator and developer.
Additionally, the joint venture is seeking approvals to build an additional 209,000 square feet of life science space on the campus. In August, we closed on 6000 Shoreline Court, a 139,000 square foot life science and office building in one of HCP's core markets in South San Francisco. The purchase price was $64 million.
The purchase complements our cluster-in-a-cluster strategy being adjacent to our 23-acre future waterfront development site, Sierra Point. Finally, we placed into service a 116,000 square foot life science facility at The Cove in South San Francisco. This building is 100% leased to AstraZeneca.
Regarding our Tandem Mezzanine Loan, we now have $8 million in a non-refundable deposit and the purchaser is working towards an end-of-year close. Moving onto the balance sheet activities for the quarter. We completed the repurchase of $500 million of our 2021 5.375% senior notes through a tender offer.
The bond tender supports our de-leveraging plan, and we remain on track to achieve our year-end 2017 target of low to mid-6 times net debt to adjusted EBITDA and financial leverage in the 43% to 44% range, although the actual reported numbers may fluctuate from quarter-to-quarter depending on capital recycling timing.
We also closed on a new $2 billion unsecured revolving credit facility with all-in pricing of LIBOR plus 120 basis points. The new line has a maturity date of October 2021 and includes two six-month extension options. Moving onto our full year guidance. We're reaffirming our full year 2017 total company cash SPP NOI growth guidance of 2.5% to 3.5%.
Segment level forecasts remain unchanged except SHOP where we tightened our range and increased the midpoint by 50 basis points to 0% from minus 2%. Third quarter SHOP performance exceeded our updated guidance provided last quarter and we are trending towards the upper side of our range. Our year-to-date cash SPP NOI growth rate is 2.5%.
But it's important to reiterate that year-to-date SHOP benefited from favorable timing of volume purchase rebate. These rebates occurred disproportionately in the fourth quarter last , but in 2017 they're occurring more evenly across the year.
We are increasing our full year FFO, as adjusted, per share range to $1.92 to $1.96 per share from $1.89 to $1.95 per share. Performance this year has benefited from the timing impact of proceeds from dispositions such as HC-One, Tandem, and certain Brookdale portfolios.
Additional guidance information can be found on pages 49 and 50 of our supplemental. And you'll notice, we have provided additional disclosure on SHOP segment purchase rebates, as well as further capital recycling disclosure, which I will cover in more detail later on this call.
Of note, our NAREIT FFO guidance on page 49 does not reflect the non-cash accounting impact of the Brookdale transaction. Now, let me turn my attention to the Brookdale transaction. We've posted on our website and as an exhibit to our 8-K filed this morning a slide deck providing additional detail.
I will refer to the slides from that presentation now if you would like to follow along. Turning to slide 1 titled Transaction Highlights, I won't spend much time on this slide since Tom already covered much of it, but suffice it to say that we believe these transactions achieved many of our stated objectives.
Turning to slide 2, we announced a series of Brookdale related transactions. First, the initial Brookdale transaction. We've agreed to sell Brookdale six assets for a total consideration of $275 million. In addition, we've agreed to acquire Brookdale's 10% stake in two RIDEA joint ventures for $99 million. Second, the future Brookdale transaction.
We've been granted the right to terminate management agreements on 36 SHOP assets and leases on 32 triple-net leased assets. We can and expect to sell or transition these assets to third-parties. Importantly, Brookdale has agreed to waive termination fees on these management agreements. Third, other key transaction terms.
In addition to the other rights Tom spoke about, we will also consolidate the remaining triple-net leased portfolio into one master lease along with providing a $5 million annual rent reduction effective January 1, 2018.
Lastly, at the bottom of the page, we've reached agreement to sell our remaining investments in RIDEA II which owns 46 Brookdale communities to Columbia Pacific Advisors. You will recall, we initially sold 40% interest in RIDEA II to Columbia Pacific in January 2017.
Turning to slide 3, we have bifurcated between the initial transaction and the future transaction. For the initial transaction, we are targeting to close on these transactions within six months or sooner, although, of course, we can provide no assurances on timing.
We expect to generate net proceeds of approximately $500 million, which is net of the $99 million cost of purchasing Brookdale out of their 10% stakes. This will result in the sale of 55 total assets at a blended cap rate in the high 6s.
For the future transaction, we are targeting to sell between 40% and 60% of the 68 assets with the balance of assets being transitioned to new operators. Based on this, and the estimated cap rate range of 6.5% to 7.5%, we expect total proceeds to be between $600 million to $900 million.
Of course, the actual amount of proceeds will depend on the mix of asset sales versus transition to new operators. We expect to close on both the sales and transitions throughout the course of 2018. Turning to slide 4, we've laid out our current Brookdale exposures and the pro forma exposure impact within each one of our portfolio relationships.
In aggregate, our current portfolio of 199 total assets and approximately 27% concentration will be reduced significantly to 79 assets and 15.7% concentration. Digging into each of our portfolio relationship, the AL/IL, SHOP portfolio will decrease by 86 assets and result in pro forma concentration of 4.7%.
The triple-net leased portfolio will decrease by 34 assets and result in a pro forma concentration of 6.2%. Our CCRC JV relationship remains unchanged. Turning to slide 5, this is a key slide that highlights our proven track record of getting Brookdale deals done. Post QCP spin-off, our Brookdale exposure increased to 34%.
We've been working diligently to reduce that exposure in a calculated and methodical way. We're fully aware we have to execute to further reduce our exposure, but we now have a pathway forward and I am confident in our ability to get it done. On the right-hand side, you can see our remaining Brookdale assets and a few key performance metrics.
In AL/IL, we are left with 20 well-performing assets. In triple-net, we're left with a well-covered portfolio. Moving on to slide 6, the pie chart on the top of the page do an excellent job showing the substantial remix in concentration to the life science and MOB segment.
We've consistently discussed evening out our capital allocation amongst our core three segments and we will now have a much more balanced portfolio. Additionally, you can see at the bottom of the page the expected improvement in our net debt to adjusted EBITDA metric.
And we are nearly done with our exit from the more volatile mezzanine loan investment business. Moving on to slide 7, we've shown a very basic financial impact summary of these transactions and broken them out based on a potential range of outcomes.
We assume the net proceeds from each of these transactions is used to primarily repay debt with a blended 4% interest rate. Since the cap rates from these transactions are in excess of the blended interest rate, we expect to incur earnings dilution.
As you can see, the aggregate run rate FFO as adjusted dilution we expect to incur is $0.07 to $0.10 per share. For the initial transaction, the run rate FFO as adjusted dilution is approximately $0.04 per share. In addition, the initial transactions assume the dilutive impact from other adjustments, including the $5 million rent reduction.
For the future transaction, the run rate FFO as adjusted dilution ranges from $0.03 to $0.06 per share. The amount of run rate dilution we expect to incur from the future transaction will depend on the amount of assets sold and the cap rate achieved. A few important additional points which are worth mentioning.
Number one, we do not expect any of the transactions to have a material impact on our previously discussed 2017 FFO as adjusted earnings and guidance. Number two, the amount of run rate dilution from these transactions is based on our decision to de-lever.
On a leverage-neutral basis, our run rate FFO as adjusted dilution will be approximately $0.025 less per share, which is an important distinction. Let me turn you now to slide 8. We have laid out the full earnings impact from all of our various capital recycling activities during the last 12 months or so, inclusive of the transactions announced today.
Working from top to bottom on this page, our starting point is our revised FFO as adjusted guidance which we raised by $0.03 per share on the lower end and increased by $0.01 per share on the higher end.
For our 2017 capital recycling activities, I would encourage you to review the updated footnotes on page 50 of our third quarter supplemental which details the amount, yield, and timing of our dispositions and acquisitions by quarter. In addition, we have also included a schedule of the debt we repaid by quarter and the corresponding rate.
As a reminder, the major 2017 dispositions that have the most significant impact on run rate earnings are the $1.125 billion sale of the Brookdale 64 portfolio which closed at the end of the first quarter, $367 million repayment of our HC-One debt investment which closed at the end of the second quarter, and the $257 million Tandem Loan which we've agreed to sell for $197 million and expect to close at the end of the fourth quarter.
The end result of all of this is that we've had $0.08 per share of earnings in our 2017 FFO as adjusted which we do not expect going forward. Moving on to the Brookdale transaction. The dilutive impact range of $0.07 to $0.10 per share matches the previous page.
Given the future sales are soon to close on average in the middle of 2018, we will have a partial year benefit for the time period we continue to own these assets. For the initial sales, we have assumed a January 1 closing, although, as we stated, these could take up to six months to complete.
Moving on to Genentech and the UK, as previously disclosed, we expect the $269 million Genentech purchase option to be exercised in July. As a reminder, this purchase option is at an 8% cap rate. On the UK, we expect to generate $500 million to $600 million in proceeds and an after-tax yield of approximately 6% to 7%.
We intend to use the majority of the proceeds from both of these transactions to reinvest in acquisition at an estimated blended yield of 5.5%. As a result, the aggregate impact from both of these transactions is about $0.03 per share of FFO as adjusted run rate dilution with half of that impact being felt in 2018.
At the very bottom of the page, we've included a placeholder for additional adjustments such as our projected 2018 year-over-year NOI growth and the positive impact from developments coming online. We will issue our full year 2018 guidance on our fourth quarter earnings call and provide additional details at that time.
In summary and before we turn the call over to Q&A, we're very pleased with the progress we have made in our portfolio repositioning efforts in a short period of time. The transactions announced today provide us with a pathway to reduce our Brookdale exposure, while simultaneously strengthening our relationship with them on our remaining portfolio.
We believe that upon successful completion of these actions, our portfolio reset will be near complete. And, importantly, we will have significantly improved the overall quality of our portfolio and further improved our balance sheet. And, with that, operator, please open the line for any questions..
We will now begin the question-and-answer session. Our first question comes from Rich Anderson with Mizuho Securities. Please go ahead..
Thanks and good morning out there and congratulations on all of this. So, Pete, on slide 3 of your presentation, I have a question about the cap rate you are applying to the RIDEA acquisition or disposition I should say.
In January, you sold a 60% interest that implied a $1.2 billion value and this is a 40% interest implies like a $550 million value if you divide $332 million divided by 60%.
So can you kind of connect those dots for me as to why one was so much larger than the other?.
Yeah. Rich, I think if you look back at the January transaction, it was actually a $908 million valuation. I think just a little bit of background on RIDEA II. We had previously owned this portfolio in a triple-net lease. And in 2014, we actually sold a 20% stake of it to Brookdale. We actually put some debt in place at that time, around $600 million.
So, in January, when CPA purchased our 50% stake of our 80% ownership there, we got back $480 million which was $360 million of debt and $120 million of equity. When you think about this remaining piece we're selling now, this is the $332 million approximately.
It's $90 million of equity and $242 million of we call it debt that we loaned into the JV there. So, as we think about total proceeds just from 2014 to today that we've received on this portfolio, it's around $880 million, which will be the total proceeds we receive upon exit.
The cap rate on this page here is a blend of what it was when the $908 million valuation was used in January to come up with the proceeds we received. This valuation is a little bit lower here, just given we're selling a minority stake. It's around $830 million.
And so the blend is around that 7% on the page, but it was high-6s for the majority stake in January and low-7s for the stake that we sold right now and the blend is around 7%..
Okay. That helps..
This is Kendall. I would add to that that roughly 17% to 20% of the NOI of those assets are from skilled nursing units..
Okay. Great. Thank you. And then the second question, a good disclosure on page 8 with the impact on 2018. When we think – I'm not going to ask you for 2019 guide – or maybe I can get 2019 guidance. I know you're not going to give 2018 guidance.
But I'm just thinking about the timeline to how we get back to normal course of business and growth profile and all that. I mean, is it just like, by definition here, another $0.03 of incremental dilution in 2019 from the Brookdale in theory and then from that point it's – you're back to kind of a regular kind of growth profile of the company.
Is that would be the last overhang, just $0.03 in 2019? Is that a good way to think about it?.
Yeah..
The difference between $0.10 and $0.07..
Yeah, Rich. And that's the way we did lay it out on the page here now. Obviously, the timing of when these deals close -.
Right..
Will have an impact on it.
But our thought on 2018 though would be to continue to disclose as we have now – we added some disclosures to the supplemental – the impacts that we would receive from some of these capital recycling items and looking at more of a normalized FFO, so you guys can understand and the Street can understand the growth rate a little bit better..
Right. So if you get it done sooner than July 1 of 2018, then you're maybe get $0.08 or $0.09 of dilution from the Brookdale transactions and then less....
In 2018, yes (00:32:34)..
Right. Okay. Yeah. I just want to make sure I understood it. That's great. Thanks very much..
Thanks, Rich..
Our next question is from Jordan Sadler with KeyBanc Capital Markets. Please go ahead..
Thank you. Good morning out there. So, Pete, I think in your remarks you were saying with these transactions, the portfolio set is largely complete. I just wanted to dig in there a little bit regarding the remaining exposure to Brookdale, including specifically the CCRCs..
Yeah, Jordan. This is Tom Herzog. The 15% as to where we stand today, we feel very comfortable with that. We feel good about the portfolio that we've retained. And let me speak specifically to the CCRCs. As we have looked at those during the last quarter, we like the assets from an economic perspective.
We think you have to look at them over a longer period due to the entrance fees but there also was something that had been in our minds for the last six or nine months. There was going to be an accounting change that back-end loaded on an actuarial basis the income recognition. That was going to be quite punitive.
And it was determined by the accounting bodies that they would not carry forward that account in. So, that adjustment that we thought made no sense went away. So as we worked with that portfolio, worked with Brookdale, we determined we should look at this at least for the foreseeable future as a hold.
And we may very well come back in the first quarter and carve CCRCs out of our SHOP, disclose them separately both in entrance fees and same-store growth, so that they don't get comingled with the SHOP which is quite confusing.
But from an economic perspective when we look at how that prices, we felt that that was going to be a core holding for us going forward..
Okay. And then coming back to the guidance. You guys have put together a nice deck here and some good metrics. But on page 7, the total indicative run rate financial impact, I believe this is an annualized number, the $0.07 to $0.10.
So the expectation is that basically all of this activity taken together in terms of reducing the exposure to Brookdale and then even recycling up to $225 million of capital into new assets.
The net impact including the de-leveraging is only $0.085 of FFO annualized?.
Yeah. That's correct. Now, as I've mentioned it in my prepared remarks, on a leverage neutral basis, it would be about $0.025 of less dilution..
Okay. Thanks, guys..
Thanks, Jordan..
Our next question is from Juan Sanabria with Bank of America Merrill Lynch. Please go ahead..
Hi. I was just hoping for kind of some more thoughts and color around the Brookdale 25 assets, that original non-core and kind of slippage in timing and pricing that we've seen there and if that's indicative of any maybe potential risk with any of the other asset sales that are now planned as part of what you announced today..
Yeah. Juan, we don't think it is indicative and Kendall will provide the background as to why..
Yeah. So on those 25 assets, we are – at least the ones that we have either sold or are under a purchase and sale agreement, we are in the, call it, low 6s, so around 6.3%, 6.4% cap rate. So those have come in line with our expectations.
We had a couple properties that fell out and we're evaluating what to do with those but that's limited to five of the assets and we may with those go out and remarket them. And the price that we were getting on those was in that same range.
So we feel that that hasn't been disadvantaged by the Brookdale assets and the cap rates are what we had thought they would be..
Okay.
And then as far as transitioning some of these Brookdale assets to new operators, could you just talk a little bit about the potential strategic options? Do you want to go and split that exposure out amongst a whole host or a few different operators or are you maybe trying to seed like a new venture to which to then kind of grow and use it as an acquisition vehicle or how are you guys thinking about that potential opportunity?.
Yeah. This is Kendall. So we've identified a handful of operators that we would transition the properties to. All of them are known to us and most of them are current operators for HCP. We do want to limit the number of operators that we do transition assets to, to minimize that transition risk.
Just generally, we're focused on operators that have strong performance track records, great systems and processes, local market knowledge including the regulatory environment. And, most importantly, we are focused on operators that have a strong track record in successful transitions.
We've realized as we've transitioned assets over the past year, year and a half that that is something that's very important. We've already had conversations with the few operators and starting after this call today we will have more conversations..
Thanks..
Thank you..
Our next question is from Smedes Rose with Citi. Please go ahead..
Hey. It's Michael Bilerman here. I'm just curious. I think, Tom, in your opening comments you gave a little bit of a chat about the dividend. Maybe you can drill down a little bit more. I mean you're running today $1.48 annualized. You just take the $1.92 and curve off $0.20 and all of a sudden you're at $1.72.
And then you think of at least probably $0.25, if not $0.30 of real cash adjustments, putting aside the CCRCs for a second and you're underwater. Now I recognize there's some growth in the portfolio, but you're going to be pretty darn tight, if not underwater on that dividend. And I recognize the balance sheet is in better shape.
How do you sort of put all that together?.
Yeah. Michael, good question. I'm glad you asked it. No, the numbers work a bit different than that. So at the current coverage, we'd be at about 85%. If you go to page 8 and you look at the – you can start with the 2018 impact if you wanted to.
The run rate impact, of course, is going to get the benefit of some same-store growth, development deliveries, et cetera, for 2018 and then 2019. So let's just stay over in the 2018, the right-hand side of page 8.
We've got the $0.08 that we had already been out and spoken to or at least provided people the information to connect the dots on the 2017 capital recycling. And then we get the Brookdale transactions which we show in 2018 are $0.05 to $0.07, within a range. We got the Genentech and the UK.
But you add all those pieces up, capture then – you see that blue box at the bottom to be provided? That includes things like year-over-year same-store growth on a portfolio of assets that should produce good, solid growth, some developments coming online, et cetera.
And we definitely are not bumping up against a dividend coverage that's anywhere near 100%. So we've got plenty of room within that..
Is that blue box? Is that a net positive -.
Yeah..
Type of number? And would be a positive -.
Yeah. One of the – oh sorry. Yeah. How we did this, Michael, is we showed the various earnings impacts from things that people can calculate today from – if you go to our prior investor presentation, we had a page that we had gone through with many investors as we've done road shows.
Just so you can reference it, it's page 9 in that prior presentation and we've walked folks through the details of it and that's the $0.08. As you go down through the rest of it, it's primarily Brookdale. And that blue box is all the stuff that has not been added in, and that's important.
I think that might have been missed by a couple folks when we read a couple of analyst pieces today. So I think it could be easily missed.
But we have not – in this, we have purposely not picked up same-store NOI growth, development coming online, and some of those types of items because we didn't want to provide 2018 guidance yet, because we're still in the middle of our annual operating plan.
So we'll be bringing you those numbers in early February, but that is absent from this schedule right now, purposely..
Right. Well, looking at those items, you just never know, right? Other items could be a negative item, right? Development coming online, you could have the cap interest come back and the assets may not be fully leased when they come online. You break out a negative on the life science.
How do you know there's not something else in the same-store pool? And then annual capital recycling, for all we know, you have additional asset sales. So it's not crazy to think that maybe that blue box is negative, right, without you telling us it's positive, right, given the history here....
I hear where you're going. I would say this. As you look at the list of different reset items that we set forth on this page, we have purposely gone through and painstakingly identified things that we said are non-core to our portfolio. And you can see from the magnitude of list that we have I think done a pretty good job in identifying those items.
So when you get down to that bottom box, that's a pretty clean box. So year-over-year NOI growth, we've already stripped out, for instance, that lease that we speak to on the right-hand side of the blue box. That's already been incorporated in. We stripped out Genentech and the UK and the mezz debt.
So you have to think through in our portfolio how much is there left other than good solid performing assets within our portfolios of MOB, life science and senior housing and a handful of hospitals that have six times coverage. And from developments, we're talking about deliveries on, for instance, The Cove.
So you know what that's yielding in that 8% range. So I think if you look at that, you'll probably find that that box is -.
It's a heart-shaped box..
Yes..
All right. Thank you..
Yeah. You got it. Thank you..
Our next question is from Michael Carroll with RBC Capital Markets. Please go ahead..
Yeah. Thanks.
Can you guys talk a little bit about the recent life science deal in Boston? How do you plan on growing this portfolio going forward and how many different markets do you want to look to expand into?.
This is Tom Klaritch. The life science deal in Boston, as we indicated, it's comprised of two parts. There's two existing buildings, 400,000 square feet.
Today, they are leased at 66%, but we're pretty far along discussions with two potential tenants that will bring the occupancy there up to 94%, so in line with our underwriting on that deal which will yield about 5.9% on those existing assets. There's the potential to build an additional 209,000 square feet.
That is currently in the entitlement process. So we're working through that and we hope to get approval on that sometime in the early 2018 timeframe. As you can see there, we're partnering with King Street Properties on the deal. King Street is a long-term owner and developer of life science assets in the Boston market. We think they're a great partner.
They're going to be our boots on the ground and we think we have growth opportunities with them moving forward..
And are you also targeting to grow in the Cambridge area or just kind of focusing right now on the suburbs?.
We really like the suburbs. If you look at Cambridge, the rents are probably $30 a square foot higher, very hard to get in. There hasn't been a lot of trades in the Cambridge area and cap rates are in the kind of the mid-4% range. In the suburbs, we're seeing opportunities for growth.
There's demand out there in the 128 corridors, about 1 million square feet according to the brokerage communities. It's a little easier for the new companies to expand into that market. Rents are about $50 a square foot versus the $80. So we really like those markets.
And it's really close to the Cambridge market, about a 10 to 15-minute drive up that Route 128. So we think it's a great area to expand into..
Okay. Great. Thank you..
Thanks, Michael..
Our next question is from Vikram Malhotra with Morgan Stanley. Please go ahead..
Thanks for taking the question.
So just around the $5 million adjustment or rent reduction, maybe you can give us some more color how did you arrive at that number? What sort of assumptions are you making? I know you can't give 2018 guidance, but maybe over a three-year period, what are you assuming for underlying growth? Because I'm sure you don't want to be in a position where you have to give another rent reduction.
So what sort of assumptions, even if they're broad, if you can just share some, it would be useful..
Vikram, that's a fairly deep question and I'm glad you asked it. When we put together the transaction with Brookdale, the intent from the very first day was that this would be a win-win transaction. And within that win-win transaction, one of the things we committed to is that we would seek to balance the scale.
Neither party would seek to get an advantage over the other. We wanted it to be a good transaction for both parties. So when we looked at the Brookdale team exiting some of those underwater leases, that's to their advantage. And in that big equation, they essentially provided us consideration for that.
At the same time, they stepped away from management fees and in the big equation we provided them consideration for that. And within that, there's CapEx and ancillary income and present value calculations and a lot more detail than they will ever want to hear.
But when we – that's all said and done and we did the calculations, there was a $5 million per year difference and that was the balancing item. Fortunately, we had a couple of leases that we thought would make sense to reduce that rent, work that into our operations and improve coverages at the same time.
So that was literally the balancing transaction within keeping the scales balanced..
But are you assuming sort of just growth in line with sort of standard rent bumps? Are you assuming something even more conservative just because you're still getting through all this supply? I mean, can you just give us some sense of just – even if it's longer-term, that'll just be helpful..
Yeah. If you took what we did with the triple-nets, it bumped us to a 1.28 times coverage. And those leases are obviously part of that. So at that point – and I'm not talking EBITDARM; I'm talking EBITDAR coverage. So these are very well-covered leases at this point. So it wasn't in our minds that some further rent reduction was coming behind this..
Okay. And the bump....
Did I capture the question properly?.
Yeah. No, that's fair.
And the bumps are now still the same as they were for what you've sold or the bumps have changed as well?.
No, the bump stayed the same..
Okay. And then, if I can just ask one other separate question. You sort of acknowledged that there's more of an office element now to the portfolio and CapEx. You'll still have the CapEx requirements or needs that you've outlined.
What do you need to do now from a portfolio management perspective? I remember a year ago you said there's more to build in terms of internal system, maybe more people.
What are some of the bigger steps you need to do now to get the internal asset management team or the two of you have to monitor this portfolio which changed quite a bit?.
Vikram, I'm going to ask for – your question was clear, but I missed a couple of words that were important.
What I heard you say is that we're rebalancing the office side of our portfolio relative to senior housing, and what actions are we taking? Is it around senior housing from an asset management perspective? Was that the question?.
It's both now. Obviously, you have more CapEx requirements. Office generally tends to have more CapEx load, maybe greater focus on kind of leads, et cetera.
So I'm just trying to understand like from a team, from a process, and a tool perspective, what do you need to do from here on? Because it's something you mentioned a year ago that your focus would be internal systems and management.
So now I'm wondering, given you've got more office, what else do you need to do from now on?.
I'm going to start the question and I'm actually going to share this one with Tom Klaritch and Kendall. We have, over time, expressed to you that we want to balance out the portfolio in each of the three key segments of life science, MOBs, and senior housing, and the office obviously becomes larger, office and MOBs and life science.
We have had, for a long period of time, very strong systems in Nashville with our MOB portfolio. And we're working on building stronger asset management systems, portfolio on asset management teams, et cetera, within senior housing. So, Tom, maybe just a moment on MOBs because you've been strong there for a long time.
But especially with Vikram's question on the size of the CapEx and how you think about it, let's turn it to Kendall to talk about senior housing..
Sure. If you look at our internal systems, one of the things that my new role will be looking at is systems that exist today in each of the segments and really making them consistent across all three as opposed to – we have some great processes and internal systems in medical office that we use for internal benchmarking and monitoring of performance.
We'll start rolling those out across the other segments to get more efficiency there. Looking at the CapEx spend, that's another area where we can really implement some tools to real-time monitor a lot of the spend and where we can best appropriate funds in that capital.
And we've been doing that in medical office and we're going to spread that out more across life science and senior housing as we move forward..
Yeah. On the senior housing side, I think, there's a couple elements to the plan for the asset management. It's building the team and then also the system. And if you look at the team, we hired an individual who's running our asset management team.
He's got 10 years in the senior housing space and was with a company where he was responsible for FP&A early on in his career and then also setting up an actual management company. So he has very deep experience.
We've hired others onto the team that have senior housing experience and that has been very helpful, especially as we look at how we analyze our portfolio, the performance and in our forecasting. And that gets to our systems.
We are building an asset management system that will include things that Tom mentioned on CapEx, how we monitor it, how we analyze it going forward. And so we are continuing to improve on our asset management function..
Okay. Great. Thanks, guys..
Thanks..
Our next question is from Michael Knott with Green Street Advisors. Please go ahead..
Hey, guys. Curious if you can talk in more detail about the SHOP results in the guidance update there and your take on the future pace of occupancy and the losses there and also supply environment and OpEx and labor..
Yeah, Michael. Why don't I start with that? And then for supply, I'll have Kendall give his input. But we did raise our SHOP guidance 50 basis points at the midpoint. I would just point out that 50 basis points translates basically into $1 million of NOI. So it's not a tremendous amount of additional dollars.
But what we really saw was an improvement in occupancy, partially as a result of some of the initiatives with Brookdale. We did also see a slight uptick as well in Houston as a result of Hurricane Harvey.
So as we thought about our forecast at the end of last quarter, we had said that July was down and we expected perhaps some continued declines as well. What we saw was actually an uptick in August and September which was a positive for us and really one of the main reasons for our costs to tighten up that range and bring the midpoint up as well.
And we're pretty confident we're trending right now towards the upper end of that range. And REVPOR is strong. And we look at expenses, we had some favorable timing impact from expenses this quarter. But by and large, we think expenses will still be overall in the 2% to 3% up range for the year.
Why don't I turn it over to Kendall to talk about some of the supply issues?.
Yeah. So maybe starting off with what we see are some positive trends. If you look at the new starts on a rolling four quarter basis, this last quarter, they fell to the lowest level since the peak in the fourth quarter of 2015. We think this is due in part to lenders being more conservative, rates are higher and also due to rising development costs.
Absorption reached 3.4% in this last quarter, which was the highest level since NIC started tracking absorption. So, longer-term, demographics continue to drive increases in absorption and we see supply moderating to more historical levels. We feel pretty good about the markets.
Looking to the balance of 2017 and 2018 based on the NIC data, new deliveries will remain elevated through 2017 and through most of 2018. We've obviously seen impact in our portfolio from the new supply as evidenced by the fall off in occupancy. We have readiness plans for our properties that are facing new supply. So we're constantly monitoring that.
And a lot of that is focused on CapEx investment and adding sales resources. If you look at some of our bottom performers that we've had, we talked about those in the last quarter. A lot of those were in markets with new supply.
And as we look at our Brookdale transaction, we're looking at selling a number of the properties that have faced supply and will continue to face new supply. But then if you also look at some of the markets where there is a lot of new supply like Houston, our assets have performed well, well in excess of the NIC averages.
And we think that's due to they have great locations and you really have to look at that 5-mile or 20-minute drive time radius to see how your property is going to perform..
Okay. Thanks. And then maybe, Pete or Tom, can you talk about the economics of the Columbia Pacific RIDEA sale versus last time? I know, Pete, you touched on it, high 6s last time, low 7s now. I would have thought that gap was a little bit wider.
Just curious if you could theoretically attribute that difference in pricing between the minority interest discount that you cited versus sort of an overall deterioration in the market for senior housing asset sales since that first transaction..
I'll just add on to what Pete said. You're going to have some of both. We have seen some deterioration. It's a minority interest. From an operator perspective, I think, Brookdale is turning the corner and some really good things are happening right now, but that probably had some impact on value. So I would say it's probably those three things..
Thank you..
Our next question comes from Jonathan Hughes with Raymond James. Please go ahead..
Hey, guys. Congrats on the quarter. Thanks for taking my question. Just one for me, and this is a bit of an extension of Michael's previous question.
But looking at the senior housing portfolios and units under construction within the trade area, have you looked at this, including the non-stabilized inventory, in addition to properties under construction? And NIC has kind of said this number is almost 10% nationwide.
I'm just trying to understand if you guys look at this and think if this is really the right way to look at the impact of new supply..
Yeah. Look, we are always monitoring – this is Kendall. We're always monitoring new supply and our competitors. And so, when we're setting rates, when we're looking at investing money in a property, we are taking those factors into consideration.
So if our asset is in a market that's going to face new supply and then there's a lot of other properties that also have low occupancies, we do factor that into our considerations.
And as I said, that's something that has gone into when we looked at our Brookdale portfolio trying to figure out which assets we want to sell, which assets we want to transition and which assets to keep with Brookdale. What you just stated was a big factor in determining which assets we would sell..
Okay. That's fair enough. That's it for me. Thanks..
Thanks, Jonathan..
Our next question is from John Kim with BMO Capital Markets. Please go ahead..
Thanks. Good morning. Just going back to page 8 of your presentation, the anticipated future sales, you're anticipating $0.01 to $0.03 dilution. This assumes 40% to 60% of the 68 assets are sold.
But what happens to the assets that you don't sell and you transition to other operators?.
Yeah. I mean, those assets as we model them here would have no impact. They would stay within the system. Obviously, a smoother transition is important because you want to make sure that there's no real value drop-off on revenues or NOI while you transition.
And as we look at the list of operators that we are looking to transition to, they are experienced operators and they know what they're doing. And we're also going to work closely with Brookdale who's actually very, very good on the transition side.
And we've come up with, I think, a good construct in working with them to make sure that this transition goes as smooth as possible..
And this is Kendall. I think there's some upside in the assets especially the ones that we're transitioning versus selling..
If it's going to another triple-net structure, wouldn't you have to have a rent reduction?.
We would move these into a SHOP or a RIDEA structure is the intention..
Okay. And then what about the remain -.
I'm sorry. The bottom line is you've got to keep in mind for those assets that we sell there would be a dilutive impact that we factored in. For those that we transition, it probably come in around neutral. So when you look at this range that we've set forth, that's what's driving that differential in the dilutive impact..
Looking past this slide and the remaining triple-net senior housing operators, right now, the coverage is 1.08 EBITDAR.
Do you anticipate selling those assets or transitioning those to RIDEA or rent – what do you think is going to happen with that portfolio?.
So I'd say a lot of leases, we have pretty strong corporate guarantees from good credits. When you see coverages fall in some of these leases, a lot of times it's one asset that's driving that – one or two assets. And we are in conversations with all of our tenants on how to improve the coverages.
And some of those might involve – the strategies might involve selling the assets that are driving that low coverage..
Or transitioning....
Or transition to another operator that may be better equipped to run that property..
So the pro forma triple-net of 19%, pro forma of these transactions, that will probably come down even further going forward and eventually go to SHOP?.
I wouldn't say materially. You're talking about one or two assets in each of the leases. And so if you've got a 15 property lease, it might be one or two assets. As you get down to the smaller leases, it's maybe one asset. So it's not a material amount of assets..
Yeah. Not near-term but over time as those triple-net assets leases either come due or there are actions taken to seek better outcomes, the general trend, as you know, has been toward SHOP arrangements. A lot of the stronger operators have moved that direction and that is a consideration. So I don't think that's unique to us.
I think it's something that is a common place in the sector right now..
Okay.
And then, finally, I realize this is more of a one-time cost, but can you provide an update on the litigation costs for hiring Scott Brinker and what they may do to G&A next year?.
Yeah, I can. We're in the middle of that right now and it's not a significant number. It's within the number that you see added back in the earnings release. It's a percentage of it. I'd rather not provide the specific number right now..
That's fine. Thank you..
Thanks..
Our next question is from Chad Vanacore with Stifel. Please go ahead..
All right. We're running late, so I'm going to keep this fairly simple. You're raised core guidance by about $0.02 at the midpoint.
So what factor in there? It looks like you improved the bottom end of the SHOP performance, but that explains somewhere between a $0.25 or $0.005? So what other factors let you raise guidance?.
Yeah. You hit the most important one which is obviously SHOP. Bringing that up was a factor but then also, as I said in some of my prepared remarks, I mean, we've had some benefit from holding on to certain assets I would say. Tandem was one that we originally had earmarked for an October closing.
That's gotten extended into the fourth quarter now or November/December. We're looking at an end of year – we're working towards an end of year close. So when you think about SHOP coming up as well as items like Tandem and then the Brookdale 25, some of those sales getting pushed out into next year, there's a little bit of a benefit from that.
So it's a combination of those..
All right.
And then, when you think about lifting the bottom end of SHOP guidance, should we see some occupancy improvement sequentially from Q3 to Q4 or you expect something flat or you expect to give back some of that?.
Yeah. Chad, that is a very good question. As I said, right now, we're trending towards the high end of our guidance on the 0% to minus 2%. If you just do the sequential math, you'll come up with the fact that fourth quarter appears to be down pretty heavily when you just look at – up 2.5% so far year-to-date and then minus 1% at the midpoint.
There is an important thing to point out there. I would say that the purchase rebates for the last fourth quarter where we had a pretty big pop in the fourth quarter will work against us this fourth quarter. It does not impact the full year, but it will have an impact in the fourth quarter.
When you adjust those out, that negative number, if you do the sequential math, actually comes down quite substantially, about 350 basis points. But we're still – even at the high end, you do that math, we're negative around 3%, 3.5%. That is because there's a lot of moving pieces still.
As we look at it here, you've got more deliveries coming in the fourth quarter. Expenses could increase. We've actually been pushing hard on sales and marketing spend. And for the fourth quarter, can generally be volatile, especially with some of these accounting true-ups towards the end of the year as well. So all that led us to be more conservative.
I think from an occupancy perspective, we're looking at a slight improvement from where we were before, but probably still around full year down 200 basis point to 250 basis point within our range right now..
All right. That's great. Thanks for taking the questions..
Thank you..
Our next question is from Nick Yulico with UBS. Please go ahead..
Thanks. So I just want to go back to the Brookdale transaction and your decision to waive, I guess, your full consent rights over any transaction that could happen, change of control at Brookdale.
How did you weigh that decision, especially since there's other landlords that have consent rights over Brookdale entity sale? And did you think about trying to get some equity in Brookdale or some sort of upside participation in Brookdale since it seems like this whole transaction improves the cash flow characteristics at Brookdale?.
Nick, I'm glad you asked that. From a standpoint of what we were seeking to get and give, no, we weren't trying to get an equity stake or something of that nature. We felt that when we got done with the trade that we had received something in the net equivalent to what we gave back.
One of the things that obviously benefited Brookdale was for us to relieve them of our unfettered consent. But at the same time, what they gave us in exchange has great value to us as well. It put us in a position where we were able to reduce our concentration dramatically.
And in a future change in control, we're able to eliminate completely, without penalty, the rest of our SHOP assets and our CCRCs, leaving us with 6% concentration all in triple-nets that also contain financial covenants. So a great place to be.
And between now and then, if there's not a change in control and if we have reason to desire to do this, which I can't see us today that we would have a reason to desire it, but we have an any time right to remove the management contracts on all the SHOP assets for a payment equivalent to 3 times management fees.
So as we weighed what it is that we're receiving in these rights versus what we're giving up, it felt like it was something that is really good for Brookdale, which is good for us. And it's certainly is something that's good for us. So that's how we looked at it..
Okay. Thanks for that, Tom. So one of the question is from a modeling standpoint you have some income tax benefits running through your income statement this year and it's not clear how much of this benefit is actually included in your adjusted FFO calculation.
Can you just quantify what the number is for this year, remind us what those benefits comprise? And I'm particularly confused about this since – if you look at your cash flow statement, it looks like you're paying taxes, yet you're booking a benefit on your income statement. Thanks..
Yeah. That would be confusing. What that involved was the hurricane. And within the hurricane, those losses that flow through, there is a tax impact on those losses which results in a tax benefit.
So despite the fact that you see that number flowing through the income statement, it ends up where that gets netted against the property damage losses, the prep, the cleanup, et cetera. So there is not an FFO as adjusted impact for that tax benefit. So that all gets wound up in the hurricane.
Those are just the losses and the tax impact which had a partial offset against all those losses..
Right. But I guess that's for the quarter. That's helpful. But what about – I mean earlier this year, it looks like you also had some of this benefit running through.
Just trying to think how much is in your FFO adjusted calculation this year of a tax benefit as we think about items for next year?.
Yeah. Nick, I think some of what you're referencing and perhaps we can take it offline is around some benefits in our CCRC venture. I think it's around $4 million per quarter. But why don't we take it offline? I'm happy to get more of the details in front of me. I don't have them all here right now and we can follow up on it..
Okay. Thanks..
Yeah..
Our next question is from Tayo Okusanya with Jefferies. Please go ahead..
Good afternoon. Wow, these calls are getting really long now. Just a quick one from me. You had a meaningful amount of acquisition activity this quarter, a lot of it kind of life sciences/MOBs.
Just wondering, going forward, is that the focus when you kind of think about acquisitions? And if that's so, if there's any interest in some of these large MOB portfolios that are kind of circulating in the market today?.
Well, I'll put it this way and the question's been asked as well, does that mean we're leaning away from senior housing. What we've said for a while is that we view ourselves as a bit underweight in life science and MOBs. And this transaction actually takes care of some of them.
We are not leaning away from senior housing, but we still will identify life science and MOB transactions and probably give some additional influence toward those. As to the larger MOBs that you see out there right now, they're pretty spendy from a pricing perspective.
For where we're at right now in our allocation, I'm not sure you'll see us competitively go after those, but at the same time we will look at those and make sure that we understand them. And so, it's more a matter of timing and sources and uses from our perspective and also where do they ultimately price out at.
Tom, what would you might add on that?.
I think the only thing I'd add is if you look today, there's some little better yields available in some of the off-campus portfolios.
And while we're primarily an on-campus MOB owner, there are some opportunities out there to look for hospital anchored or very large physician group anchored off-campus assets that probably are 50 basis points to 75 basis points better yielding than the large on-campus portfolio. So we may take a look at some of those moving forward..
How do you think about the quality of those portfolios though versus the quality of what you have today?.
I think the key there is the anchored by a key hospital system or some of these mega group practices that can have upwards of 100 to 120, 130 doctors in them. And they've been around for 30, 40 years. They have locations all over a market. They're normally regional.
I think when you have that kind of occupancy in the buildings, the quality is getting up there with some of the other portfolios you're seeing now. They may be in a little different markets in some instances but on a long-term basis they're very good assets..
Got you. Thank you..
Thank you..
Our next question is from Michael Mueller with JPMorgan. Please go ahead..
Yeah, hi. A couple quick ones going to first of all, I think it was slide 8, the earnings impact slide. For the $6.5 million life science headwind, is that full year? Does that happen to start mid-year, end of year? Just trying to size up the magnitude of that full impact on an annualized basis..
That is the full year impact on 2018 and that lease goes into effect. It's basically a February 1 effective lease extension there. So it's 11 months basically of the impact.
Got it. And then one other one on timing. The $5 million rent reduction.
Is that effective immediately or does that take place on Jan 1?.
That is Jan 1.
Jan 1. Okay. That's it. Thank you..
Thank you..
Our next question comes from Todd Stender with Wells Fargo. Please go ahead..
Hi. Thanks for staying on. Just a follow-up question on the life science acquisition. We're used to seeing scale from HCP in life science like you have in South San Francisco and San Diego, but it might be hard to replicate in Boston.
Is this a property type, maybe like medical office, where you're managing it internally? Do you need scale in all these markets and can we see maybe go in other markets where there's smaller footprints?.
I think you want to have some amount of scale just like in medical office when you look at it. We like to move into a market when we can get 125,000 to 200,000 square feet where you can get some economies in management of the portfolio. You probably look at the same type number in life science.
Although, we tend to focus on the big four research markets and obviously we are large in San Francisco and San Diego. Getting the potential 400,000 to 600,000 square feet in Boston is great scale for us. So that's probably where we'll focus..
Yeah. I would add, Todd. For an initial investment in a major market, 400,000 to 600,000 square feet is a pretty good footprint with a strong partner who has a lot of experience as an owner, developer. And we would hope to grow with them over time. So this is, for us, an opportunity to make a substantial investment in Boston all at one time..
Okay. Good point. Okay. Thank you..
Thank you..
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Herzog for any closing remarks..
Well, thank you, everybody, for joining us and your interest in HCP. We look forward to seeing you all soon, possibly at NAREIT. So thanks again..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..