HCP's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 2.11 | About: HCP, Inc. (HCP)

HCP (NYSE:HCP)

Q2 2011 Earnings Call

August 02, 2011 12:00 pm ET

Executives

Paul Gallagher - Chief Investment Officer and Executive Vice President

James Flaherty - Chairman and Chief Executive Officer

John Lu - Vice President of Investment Management

Timothy Schoen - Chief Financial officer and Executive Vice President

Analysts

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Jonathan Habermann - Goldman Sachs Group Inc.

Omotayo Okusanya - Jefferies & Company, Inc.

Jeff Theiler - Green Street Advisors, Inc.

Richard Anderson - BMO Capital Markets U.S.

Todd Stender - Wells Fargo Securities, LLC

Quentin Velleley - Citigroup Inc

Michael Bilerman - Citigroup Inc

Bryan Sekino - Barclays Capital

Ross Nussbaum - UBS Investment Bank

Suzanne Kim - Crédit Suisse AG

Adam Feinstein - Barclays Capital

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 HCP Earnings Conference Call. My name is Chanel, and I'll be your coordinator today. [Operator Instructions] Now I would like to turn the presentation over to your host for today's conference call, John Lu, Senior Vice President. You may go ahead, sir.

John Lu

Thank you, Chanel. Good afternoon and good morning. Some of the statements made during today’s conference call will contain forward-looking statements, including the statements about our guidance. These statements are made as of today’s date and reflect the company’s good faith, beliefs and best judgment based upon currently available information. The statements are subject to the risks and uncertainties and assumptions that are described from time to time in the company’s press releases and SEC filings.

Forward-looking statements are not guarantees of future performance. Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement, or at all. Events prior to the company’s next earnings announcement could render the forward-looking statements untrue, and the company expressly disclaims any obligation to update earlier statements as a result of new information.

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

I will now turn the call over to our Chairman and CEO, Jay Flaherty.

James Flaherty

Thanks, John. Welcome to HCP's Earnings Conference Call for the Quarter Ended June 30, 2011. Joining me today are Executive Vice President, Chief Investment Officer, Paul Gallagher; and Executive Vice President, Chief Financial Officer, Tim Schoen.

Let's begin with our most recently announced results, and for that, I'll turn the call over to Tim.

Timothy Schoen

Thank you, Jay. Let me start with our second quarter results followed by our investment activities and balance sheet and end with an update to our 2011 guidance.

For the second quarter, we reported FFO of $0.78 per share, representing a 42% increase compared to $0.55 per share for the second quarter of 2010. In addition, we reported FAD of $0.62 per share, representing a 32% increase compared to $0.47 per share a year ago.

There are several items that occurred during the quarter I would like to highlight. First, commencing April 7, our results reflect the ongoing benefit from our accretive $6.1 billion acquisition of the HCR ManorCare real estate portfolio and our $95 million investment in the operations of HCR ManorCare that represented a 9.9% equity interest in the closing. Second, our results for the quarter were favorably impacted by 2 non-recurring items, including interest income totaling $38 million -- $34.8 million, or $0.09 per share, from the previously disclosed early par payoff of our debt investments in Genesis HealthCare; and income of $0.01 from litigation proceeds we received from a prior sale of assets. Third, our FFO results also included a net positive $0.01 from HCR ManorCare merger-related items incurred during the first 6 days of the quarter prior to close.

These items consisted of $0.05 of income primarily related to gains from reinvesting our existing HCR ManorCare debt investments, partially offset by $0.03 of direct transaction expenses and $0.01 of negative carry pertaining to our prefunding activities. Excluding these merger-related items, FFO, as adjusted for the quarter, was $0.77 per share. Lastly, our second quarter cash Same Property Performance increased 2.6% year-over-year. The growth was negatively impacted by a $4 million deferred rent payment received during the second quarter of 2010. Excluding this item, year-over-year cash Same Property Performance would've increased to 4.5% for the quarter.

Paul will review our performance by segment in a few minutes.

Turning now to our investment activities and balance sheet. In addition to our HCR ManorCare acquisitions, we made investments totaling $97 million during the quarter, including $65 million for the Cove, the premier development site in South San Francisco, and $32 million related to construction and other capital projects.

During the quarter, we prepaid without penalty $92 million of mortgage debt that had an average interest rate of 7% and an average remaining maturity of 5 years. At the end of Q2, our financial leverage and secured debt ratios were at multiyear lows of 40% and 10%, respectively. Our 2011 remaining debt maturities totaled $312 million.

We ended the quarter with $276 million of cash, of which $225 million was used to retire a working capital liability paid after quarter end. We also had $1.4 billion available under our revolver.

Finally, let me conclude with an update to our 2011 guidance. We are raising our full year cash Same Property Performance growth to range from 3% to 4%, primarily driven by improved performance in our senior housing segment.

We are raising our full year FFO guidance to range from $2.48 to $2.54 per share, up $0.01 from our last guidance. There are a few items not previously contemplated that led to this increase, including $0.02 from the increase in Same Property Performance and a prepayment of the $92 million mortgage mentioned earlier; a $0.01 benefit from the litigation proceeds received in Q2, partially offset by $0.02 higher G&A expenses due to several items.

Our full year FFO guidance reflects a negative $0.15 impact from HCR ManorCare merger-related items. These include the $0.16 reported in Q1, partially offset by a positive $0.01 in Q2 discussed earlier. Excluding these merger-related items, we expect 2011 FFO as adjusted to range from $2.63 to $2.69 per share, which is also $0.01 higher than our last guidance.

We are raising our FAD guidance to a range of $2.09 to $2.15 per share, up $0.03 from our last guidance. The increase is driven by the same $0.01 net benefit just mentioned in our FFO guidance and $0.02 from lower second-generation capital expenditures, due to timing of projected leasing activities.

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

Paul Gallagher

Thank you, Tim. Before I begin, I would like to note that with regard to our HCR ManorCare acquisition and the buyout of our partner on our Ventures II portfolio, our same-store property count represents just 58% of our portfolio versus 95%, year end 2010.

Now let me break down 2011 second quarter performance in detail.

Senior housing. Occupancy for the second quarter in our same property senior housing platform was 86%, a 50 basis point sequential decrease over the prior quarter, but an 80% increase over the prior year. Facility rates and margins for our senior housing portfolio continue to improve, and cash flow coverage is up slightly to 1.20x.

Current quarter year-over-year same property cash NOI growth for our senior housing platform was 6.7%, driven by the property's transition from Sunrise to new operators and by improvements in the retained Sunrise portfolio.

On June 1, 2011, HCP entered into definitive agreements to form a strategic venture with Brookdale Senior Living in conjunction with Brookdale's acquisition of Horizon Bay. Horizon Bay currently operates 37 HCP-owned senior living communities. Brookdale will assume an existing triple net lease on 9 of the communities, assume the management contracts on 3 communities, sign a new lease for 4 communities and enter into a RIDEA joint venture on the remaining 21 communities. Brookdale will buy a 10% ownership interest in the 21 RIDEA-managed assets.

Pro forma for our Brookdale joint venture. Operating assets in HCP's senior housing sector will represent 4% of HCP's total investment portfolio.

Post-acute/skilled nursing. On April 7, 2011, HCP closed a $6.1 billion acquisition of 334 HCR ManorCare post-acute/skilled nursing and assisted living facilities. The lease is guaranteed by HCR ManorCare.

As reported in this quarter's supplemental, and consistent with HCP's historical reporting of our triple net lease portfolio, for the trailing 12 months period ended March 31, 2011, HCR ManorCare reported cash flow that produced a fixed charge coverage ratio of 1.57x pro forma for the full year's rent obligation to HCP.

Cash flow for the 9 months ended June 2011 on an annualized basis produces a coverage ratio of 1.66x and includes the pro forma full year impact of RUGs-IV. This compares favorably to HCP's underwritten coverage of 1.50x, which excludes any benefit of RUGs-IV.

HCP's remaining post-acute sniff portfolio is comprised of 45 assets, leased to 6 different operators and comprise the entire same-store property count. The year-over-year same property cash NOI for the second quarter increased 2.8%.

Cash flow coverage is strong at 1.69x, an 8 basis point increase over the prior quarter and a 20 basis point increase over the prior year. These trailing 12-month coverages reflect 6 months of Medicare reimbursement rates under RUGs-IV.

All but 4 of these 45 properties are structured in master lease pools, and all have parent or personal guarantees. The annual rent from the 4 non-pooled properties total $1.3 million.

Hospitals. Same property cash flow coverage increased 3 basis points to 4.68x. Year-over-year, same property cash NOI for the second quarter increased 2.9%. The growth continues to be driven by the Hoag lease at our Irvine hospital. And as a result of Hoag investing nearly $85 million in upgrades to our asset, the property was awarded LEED Silver designation.

Medical Office Buildings. Same property cash NOI for the second quarter was up 3.9%. The growth was due to an increase in occupancy, normal rent steps and expense controls resulting in $1.1 million of operating expense savings versus the second quarter 2010. Our MOB occupancy for the second quarter increased to 91.1%, with good leasing activity in Tampa and Houston.

During the quarter, tenants are representing 336,000 square of feet occupancy, of which 254,000 square feet related to previously occupied space. Our year-to-date average retention rate was 80.4%.

Renewals for the quarter occurred at 1.1% higher mark-to-market rents, with the average term for new and renewal leases at 52 months. We have 988,000 square feet of scheduled expirations for the balance of 2011, including 233,000 square feet of month-to-month leases. Our leasing pipeline includes new and renewal prospects totaling 922,000 square feet, or 93% of our remaining 2011 rollover exposure.

As a result of our sustainability initiatives, utility costs continue to yield positive economic results. On a same-property basis, utility expenses were down $530,000 versus 2010. We received another ENERGY STAR label at our MOB on the Skyline Ridge campus in Denver, Colorado, bringing HCP's total ENERGY STAR-label properties to 30 across MOB, life science and senior housing assets.

During the quarter, HCP was recognized by the U.S. Environmental Protection Agency as the leader in ENERGY STAR certifications for the medical office category.

Life science. Same property cash NOI was down 4.3% in the second quarter. This decrease was driven by the final repayment of previously deferred rent received in the second quarter of last year. Absent that payment, NOI for the quarter was up 3.1%, largely driven by contractual rent increases and increased recoveries on expenses.

Occupancy for the life science portfolio increased 20 basis points during the quarter to 89.2%. The life science development pipeline continues to consist of 3 redevelopment projects totaling 204,000 square feet, with total remaining redevelopment funding requirements projected at $25 million.

For the quarter, we completed 19,000 square feet of leasing, bringing the year-to-date total to 251,000 square feet with a retention rate of 57.8% on expiring space. Including leases executed with new tenants, over 90% of the expiring space was re-leased without any downtime. In addition, we completed 64,000 square feet of leasing during the quarter that will commence in subsequent quarters and have approximately 82,000 square feet of leasing in the pipeline.

Through June, we have addressed 130,000, or 43% of the 299,000 square feet, left to expire. HCP's portfolio of tenants continued to experience success in -- accessing capital in both public markets and private partnerships. Most prominently, LinkedIn, which leases over 125,000 square feet at our Mountain View campus, raised nearly $350 million in their IPO. Also, Rigelli [ph] , a tenant in approximately 150,000 square feet in South San Francisco, raised $150 million via a follow-on offering. Other HCP tenants, including Alexa, OncoMed and CytoKinetics, raised over $90 million in the quarter through various partnership agreements and milestone payments.

Finally, as a reminder, HCP's real estate portfolio is comprised primarily of long-term triple net leases that represent 83% of the entire portfolio. The remainder of our portfolio consist of multi-tenant and Medical Office Buildings where 20% of the MOB's portfolio leases roll each year and where HCP has been able to achieve 80% plus retention.

Lease expirations excluding the MOBs for the next 5 years averaged just 2% per year of HCP's total annualized revenues, with no one year higher than 2.6%.

With that review of HCP's portfolio, I'd like to turn it back to Jay.

James Flaherty

Thanks, Paul. Despite unprecedented macro headwinds, HCP's real estate portfolio continues to perform well. This morning, we raised our adjusted same profit performance guidance to 3% to 4% for 2011. This is the fourth quarterly increase in guidance of this metric in the last 7 quarters.

Unlike a number of the other property sectors that are rebounding from depressed performance results, HCP's positive 3% to 4% for 2011 is on top of a positive 4.8% for 2010 and a positive 3.2% for 2009.

During the quarter, we consummated 2 important strategic initiatives. One, a joint venture with senior housing leader, Brookdale Senior Living; and two, the PropCo acquisition from post-acute industry leader, HCR ManorCare. The Brookdale JV includes our formerly Horizon Bay-managed portfolio and will result in 21 of these properties managed under a RIDEA structure.

The economics of this transaction provides HCP with an attractive spread over the alternative of a triple net lease format. The April closing of our HCR ManorCare transaction successfully recapitalized HCP's prior debt investments with the company and secured long-term ownership under an attractive triple net lease structure for HCP's shareholders.

With regard to the Ventas litigation, we were disappointed by the July 5 decision of the Sixth Circuit Court of Appeals, which remanded the case back to the trial court in Louisville, Kentucky, for a trial on Ventas' claim for punitive damages. We do not believe we should have any liability for punitive damages in addition to the full compensatory damages that the court has already awarded. Obviously, the litigation has been expensive and distracting, and we would prefer to resolve this case if reasonably possible.

Last Friday, CMS, the Centers for Medicare and Medicaid Services, issued their fiscal year 2012 reimbursement levels for skilled nursing facilities that care for post-acute patients. Everyone acknowledges that the changes CMS made in fiscal year 2011 RUGs-IV rates resulted in higher rates and earnings than they intended, although provider costs also went up because of related changes.

The 11.1% CMS reduction in fiscal year 2012 rates will take the rates back to the levels CMS intended, and the industry will likely respond with significant labor cost reductions, and there will clearly be disruption.

Many of you will recall that one of the reasons we chose to invest in the assets of HCR ManorCare was that management team's proven ability to adapt to a changing reimbursement environment, something they have done successfully on a number of occasions. We expect they will do the same in light of the CMS announcement for fiscal year 2012.

I understand HCR ManorCare plans to make significant reductions in their costs to offset a good part of this rate reduction, while maintaining their commitment to quality patient care and lower-cost rehabilitation for their post-acute patients.

From a credit perspective, HCR ManorCare has more than sufficient financial flexibility to negotiate changes ahead. As of June 30, 2011, the company had $230 million of unrestricted cash on its balance sheet and was comfortably inside its corporate debt covenants.

Capitalizing its lease payments using a market approach, HCR ManorCare's adjusted net debt-to-EBITDA ratio was below 5x. It is reassuring that HCR ManorCare and other post-acute providers have proven to be a lower-cost alternative for many patients being discharged from hospitals, compared to the alternatives of staying longer in the hospital or going to higher-cost in-patient rehabilitation facilities or long-term acute care hospitals.

We expect quality post-acute providers like HCR ManorCare will continue to have a growing role in providing services to a targeted number of patients requiring short-term rehabilitation.

It is likely that the CMS action will prove to be a catalyst for market share opportunities and consolidation within the post-acute, the skilled and the senior housing sectors. This development comes at an especially opportune time for HCP, given our scalable partnerships with best-in-class operators, HCR ManorCare and Brookdale, and a balance sheet that is unusually liquid. As was the case during the 2008-2009 investment environment, HCP is poised to capitalize on these developing conditions.

With that report, Paul, Jim, and I will be delighted to take your questions. Chanel?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Derek Bower of UBS.

Ross Nussbaum - UBS Investment Bank

Jay, it's Ross Nussbaum here with Derek. A 2-part question for you. First, what is your outlook for skilled nursing reimbursement for later this year, tied to what's going on in Washington with the budget? And do you have any thoughts for what happens as we look a year forward based on the discussions that you have with the lobbyists on this issue? That's part 1.

James Flaherty

Okay. So basically, a general outlook, looking past the fiscal year 2012 reimbursement decisions. So as we get into '13 and beyond, relative to what entitlements in general, is that the question?

Ross Nussbaum - UBS Investment Bank

Correct, and what could happen in November. The size of the budgets, you see any risk there?

James Flaherty

Well, relative to what could happen in the budget, if they go to -- to my understanding, if they go to the automatic changes, those impacts will all be fiscal year '13-related. Those are -- in fact, there was a New York Times editorial yesterday that talked about the amount of the debt ceiling reduction, which is slightly less than $1 trillion. I believe it's $917 billion. Only $22 billion. Get this, only $22 billion of the $917 billion is actually a fiscal year 2012 impact. So for the most part, all of that amount that was approved yesterday, and any prospective amount which will come either automatically by the trigger mechanism they put in place or from the group, from the joint commission, that will all impact 2013 and beyond. So that's how that works. But let me take the thrust of your question, which was more -- yes, I'll rephrase it, kind of future of Medicare and entitlement reform? If you'll allow me a little bit of that characterization. Yes, I think -- a couple of soundbites here that are important -- that have been important to our thought process. We're not real big on Medicaid. That's the state-based programs. The states', albeit benefiting from slightly better economic situations this year than they had anticipated, are still not in strong shape. And a lot of what -- a lot got them through kind of the 2009 and '10 period was support from the federal government. It's not clear to me that, that's going to be there, either in general or certainly, to the magnitude that it has been historically. But I think where you're really going, Ross, is what's the political will of our country, of our Congress and, quite frankly, of the seniors in the country, to have meaningful healthcare reform? I would point out that the June 2011 election, the special election up in upstate New York for the 26th Congressional District, I think that's a very important development. And for those of you who are not familiar with what happened there, literally 2 weeks before that special election, the Republican contestant was -- almost had a 20-point lead in the polls. And that contestant, about 2 weeks later, lost by almost the same amount to a Democratic contestant. And the only thing that really happened from the timeframe that, that was Republican was up 20 points to losing 20 points, was Paul Ryan announced his proposed Medicare reform. And I think we all recall the attention and the comments that, that received. That actually is -- a lot of what is in that is in the Simpson-Bowles proposal, and it's probably a fix for entitlements, Medicare, Medicaid, Social Security, that over a longer period of time, would do a very, very good thing for our country. Whether we'll get there or not is anybody's guess, but -- so I guess, that's kind of how I'd look at that issue.

Ross Nussbaum - UBS Investment Bank

Okay. Raw topic, obviously. The second part of my question relates specifically to the coverage ratios that were cited in the prepared remarks as well as on Page 15 in the supplemental for HCR ManorCare. And I guess, there's a new number. It looks like you disclosed -- which isn't at the OpCo level, but it looks like it's at the PropCo level, the 1.28x coverage for the $330 million --

James Flaherty

That's not a new -- we've always -- we've consistently reported our coverages both ways. So that's not new at all.

Ross Nussbaum - UBS Investment Bank

So how -- the biggest difference between that number and the broader OpCo fixed charge coverage, can you help us understand the dynamics?

James Flaherty

Yes, it's pretty straightforward. The 1.28x involves a guarantee that was consistent with the guarantee we had when we owned the debt in PropCo. So the entire amount of the guarantee we had for those debt investments were facility-based revenues, facilities that were owned by PropCo. As part of the transaction that we announced last December, the guarantee we have is now a complete corporate parent guarantee that includes every revenue stream, every business that comes into the company. So that's why you can look at the PropCo level at 1.28x. But the guarantee that we have standing behind our rent obligations is, if you include the -- consistent with our HCP reporting practice, the trailing 12 months lag in the quarter, the March 31 quarter, that's 1.57x. If you take -- we now have actual results through the June 30 quarter. So if we take the 9 months that the RUGs-IV benefit has been in place, ended June 30, and you annualize those 9 months so you get a full year's impact of the RUGs-IV benefit and then put against that a full year's rent payment from HCR ManorCare to HCP, that gets you to that 1.66x. So again, consistent with what we announced last December, we never underwrote any of the RUGs-IV benefit into our thought process. And then we came up with the 1.5x coverage ratio. So it should not come as any great surprise that the actual coverages are materially higher than that. 1.57x reflecting 6 months, 1.66x reflecting 9 months annualized, and you will see these coverages for each of the next 2 reporting cycles for HCP continue to move higher from that 1.57x. Parenthetically, you also see our coverages for the remaining post-acute skilled portfolio that we have. You'll also see those march materially higher in each of the successive quarters as well, because you're reflecting -- next quarter, you'll have 3 quarters of actual results of the RUGs-IV reimbursement. And then finally, for the quarter that we report in December, which won't be reported till early February, you'll have the full 12 months. You won't see those coverages begin to tick down until we report our March 31, 2012 quarter in early May.

Operator

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Jonathan Habermann - Goldman Sachs Group Inc.

Just following up on CMS a bit. I mean, clearly, a bigger-than-expected recommendation for cuts upfront. I'm just -- can you quantify, I guess, or give us some perspective on the disruption? I know you mentioned that part of it would be cost reduction, and it sounds like you view that as manageable, given reducing this reimbursement back to 2010 levels. But can you give us some sense of perhaps what you're expecting in terms of -- you mentioned perhaps acquisition opportunities, or just even changes in pricing going forward?

James Flaherty

Yes. Well, let me say this. Look. A year ago, a law was put into effect that was meant to be revenue-neutral to the industry. And they missed a little bit, okay? They missed a lot in favor of the operators. They've now, last Friday, proposed a final ruling, which is still subject to Congressional approval, that misses a little bit going the other way. But let's take a step back, and let's take a look at what we've got. Let's take a step back from the hysteria that's out there and the confusion. I mean, here's -- let's just focus on a couple of facts. One, we've got a demographic in the United States with the aging baby boomer that is continuing to demand these sorts of services. And that's not going to change for the next several decades. Two, the post-acute skilled environment is, without a doubt, the lowest cost setting for this type of service. I mean, go look it up on the CMS website, it's materially the lower cost environment than either the in-patient rehab or the long-term acute care hospitals. So the point in that is that, sooner or later, sanity ought to prevail. Third, we are -- we have hitched our wagon to the premier operator, HCR ManorCare, in this space. And that came with it the premier real estate portfolio in that space. This is an entity that is incredibly well capitalized. And given what I've just cited on the facts, we'll continue to get even better capitalized in the next 90 days, from a cash flow generation standpoint. This is, without a doubt, a company that is going to -- has proven its ability to manage through reimbursement environments. It has a scalable platform. It has the 3 necessary elements that we've always cited in terms of who we want to align ourselves with in the healthcare space. It has quality outcomes, it has critical mass, and it has efficient operations. And I think in the next quarter or so, if I had to guess, they will be right-sizing their business platform and their business model from a cost standpoint to deal with fiscal year 2012. And I think once they get that stabilized, say, the next quarter or so, I think you'll see this management team become active from a standpoint of the consolidation opportunities that will present itself in the space. There's going to be a tremendous amount of disruption. This movie has played out before. This management team has excelled in this sort of environment. And we are hopeful, as a capital partner to this company, that we will benefit indirectly, in terms of our ability to put additional attractively priced real estate on our balance sheet and, quite frankly, to grow our OpCo investment in the company. So that's how I see this playing out over the next 6 to 12 months, Jay.

Jonathan Habermann - Goldman Sachs Group Inc.

That's helpful. So it sounds like you see opportunities both from the operator side as well as from the real estate side. I mean, it sounds like from HCP's perspective, you'd prefer to still focus on the real estate?

James Flaherty

Certainly, I prefer to focus on real estate. We do have an OpCo investment that I think over time, will morph itself into additional real estate. That's the way we view that investment.

Operator

Your next question comes from the line of Adam Feinstein of Barclays Capital.

Adam Feinstein - Barclays Capital

I guess a lot of questions already on the nursing homes, and I guess, clearly, Jay, just back to your last point, opportunity to grow in terms of finding other assets from ManorCare to manage, I mean, that seems like a big opportunity. Just curious to get your thoughts in terms of what sort of time period you would expect that to play out over? And maybe, just -- make that one a quick one I guess, since most of the questions have been on ManorCare. I was going to ask more about the recent Brookdale deal. It seems like a great opportunity for you guys. I just wanted to get some more thoughts in terms of where you see that deal ultimately going?

James Flaherty

Sure. On your first question, Adam. Again, I think HCR ManorCare, and if I had to speculate, a lot of the other skilled, post-acute operators are, yesterday and today, are focused on making some very, very difficult decisions relative to labor cost reductions and changes in business models and things like that. My guess is, in the case of our friends in Toledo at HCR ManorCare, that will -- they've got plans in place. They anticipated -- they didn't anticipate this magnitude of a cut, but they certainly had plans in place for whatever the magnitude of the cut was. So they're going about the business of right-sizing the cost structure. My guess is they'll get that stabilized later this year. And I would think, coming either into a year end sort of timeframe, calendar year end or coming out of the year end process, the first part of next year, I would suspect that we will be looking at consolidation opportunities together. So that's how I would put the timing on that. With respect to the second part of your question, which was the Brookdale JV, yes, this really worked out quite well. What was part of this, an important part of this, was Brookdale's acquisition of Horizon Bay, which previously had managed 37 of HCP's properties. So Brookdale will take that over. That's obviously someone we've known quite well. We have enormous regard for Bill Sheriff and his team down in -- just outside of Nashville, in Brentwood, Tennessee. What we've done there is we've really kind of broken that 37-property portfolio up into several different arrangements. We've got -- first of all, Brookdale is going to affirm and guarantee a lease on a number of properties, 9 properties, that we transitioned from Sunrise Senior Living a year ago next quarter to Horizon Bay, under attractive terms. So Brookdale will become the guarantor on that lease. In addition, of the 25 properties that we're in, what we call Joint Ventures II, 4 of them had a significant skilled component to them. And consistent with HCP's historical view, that we do not want to have RIDEA structures in the skilled space, which we kind of developed a high level of intensity and conviction around that perspective in the last 2 years working with the HCR ManorCare folks. We took 4 of the properties and put those on a triple net lease, which again will be operated by and guaranteed by Brookdale. And then the remaining 21, we've put into a RIDEA joint venture. It's our first RIDEA joint venture. It's the first time that we've been able to see economics that were materially higher than a triple net lease execution. And again, another part of our strong-felt conviction is, if you're going to do RIDEA structures, you need to get premiums to the triple net lease execution in order to justify taking on the incremental risk associated with a RIDEA structure. And to date, until this particular transaction, we did not see those sorts of premiums in the deals that we had looked at previously. So anyway, that's what we've done with that portfolio. Again, not unlike our situation with HCR ManorCare, we anticipate adding to that joint venture and to that relationship with Brookdale. And we're currently looking at a couple of different opportunities. No guarantees, but it is our intent to grow that relationship with Brookdale, just as it is our intent to grow our relationship with HCR ManorCare.

Bryan Sekino - Barclays Capital

And Jay, it's Bryan. Just a quick one for me on just the improvement you mentioned on the Sunrise facilities, the legacy Sunrise facility that you guys still have renting out to them. Is it more or something that you're seeing on the top line there? Is it them kind of improving the cost management, which kind of was the issue before?

James Flaherty

Actually, one of the things that we've seen there is, with the transition, Sunrise has taken some of the executive directors that were in some of the transition assets and moved them back into ACP-retained assets. And they've just been able to outperform.

Operator

Your next question comes from the line of Michael Bilerman of Citi.

Quentin Velleley - Citigroup Inc

It's Quentin Velleley here with Michael. Just going back to HCR ManorCare. And you own 9.9% of the operating company and you commented that they're aiming to make significant cost cuts. But I'm just curious what your expectation is of EBITDA and earnings over the next couple of years as the CMS cut comes through and they attempt to cut costs?

James Flaherty

Well, I think it's pretty straightforward on a same-store basis. Remember, this is a company that has grown, for the last decade, all organically. They haven't acquired anything. The last significant acquisition they made was back in 1999, when HCR acquired ManorCare. So from an organic growth standpoint, you're going to see fiscal year '11 results materially higher than fiscal year '10. And you'll see, on a steady-state basis, fiscal year 2012 results lower than they were in fiscal year '11. And that evidence is the RUGs-IV benefit. Again, when we cut our deal, which was back in the second half of 2010, we excluded any benefit from that. So we're going to end up with a result in 2011 that will manifest itself either in earnings for our 9.9% interest in the company or coverage ratios. We'll have a result that is materially higher, i.e., materially better than what we underwrote. And in fiscal year '12, we'll look like -- it'll be certainly a downdraft from fiscal year '11. But I think probably the more appropriate way to look at fiscal year '12 will be just kind of make-believe fiscal year 2011 never happened and look at the trend from 2010 to 2012, which is going to be more consistent with what our underwriting was. So that's what that management team is doing. They're exceptionally good at it. And obviously, it excludes any benefit from any consolidation opportunities that I suspect will soon be at their doorstep, if they're not already there.

Michael Bilerman - Citigroup Inc

It's Michael Bilerman speaking. Just going to -- you made some comments on the lawsuit with Ventas, and I think you referenced that it's costing a lot of money, costing a lot of time, and that you are disappointed that it got pushed back down at the lower courts for potential evaluation of punitive damages. And I think I might note, this is not perfect, you said you'd like it to be resolved if reasonably possible. I don't know what edge you could use.

James Flaherty

I think your notes are exceptionally good on that point.

Michael Bilerman - Citigroup Inc

I guess you're in the predicament that you are now, with the potential liability potentially growing in size with punitive damages. And I guess, how can you -- what is the option to reasonably resolve the lawsuit? And do you regret sort of pushing it to this point or following it through to this point, versus sort of the initial maybe just cutting it off a number of years ago at the outset?

James Flaherty

Look, I stand by what I said. This has been an expensive matter. It's been distracting. It takes 2 to resolve this. We would prefer that this matter be resolved, be settled. We'd get this behind us if reasonably possible. But it takes 2 to work something like that out.

Michael Bilerman - Citigroup Inc

And I guess, just in hindsight, does it give you any pause of -- letting it get to this point? Does it change your sort of views on how the company conducts itself? Or does it change any -- does it bring a different perspective to managing the organization for this standpoint?

James Flaherty

Yes, I think the results speak for themselves, Michael. We feel very good about the business portfolio that we have right now. The mix of businesses, how we're positioned for both the near-term and the intermediate term. And other than that, I really -- it's not appropriate for me to make any other comments on the litigation.

Michael Bilerman - Citigroup Inc

The other aspect of the CMS cuts and, is the fact that some of the senior housing operators got into some of the skilled-type revenue sources, and providing some of that -- some of those services, is there any impact at all that you're going to see on your senior housing portfolio potential reductions?

James Flaherty

Well, I think if you've seen both 2 of the 3 large publicly-traded senior housing operators have press releases out, Michael, yesterday even before the market opened. I don't know if you've read that, but they both quantified the impact. So I think there's, as I made mention, we think there's going to be impact across the skilled, the post-acute and the senior housing, and we think this will be a catalyst for a consolidation activity. If you go back and study when industries consolidate, you'll find that in sort of '09 environments, where you've got reasonable, not even excessive, but reasonable sorts of returns, you very rarely will see any consolidation activity. When you see an external shock to a system, and probably in my business career, the most obvious one was back at the end of 1989, when President Reagan had prevailed in the Cold War, the Berlin Wall came down. You had the Defense Department budget cut almost in half overnight. You went from 25 to 30 publicly-traded aerospace defense contractors down to about 5 or 6 in a 3- or 4-year timeframe. This is absolutely an external shock. This impacts the skilled space, the post-acute space, the senior housing space. I believe with passion, it's going to be a catalyst for a consolidation. It doesn't hurt from a consolidation catalyst standpoint, that there's some other bad stuff going on out there, like the net worth of the senior population of the country, the unemployment, the economic -- the dampened economic recovery and the residential real estate market. So I think, this all might very well produce an unprecedented level of consolidation activity. And we're sitting here with the ace in the post-acute space, HCR ManorCare, and Brookdale Senior Living, whom we have enormously high regard for. We've got -- we've structured operating relationships with both those 2 concerns, and we've got a balance sheet that's never been as low-levered and as liquid as it is today. So this becomes a very interesting opportunity for HCP.

Operator

Your next question comes from the line of Paul Morgan of Morgan Stanley.

Unknown Analyst -

This is Jerrold with Paul on the line. Jay, I just want to touch on a comment you made the during the last call. You mentioned there was a $15 billion in potential transactions for the realty space in 2011. I just want to know if this number's still active? And if so, do you have an updated number? And how would you break out the potential opportunities among asset classes?

James Flaherty

Well, I think, again what we've said -- we say, we generally be -- in the last couple of years, we've announced what we think the next year's worth of announced M&A deals are. So last November, I indicated I thought that could be $15 billion. I think we've got announced M&A deals already this year of $12 billion. So we're well over 80% of that goal. We've got half a year to go. And certainly, the deals that we are aware of, that are in various stages of discussion, would if they all happen, would be well in excess of taking that announced number of $12 billion today of above $15 billion . So absolutely, it's still an actionable and viable number. With respect to where -- from a property-type standpoint where those deals are, I would say they're, for the most part, in terms of the way we look at the world, spread across -- each of our 5 sectors is represented in that incremental number, and then some. I would say the space that probably has the least dollar amount of transactions that we're looking at today is the hospital space. And I would say the other spaces, medical office, life science, senior housing and skilled, are very material. And I'm not sure I can even distinguish one versus the other. There's an awful lot under discussion in each of those 4 remaining sectors. So the outlier to the downside from an activity level, at least from HCP's 5 sectors, would be hospitals.

Unknown Analyst -

Okay. And I just want to touch on Brookdale, particularly managed by the RIDEA JV assets. What is your growth expectation for those? I don't believe I've seen that.

James Flaherty

That's because we haven't disclosed it.

Unknown Analyst -

Okay. That's a good reason. And then the other question is, in terms of same-store NOI, as for the senior housing space, there is a 6.7% increase. How much do you attribute this to the Sunrise transition versus the rest of the portfolio?

James Flaherty

Most of the growth in the senior housing sector is from either the transition Sunrise assets or the retained assets. So it's all related to Sunrise. It's better performance -- better performance under the Sunrise assets, and then better performance under the transitioned assets.

Unknown Analyst -

Okay. And then the rest of the portfolio, as you said, it's more normalized, I guess, 2% same-store NOI?

James Flaherty

We've got the contractual rent off same-store.

Operator

Your next question comes from the line of Jerry Doctrow of Stifel, Nicolaus.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

A lot has been covered so just a couple of things, Jay. Development, I want to just focus on that a little bit. You acquired that premier site in South San Francisco. Expectations for development, might we expect that, that sort of pipeline to be ramping up? And any sense of what a dollar magnitude might be and the timeframe?

James Flaherty

Yes, I think for us, the development is more taking advantage of kind of what I'll call lay-up opportunities within our existing footprint. So we've obviously got a material and very successful footprint in South San Francisco. This will add nicely to it, the co-property that you referenced. I think in senior housing, we're doing some of that, in markets and with operators that we know well. I think we're very excited about the returns on those. I think it's not going to move the needle from a company standpoint. In Medical Office Building, we're doing some redevelopment. We're also doing some redevelopment in Life Science. And so that's, I guess, it's nice stuff. It's accretive, it adds to the bottom line, it helps us grow the dividend. But in the big scheme of things, you're never going to see it as a magnitude of, say, one of our existing 5 property types or anything like that.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

And just sort of on a run rate basis, I mean, I think you've got a -- I don't have the number in front of me, but a couple of hundred million or so you're running through now, is it -- any just order of magnitude where we might see on the annualized basis on development?

James Flaherty

Define development. New starts or NOI coming off of developments? Jerry, are you there?

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Yes, I am. Both new and redevelopment. I'm lumping it all together.

James Flaherty

I suspect that if you add up the development and redevelopment we've done this year, I wouldn't expect to see that get much higher in '12 or '13, 2012 or 2013.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

And then just on the senior housing stuff, a lot of us have talked about, you've got a few other operators in the portfolio where some of the leases are lease coverage subsidizable. Then are there other opportunities for RIDEA? Or transitions within the existing portfolio?

James Flaherty

No. I mean, I think we like what we've got. I mean, we --

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

[indiscernible] zero -- there's no -- I mean it's one-to-one coverage, that sort of thing?

James Flaherty

I'm sorry, for who? Are you talking about a specific operator, Jerry?

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Yes, yes, a specific operator in your portfolio. It's age in senior living, is like basically one-to-one.

James Flaherty

No, I think in terms of RIDEA and senior housing, I think you should think about that being the Brookdale Senior Living.

Jerry Doctrow - Stifel, Nicolaus & Co., Inc.

Okay. And not re-transitioning portfolios you've got. Okay, last question for me, just, and I want to sort of redo a lot on ManorCare. But on the property level coverage, if you were doing the same sort of 9-month calculation, I assume that 1.28x would also be a decent amount higher? On the quarter amount to the point you're selling whatever --

James Flaherty

You'll see that -- again, you'll see these coverages -- you'll see these coverages, as you will with our non-HCR post-acute portfolio, you'll see these coverages march successively higher for our Q3 results and our Q4 results, across-the-board.

Operator

Your next question comes from the line of Tayo Okusanya of Jefferies & Company.

Omotayo Okusanya - Jefferies & Company, Inc.

Just a follow-up in regards to Jerry's question about some of the senior housing operators and how they're doing with coverage. I mean, is the idea here really that occupancy is expected to improve now that you've improved the coverage ratios? And how do you kind of see that happening if everyone is kind of predicting a world with slower economic growth going forward?

James Flaherty

Well, I think overall, our senior housing portfolio is covering at 1.2x, okay? As Paul talked about that, so we feel very good about that. We're at occupancy levels that are clearly up from what they were at the beginning of last decade, but clearly down from where they were at the peak, which would've been kind of '06. We've got very, very good structures, like we have in the post-acute, skilled space. And we think that over time, those occupancies will move up. We also think that the combination of what is likely to be a -- not a lot of wage push from the labor side of the equation, as well as some more moderate rate increases, that these coverage ratios will continue to go higher as well, just like they're going to go higher in post-acute and skilled, albeit for different reasons. So we're very comfortable with what we've got. We've obviously got the 2 major economic drivers stepping back, which is the aging baby boomer, and the fact that there's no new supply coming into the space, and there's no new supply even being financed. So we're quite pleased with the portfolio of senior housing assets we have today. And quite frankly, we'd like to grow them.

Omotayo Okusanya - Jefferies & Company, Inc.

Okay, that's helpful. And then just going back to the world of consolidation in the skilled and nursing space. Do you kind of see yourselves doing more of a kind of starting up owning some of the debt of an operator and possibly taking over the real estate, very similar to ManorCare? Or do you kind of see more of a world of just buying the assets outright?

James Flaherty

I think it remains to be seen. My guess is that this external shock is so draconian and so unexpected that the shelf life of when the impact of this playing out in the industry to when it presents opportunities is going to be much shorter. I think, in order to really thrive -- I'll go back to my aerospace and defense industry analysis, you really -- you need to have quality outcomes, you've got to have efficient operations and you've got to have critical mass. There's just not a lot of business platforms out there that have all 3 of those. We happen to be attached to the premier one, and I suspect there's going to be, quite frankly, lots of discussions now. I would also tell you that, given the quality filter that HCR ManorCare and we have, you shouldn't expect that we're just going to be out there buying up everything. But we still got to fit from a standpoint of quality of real estate, quality of operations, quality to people, quality of geographic footprint, and reimbursement levels and things like that. But I think once we get through this initial period of disruption and right-sizing, I think, I suspect, there's going to be an awful lot of opportunity back and forth between HCR and HCP, and quite frankly, Carlyle.

Omotayo Okusanya - Jefferies & Company, Inc.

Okay. Then just last question, would you expect, between now and October 1, when the rules state expect that again operators press the level as harder as they can to get everything the dollar they can out of the current favorable rules, such that it does not as much just location of maybe some people we ultimately expect when the new rules are set in place?

James Flaherty

No.

Omotayo Okusanya - Jefferies & Company, Inc.

Do you think that timeline is just way too short?

James Flaherty

I think the disruption started Friday afternoon. And I think it's only going to intensify between now and October 1.

Operator

Next question comes from the line of Rich Anderson, BMO Capital Markets.

Richard Anderson - BMO Capital Markets U.S.

So the first question is what is the percentage of Medicare, using any metrics for your senior housing portfolio?

James Flaherty

It's quite small. Do we have that?

Timothy Schoen

Yes, it's under 3%.

James Flaherty

Under 3%.

Richard Anderson - BMO Capital Markets U.S.

So your thought about senior housing having some consolidation opportunities is a much, obviously a much smaller opportunity in your mind?

James Flaherty

Well, you're only looking at one of the external shock catalysts. I identified 3 or 4. I identified the balance sheet to the seniors in the country today. I identified the tepid economic recovery. I identified what is likely to be...

Richard Anderson - BMO Capital Markets U.S.

Okay. So that's broader commentary about the economy.

James Flaherty

Yes, I mean, Goldman Sachs is out there today with the report demonstrating the analytics of when technically the economy will tip into a double-dip recession. And it's not that far from now. So there's various catalysts, various sectors. At the end of the day -- I'm sorry to sound like a squeaky record, but the quality providers, the operators that have quality outcomes, efficient operations and critical mass, of which there are not a lot of those folks in need of the post-acute space or the senior housing space, are going to have very, very attractive opportunities. And given our existing relationships and partnerships that are scalable with those players, we're very excited about what the next 6 to 12 months could bring.

Richard Anderson - BMO Capital Markets U.S.

Okay. My next question is on, and just to quickly on your comments on VTR. Do you have any knowledge or view of what we might -- what one might expect in a punitive damages scenario? Maybe you could comment on what is the precedence out there and what -- how that might be playing into your thought process about a settlement?

James Flaherty

Yes, again, we -- just like we don't comment on M&A prospect M&A transaction, we don't comment on litigation matters. So aside from the comments I made in my prepared remarks.

Richard Anderson - BMO Capital Markets U.S.

Okay. And then just broader on what you thought, first of all, just the business of seeing how skilled nursing and post-acute -- obviously, it's a very fair statement that you're aligned with one of the best, if not the best in the business. But how would you respond to sort of the commentary of seeing a great company in an industry that's otherwise in a tough spot right now? I mean, I understand the consolidation opportunities. But how do you kind of shake that guilty-by-association mantra?

James Flaherty

We're very proud of our relationship with HCR ManorCare. Guilty-by-association, I think...

Richard Anderson - BMO Capital Markets U.S.

Just for the industry, I mean.

James Flaherty

Well, like again, we're not a capital partner to the industry. We are largely a capital partner to one player, and we are extremely proud of that relationship. We have made an enormous amount of money for our shareholders since we made our first investment in that company back in 2007, 4 years ago next quarter, and we suspect we'll make multiples of that return for our shareholders in the period ahead. We think it will be a little bit of a different -- it'll be maybe less organic growth than it has been in the last 4 years, and more external growth. But we couldn't be more pleased with what we have in place, how we got there and what the near- and intermediate-term future holds for us.

Richard Anderson - BMO Capital Markets U.S.

And then finally, you mentioned the consolidation opportunity. I'm curious how that works. I mean, is there -- is it something where you would just expect to be involved and, if so, take you along on real estate opportunities? Or is there some sort of way where you're tethered to being involved in the real estate that may come off with some consolidation that they might get involved in?

James Flaherty

Well, I think all those permutations are possible, Rich. So we'll play that out close to -- as we put something in the [indiscernible].

Richard Anderson - BMO Capital Markets U.S.

But there is a scenario where, as -- because of your ownership stake in the operating company, that you have a first kind of look at things?

James Flaherty

We have a very close working relationship with HCR ManorCare, and we think there's going to be some attractive opportunities to present themselves, and when we get the specifics of those all identified and lined out, we will take you through them in a fair amount of detail.

Richard Anderson - BMO Capital Markets U.S.

Okay. And one last, I'm sorry. Just in order of preference, if you were to go to the capital markets today, and maybe this is the first question for Tim, I suppose, maybe or you. But debt equity, some combination, what looks attractive to you today, now that we're kind of going down the mindset of potentially seeing similar external growth for the company?

Timothy Schoen

Well, we're sitting on a fairly good chunk of change, cash-wise, on the balance sheet. We've also got a line of credit that has nothing drawn on it. So it really kind of depends, size-wise, what are we talking about. We're obviously going to stick to our target 40/60: 40 parts debt, 60 parts equity leverage ratio. That's the arrangement deal that we have with the rating agencies. So we've got to think about how big a deal it is, does the seller want to take equity directly, which we've done in the past. All those sort of things. But we've got the world by the oyster, as regard to that right now.

Operator

Your next question comes from the line of Jeff Theiler of Green Street Advisors.

Jeff Theiler - Green Street Advisors, Inc.

Just really quick. In terms of senior housing, a lot of people have been talking about, we haven't seen kind of this big uptick in occupancies, and you mentioned a bunch of the pressures that were in the industry. Are you seeing a backing up in pricing for deals that are in the market right now?

James Flaherty

Well, I think the most accurate way to answer that question is let's wait and see what the next transaction gets announced is. I think the fact that the pace of the deals have slowed a little bit, you can probably infer that the answer to your question is yes, based on that. But we'll see. I mean, you can see the results. You can see the stock prices of the publicly-traded senior housing operators. And I know you follow that stuff, so you can draw your own conclusions. But we still think this is a fantastic business. Over the intermediate term, we think for different reasons in the post-acute skilled space and for different reasons still in the hospital space, these spaces have challenges that are going to really put a spotlight on the fact that the best players, the most efficient operators, the ones with critical mass, the ones with quality outcomes, HCA in hospital land, HCR ManorCare in post-acute, Brookdale Senior Living, Emeritus in the senior living space. They're going to outperform.

Jeff Theiler - Green Street Advisors, Inc.

Great. And then, just one quick technical one. On the queue mix in your skilled nursing, on your HCR ManorCare portfolio, how much of that bounced around? I saw that decreased a little bit, but is that just the general volatility that you see quarter-to-quarter?

James Flaherty

It's very, very steady. It's very steady. It's much like their occupancy, Jeff.

Jeff Theiler - Green Street Advisors, Inc.

Okay. And does that cover just the post-acute assets? Or does that also including some of the assisted living assets in there?

James Flaherty

That's everything. That's everything.

Operator

Your next question comes from Mark Bifford [ph] of Bloomberg Research.

Unknown Analyst -

Jay, I was wondering if you could talk a little bit about the Bloomberg -- I'm sorry, the Brookdale switchover of the assets? And what the coverage ratio was for the RIDEA assets that you brought in on the 21? And then on the new leases that you signed for the 4 assets and the separate triple net lease? And is it your intent that to bring in assets because I saw the coverage on those, I think, was a 0.9x? And I'm just wondering if it's better to put that into a RIDEA structure and put incentives into it for Brookdale given that they have an ownership interest, so they can drive the fundamentals of those properties?

James Flaherty

Well, I think that's what we did. The only exception to what we -- what you said that we did, that we actually did, is we carved out 4 of the 25 that had a skilled component to them. They were up in Rhode Island. And because we have a view that we don't want RIDEA structures for skilled assets. So we pulled those 4 out, put those in a triple net lease, master lease, corporate guarantee. And then the remaining 21 are, as you identified, have a coverage ratio of below 1. And there are certainly incentives there. There's a below market management fee. And incentives that run the other way to the benefit of Brookdale. Again, please remember that the jumping-off point there, this is a portfolio that has got a margin today of 37%. That's down from 41% 2 years ago. And it's got an occupancy today of in high 80s. And that was 92%, 93%, 94% 2 years ago. So we have a very high level of confidence that Brookdale, because they've got a geographic footprint that lays very nicely over this portfolio of 21 properties, as well as an ancillary revenue component to the business model, which Horizon Bay did not have, that you'll see both those metrics, the operating margin as well as the occupancy, go back to where they were 2 years ago and exceed that in a relatively short period of time. So from that standpoint, this is a very attractive opportunity for our shareholders.

Paul Gallagher

One of the other things that went into our thought process about the 4 leases was those properties actually have slightly higher occupancy and are much more stable, and there's not as much upside in those particular parties and was much more conducive to a triple net lease. And as Jay mentioned, with the occupancy a little bit lower on the independent living and the ability to overlay ancillary services, there was more upside in the sharing through the RIDEA structure on the remaining portfolio.

Unknown Analyst -

So did Brookdale have any of their -- or I'm sorry, did Horizon Bay have any of the ancillary income at all on those properties? And that's all going to be upside then in the RIDEA structure?

Paul Gallagher

It was selective through third-parties, so it did not fall to the bottom line to the properties.

Unknown Analyst -

Okay. And then lastly, Jay, just the amendments by CMS last week. I mean, how much of it do you think is that they want to force consolidation in the space, given that it's a way for them to reduce costs by putting a number of these companies together and overall negotiating with them at some later point to further reduce costs for CMS?

James Flaherty

Well, I'd say, I'd say 2 things to that, Mark. I'd like to say a lot more about that 2 things. One, I was not in the room in Washington, D.C. last week, so I was not privy to the deliberations. And two, you'll probably need to get a cocktail into me before I open up to my feelings on that. Clearly, there was -- this has been a very significant adjustment. It was not anticipated, both in terms of the magnitude or the timeframe in which it is being affected. I find it fascinating to note that, as part of the deficit reduction bill that was signed yesterday, of that, just under $1 trillion -- think about this, I'll give you some context here -- only $22 billion of that spending cut is going to find its way into the government's fiscal year 2012, the year that ends September 30, 2012. It's estimated that the impact to the skilled, post-acute space, industry-wide, is just under $4 billion. And that will all be done in fiscal year '12. So something just shy of 20% of the spending cuts that just the Congress just spent the last 2 months negotiating, is the impact of the post-acute skilled space. At a time when there were CMS increases to the hospital space, the inpatient rehab space and the long-term acute care hospital space. So it's -- I bet that ought to give everybody out there some context for how severe an adjustment this is. And which is why we think there's going to be a fair amount of disruption here in the near-term.

Unknown Analyst -

I mean, have they telegraphed at all in any other parts of Medicare areas, where they're looking to cut? And how that might impact HCP, if at all?

James Flaherty

Again, Mark, I'm not in the room in D.C. in these conversations. So that's probably a pretty good summary of what I know today.

Operator

Your next question comes from Todd Stender with Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC

A lot of my questions have been answered. I guess, Paul, this might be for you. Just looking at the ENERGY STAR label for your Medical Office Buildings. What percentage of your total MOBs have the STAR label, Part 1 and Part 2? Would you say that, if you put an ENERGY STAR label MOB side-by-side with one that is not, you'd get a premium cap rate to that?

Paul Gallagher

We have definitely seen, on the second part of your question, people are interested in green buildings, so there might be a little bit of a premium. But that's going to represent itself from the standpoint of saving actual dollars. So it's a real benefit to the efficient operations of the project. So we have somewhere in the, I guess, 27 or 28 out of our 188 properties, have the ENERGY STAR label.

Todd Stender - Wells Fargo Securities, LLC

Okay. And just looking at your guidance on the FAD guidance...

James Flaherty

By the way, Todd, on that. Tom Clarence and Mike Mcwayne [ph], who are senior executives down in Nashville, I think you visited with them in the past, they are front and center on that. They do a -- in addition to doing a great job with the MOB portfolio, they've done a wonderful job, and as the Environmental Protection Agency has now designated, we are the absolute leader that they've identified in this space. So we feel very proud about that.

Todd Stender - Wells Fargo Securities, LLC

And just looking at the guidance, your FAD guidance, leasing cost and tenant capital improvements. The estimates came down. Is there anything to read into that? Maybe it's a function of market demand or pricing power?

James Flaherty

No, nothing to read into that.

Operator

Your next question comes from the line of Dan Cooney, KBW.

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Jay, just a quick follow-up on the consolidation discussion. I mean, can you guys talk a little bit if you've adjusted your kind of underwriting assumptions for skilled nursing, just given the new reimbursement environment, in terms of minimum rent coverage, cap rates? Are you kind of foreseeing a big change in that at all?

James Flaherty

Well, again, we're now not quite 48 hours into the news. So I think our Chief Investment Officer here, Mr. Gallagher, runs the dynamic investment committee process, but I'm not sure it's quite that realtime. But yes, clearly there's going to be an awful lot of disruption. And we've made our bet with one hell of a management team in HCR ManorCare, and I suspect these opportunities, when they get fully vetted and flushed out, are going to be very attractive.

Operator

Your next question comes from the line of Suzanne Kim, Crédit Suisse.

Suzanne Kim - Crédit Suisse AG

Question about leases. How are they structured? I mean, at what ratio are you starting to get worried about the tenant? And have you ever done a rent reset with an operator before?

James Flaherty

Suzanne, what sector are you talking about?

Suzanne Kim - Crédit Suisse AG

We can look at the skilled nursing. At what ratio are you starting to get a bit worried about?

James Flaherty

Well, I don't know. Probably something around 1:1, 1:1.5, 1:2 would be a concern of mine. It kind of depends. You've got to look at the geography. You've got to look at the operator. You've got to look at the acquired real estate. You've got to look at the amount of CapEx it needs. I think you and your peers sometimes get overly focused on coverage ratio, which is without a doubt important. But I think what sometimes that analysis misses is the structure. So I would -- let's say we had a portfolio and we underwrote it at 1.5. And we had master lease, corporate guarantee, various pools that fall out on a staggered basis. And then we had a similar portfolio that was also 1.5 coverage, but that was comprised of 5 assets at a 2x coverage, and then 5 separate assets that are 1x coverage. In that -- In those 2 scenarios, the operator's likely to present you with the keys on the 5 properties that are in a 1x coverage and keep you in, what effectively is a below market rent return to the landlord in the 2x coverage. Obviously, if you're in the first scenario, the 1.5x coverage where you've got bulletproof structure, there's not the possibility to do that. So I think -- I do think it's important to look at coverage. I think you've got to look at coverage over a period of time, see what's going up, going down, staying the same. But I think structure -- we have a mantra in our company that structure matters. Structure oftentimes trumps economic, Suzanne.

Suzanne Kim - Crédit Suisse AG

Sure. But the bigger question is, have you ever worked with an operator to reset their rent?

James Flaherty

I can't -- I'm sure, at some point back in the company's history, but certainly not in the last several years, no.

Operator

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to Mr. Jay Flaherty, Chairman and CEO.

James Flaherty

Okay, everyone. Thanks for your time. Have a good and enjoyable rest of the summer. And we'll see you at post-Labor Day. Take care. Thank you very much.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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