Welltower Inc (WELL) — Q4 2015 Earnings Call Transcript

Thank you, Colia. Good morning, everyone, and thank you for joining us today for Welltower’s fourth quarter 2015 conference call. If you did not receive a copy of the news release distributed this morning, you may access it via the company’s website at welltower.com. We are holding a live webcast of today’s call, which may be accessed through the company’s website. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and, from time to time, in the company’s filings with the SEC. I will now turn the call over to our CEO, Tom DeRosa. Tom?

Thanks, Jeff. I'm pleased that we finished 2015 with our strongest quarterly performance of the year. These results are driven by solid fundamentals, a disciplined investment thesis, and the unique operating platform that we have developed and employed at Welltower over many years. Today I want to highlight three topics that are top of mind; capital allocation, Genesis, and seniors housing supply. On to the first topic; capital allocation. This is the most important exercise of any management team and how I spend most of my time. We think about this as a framework for how we maximize shareholder returns. Essentially every public company has five primary ways to deploy capital; acquisitions, investing in the existing business, paying down debt, paying dividends, and buying back stock, and four ways to raise capital; internal cash flow, issuing debt, issuing equity, and disposing of assets. So, when the equity capital markets were favorable we took full advantage and built the industry-leading healthcare real estate portfolio. For us it was not about winning a pie-eating contest but building unmatched, local scale in major metro markets with the best operators in the business. Simply put we've created a real operating platform, not a passive collection of assets in which success is measured only by year one FFO accretion. The good news for our shareholders is we don't take access to the capital markets for granted and we don't gamble with our shareholder capital. Hence we took advantage of the strong equity market to significantly delever our balance sheet. Now in a less than accommodating public capital market we are sitting in an enviable position. We are also proud that in 2015 the Canadian Pension Plan; one of the largest investors in commercial real estate in the world chose Welltower to be its joint venture partner to make its first investments in healthcare real estate. Scott Brinker will talk about our most recent venture with CPP as well as our ongoing successful partnership with PSP. Welltower has always seen targeted dispositions as an important component of our capital allocation strategy and 2015 was no exception. We sold less strategic assets such as our last U.S. hospital asset realizing an 11% unlevered IRR. And we took advantage of robust pricing and sold our life science portfolio at a 5% yield realizing an unlevered IRR of 15%. May I remind you that we have sold $4 billion in assets over the last five years for cash and used that cash to buy better quality real estate and delever the balance sheet. Over the medium-term we still see opportunity for targeted acquisitions to go deeper into markets where we have local scale in our senior housing business and we also see enormous opportunity to grow our outpatient medical business, but only with the best health systems in this country. I talked about our desire to develop relationships with the leading academic medical centers on my very first investor call in May 2014. I told you that this would not happen overnight, as institutions like Johns Hopkins and Cleveland Clinic really don't need our capital. However, increasingly what they do realize they need from Welltower is our expertise in seniors housing, residential Alzheimer's care and, read my lips, post-acute-care and the connectivity the best-in-class operators that we bring to the table. I'm happy to tell you that these discussions are now starting to bear fruit and, for example, we now own three facilities with Johns Hopkins, which is the number one rated health system in the United States. So, let's talk about Genesis; I want to make it very clear we believe in Genesis and the value that post-acute operators like Genesis bring to lowering health care costs and improving our comps. The challenges facing the post-acute industry as it transitions to a value-based care system are well known. If you sit with the CEOs of the leading non-profit health systems in the U.S., like we do at Welltower, they realize that they need to connect to this expertise more than ever as they move to the reality of bundled payments. Have you seen the performance of the for-profit acute-care hospital sector lately? After a brief benefit from the HCA that peaked in the second quarter of 2015, the cold reality is that higher co-pays are translating to a drop in hospital visits. This is why Welltower, as of year-end 2015, no longer owns acute-care hospitals in the U.S. We believe operating and margin pressures will push acute-care operators to move patients to lower-cost outpatient and post-acute settings. We are optimistic that operators like Genesis that are delivering next-generation post-acute care will become the preferred providers to the top-end health systems and have a large inventory of low quality mix SNFs get taken out of service. We understand the market as a voting machine in the short run and the votes are in. While the market has implied a disruption of the majority of the equity value in our investment in Genesis, I can assure you that there is significant value in this relationship and in this investment. Scott Brinker is going to talk more about that in detail. Finally, to the topic of seniors housing supply, you may recall we had a long discussion about this topic on the third quarter call. We continue to believe the fear of supply in the U.S. is overblown. There's no doubt that certain markets are oversupplied, but we are primarily in markets where it is difficult to build and hence believe our performance will be resilient. You can look at the portfolio performance this quarter as evidence of this resiliency. As seniors housing operating occupancy has rebounded sequentially up 80 basis points and same-store NOI was up 4.3% in the U.S. Like most companies in healthcare and I know you're seeing this in the retail sector as well, we're seeing wage pressure in some parts of the U.S., due to increases in the minimum wage, and we're seeing it in the U.K., due to the imposition of the national living wage. Increased supply where it has impact will most likely exacerbate that problem. We are working with our operating partners to capture new labor efficiencies and identify opportunities for enhanced pricing power. In conclusion, we believe we have a superior portfolio in superior markets, best-in-class operating and capital partners, and a seasoned team to execute across all markets. With the right assets in the right markets, we will prove the thesis that healthcare real estate has lower downside and better upside over a cycle. Now I'll turn it over to Scott Brinker.

Okay, thank you, Tom. We took full advantage of the upcycle; we now have unmatched scale in the markets where you want to own real estate; 77 properties in Southern California, 47 in Greater London and 281 on the eastern seaboard from Boston to D.C. Our history in the business tells us these markets will produce superior results. We're entering a period of increased separation among companies. Our real estate quality will stand out more than ever. Each business segment turned in a strong fourth quarter. The results show that our capital allocation is paying off. The operating portfolio trended higher with 3.3% same-store NOI growth; fundamentals are solid, occupancy was up 20 basis points and rates increased 3.2%. Importantly we're not buying the growth, as CapEx remains at very modest levels. The age of our properties is a material competitive advantage. Performance in the U.S. continues to be strong with 4.3% same-store NOI growth. Large metro markets once again outperformed, validating our capital allocation. Same-store NOI in Canada grew 4.6% despite an economy with near-zero inflation, highlighting the resiliency of our business. The U.K. portfolio is poised for a rebound this year based on recent revenue trends. Several Wall Street analysts recently ranked our outpatient medical portfolio as number one in asset quality. The impact can be seen in our results. We hit all-time highs in occupancy and tenant retention last year, leading to another solid quarter with 3.1% same-store NOI growth. Visibility is the key word here and there are three drivers; one, very little lease rollover; two, when leases do roll we typically renew more than 80% of them; and three, nearly all of our buildings are sponsored by a health system. That's important because they act as a magnet for other tenants. The space leased directly to a health system is climbing and now sits at 60%. We see that number moving even higher as hospitals transition more and more services to outpatient settings. I'll move to Triple Net, a highly visible income stream that contributes half of our earnings. Same-store seniors housing NOI increased 3.3%, while post-acute long-term care increased 3.1%. We've been eagerly anticipating a chance to talk about the next topic, which is Genesis. Dramatic underperformance by ManorCare, who is not in our portfolio, is unfairly implicating Genesis if not an entire industry. Industry headwinds clearly exist but they are not new. In fact, we've been preparing for years including selling nearly $1 billion of last generation skilled nursing assets. And rather than focusing exclusively on the short-term headwinds we also considered a bigger picture. According to Avalere, a highly regarded research firm, the dramatic increase in the Medicare population will more than offset the decline in length of stay and per capita utilization. As a result, the number of skilled nursing Medicare days is expected to increase by more than 10% over the next five years. That data reminds us that skilled nursing plays an important role in cost-effective healthcare delivery. There's a reason we haven't suffered any lease rejections or rent reductions like other skilled nursing landlords. One, strong payment coverage. The cash flow from the Genesis properties that we own fully supports the rent payment to Genesis and so to ourselves. Our Genesis properties generate nearly $1.60 of operating income for every $1 of rent. Given the profitability inside the walls of our buildings, the parent guarantee is simply an additional security blanket. And that parent guarantee does have value. Parent company's fixed charge coverage increased last year and Genesis expects further improvement this year to north of 1.3 times. Two, we've been actively managing the portfolio since the day we closed the sale leaseback five years ago. That includes selling underperforming buildings, funding new development in acquisitions with strong coverage and facilitating mergers that generate synergies. And three, Genesis is a superior operator. Despite the challenging environment, our property level Genesis payment coverage is only 1 basis point lower than it was four years ago; 1 basis point. Property level EBITDAR increased a healthy 2.5% per year during that period and remember that we own the legacy Genesis portfolio, which is concentrated in the Mid-Atlantic and New England. These are hands down their absolute core assets. Final comment here is that we expect Genesis to refinance our mortgage loans with significant pay downs coming this year in line with the business plan. Turning to 4Q investments, we closed $1.5 billion at a 6.8% initial yield. It's fair to say that 2016 investment volume will look much different than previous years. Capital allocation helped drive our historical outperformance and remains a top priority. Every day we look at the relationship between cap rates and our cost of capital. Discrepancies plus or minus provide an opportunity to create value. We have the luxury of not needing to make any rash decisions but if buyers have an aggressive view of asset value we'll be happy to crystallize value in select properties. By design, our investment pipeline is quite limited today and we can fully fund it with operating cash flow and in-process asset sales. I want to share color on a new relationship, it's a curb operator called Discovery Senior Living. Last quarter we acquired six high performing independent living communities in Florida that Discovery built and will continue to co-own and manage. The properties are typically 100% full with a waiting list. Significant renovations are nearly complete which will allow Discovery to market the properties at a higher price point generating strong earnings growth. To fund the acquisition we partnered with the Canada Pension Plan Investment Board or CPP. This marks their first investment in U.S. seniors housing, again highlighting the confidence in our platform by one of the world's leading investors. The other major acquisition last quarter was with Revera where we partnered with PSP, a long-time and important pension fund partner of ours. The acquisition deepens our large Metro market footprint. Welltower will receive a 6.1% preferred return that grows by 4% per year through 2020. We sold our final U.S. inpatient hospital last quarter. The number of hospital beds has been nearly cut in half in the past few decades. And there are more closures coming. The old physical plans require massive CapEx and even many of the buildings are often unprepared for advances in technology. We also see an adverse selection problem. The hospitals looking for sale leasebacks are too often the ones you don't want to do business with. I'll wrap up with our excitement about the current environment. The last down cycle laid the foundation for what Welltower has become. The next few years will be the ideal environment to take another leap forward. Now to Scott Estes.

Thanks, Scott, and good morning, everyone. My financial message today echoes the capital allocation team that has been essential to our long-term successes and organization. Calendar 2015 was an important year for HCN and that we positioned the balance sheet for the current period of volatility by opportunistically raising equity in response to the strength of our investment pipeline. 90% of the investment closed in the fourth quarter of 2015 were negotiated during the first half of the year. And while there's always an urge to perfectly time the equity market, we're glad that we chose to pre-fund the majority of this activity allowing us to end the year with essentially the same conservative leverage ratios that we started with in 2015. While we're poised to generate another year of solid financial results and dividend growth in 2016, our net asset stellar message and public guidance for the upcoming year reflects our current mindset of remaining both disciplined and opportunistic while protecting our downside. More specifically, our ability to utilize dispositions as a source of capital in the current environment should provide multiple benefits. It should allow us to maintain our further reduced leverage. We can enhance our asset quality and try to tame it and we can maintain adequate liquidity and execute our 2016 capital plan within a self-funded framework. Given the recent uncertainty surrounding the macroeconomic backdrop, our conservative approach leaves us well positioned to wait out the current storm as we continue to appropriately allocate capital to maximize shareholder value. I'll begin my more detailed remarks with perspective on our fourth quarter financial performance and changes in our supplemental disclosure. As Tom said, we had a great fourth quarter as normalized FFO came in at $1.13 per share and normalized FAD was $0.99 per share representing strong 10% and 9% year-over-year increases, respectively. Results were driven primarily by the solid same-store cash NOI increase averaging 3.1% for the full year and the $3.6 billion of net investments completed over the last 12 months. I note that our FFO and FAD payout ratios for the fourth quarter declined to 73% and 83%, respectively. There were two noteworthy items on our income statement this quarter that I'd like to take a moment to explain. First, we incurred $35.6 million in other expenses this quarter, which represented a non-cash charge related to marking the value of our Genesis stockholding in the market at year-end. And as a reminder, we essentially received our initial $58.5 million in stock for free as it represented the amount of purchased options for 9.9% of Genesis within the money at the time they went public. Conversely, on the positive side of the ledger, we realized a gain on the sale of assets of $31.4 million in the quarter, which is largely due to the profitable disposition of our final U.S. acute-care hospital during the period. In terms of dividends, we will pay our 179th consecutive quarterly cash dividend on February 22nd of $0.86 per share. As this new annualized rate of $3.44 per share represents a 4.2% increase over our 2015 dividend level and a current yield of 6.1%. In terms of our supplement this quarter, the only notable change is on Page 2 where we did add a table providing detail on the number and dollar value of the individual acquisitions and joint ventures completed each year. Turning next to our liquidity picture and balance sheet. The fourth quarter was an active one in terms of capital raising activity for the company. In October, we completed the sale of $500 million of unsecured debt priced to yield just under 4.3% through our reopening of our 10-year notes through June 2025. And in November, we successfully tapped the Canadian senior note market for the first time in our history, completing the sale of C$300 million of 5-year notes priced to yield just over 3.4%. In terms of equity, we issued 1.1 million common shares under our dividend reinvestment program generating $66 million in proceeds and we tapped our ATM program for the first time since 2012 issuing 696,000 shares at an average price of $69.23, raising another $47 million. We also generated $225 million of proceeds through the sale of non-strategic assets and loan pay-offs and finally we repaid approximately $104 million of secured debt at a blended rate of 5.9% and assumed to issue $674 million of secured debt at a blended 3.3% rate. Importantly, as a result we have over $2 billion of liquidity entering 2016 with only $350 million of line borrowings net of the $361 million in cash on balance sheet and the $124 million of cash received from CPP's Discovery portfolio buy-in subsequent to year-end. Our balance sheet and financial metrics at the end of 2015 remain in excellent shape. As of December 31st, our net debt to un-depreciated book capitalization was 39.9% and net debt to enterprise value of 32.7%. Our net debt to adjusted EBITDA stood at 5.6 times while our adjusted interest in fixed charge coverage for the quarter was strong at 4.3 times and 3.4 times respectively. Our secured debt level remained at only 12% of total assets at quarter-end. In light of the recent strength of the U.S. dollar against both the pound sterling and the Canadian dollar, I would like to remind you of our hedging strategy entering 2016. We have minimized any material risk as a result of exchange rate fluctuations. Through a combination of unsecured and property-level debt denominated in local currencies and other currency hedges in place, our international investments are approximately 87% hedged from a balance sheet perspective and 83% hedged from an earnings perspective. So as a result, the sensitivity of both currencies moving 10% in relation to the U.S. dollar from current levels would impact our earnings either up or down by only $0.01 per share this year. Finally, I'll conclude my comments today with an overview of the key assumptions driving our 2016 guidance. In terms of same-store cash NOI growth, we are forecasting blended growth of 2.5% to 3% in 2016, as we continue to project solid predictable internal growth across our portfolio. To further break down this forecast by asset type, first for our seniors housing operating portfolio we are projecting growth in the 2% to 3% range as we remain confident in the operating environment and our operator's relative performance. For our seniors housing Triple Net portfolio, we anticipate growth of approximately 2.5% to 3%. For our long-term care post-acute portfolio, we are projecting an increase of approximately 3%. And last for our outpatient medical portfolio, we project an increase of approximately 2% to 2.5%, driven primarily by annual rate increases, continued strong occupancy, very low turnover and a retention rate of approximately 80%. In terms of our investment expectations, there are no acquisitions beyond what we've announced today in our formal guidance. As a result, the only acquisitions included in our 2016 guidance are the approximate $163 million of investments through our Mainstreet partnership at an initial cash yield of approximately 7.5%. Our 2016 guidance also includes $419 million of development conversions at a blended projected yield of 8.2%. In terms of dispositions, we have included $1 billion of dispositions in our forecast. This is comprised of $178 million of proceeds from assets currently held for sale at a blended yield on sales of 7.2% with the remainder representing loan pay-offs and other potential property sales. Although we prefer to avoid any specifics of what we might sell this year, as Tom said earlier, we have a successful history of selling not only non-strategic assets, but also more opportunistic asset sales to lock in attractive values. My point here is that we have multiple options in our approach to sales this year and believe there are no pools of assets that are off-limits as we evaluate asset sales to most efficiently allocate capital. Our capital expenditure forecast this year is $83 million which is comprised of approximately $55 million associated with the seniors housing operating portfolio with the remaining $28 million coming from our medical facilities portfolio. As Scott mentioned these amounts continue to represent a relatively modest 7% to 8% of anticipated NOI in both asset categories due to our generally more modern portfolio. Our G&A forecast is approximately $160 million to $165 million for 2016, as the majority of growth on a year-over-year basis is due to the annualized 2016 impact of hires and infrastructure investments made during 2015. We remain very comfortable with these spending levels to support the continued growth of the organization. I would also note that we expect first quarter G&A to be slightly higher than the average for the year as it typically includes accelerated expensing of stock-based compensation for certain employees and directors. We anticipate incurring income tax expense of approximately $16 million to $18 million in 2016, based on our latest estimation of taxable income that is largely generated by our seniors housing operating portfolio. And finally, as a result of all these assumptions we expect to report 2016 FFO in a range of $4.50 to $4.60 per diluted share and FAD in a range of $3.95 to $4.05 per diluted share both of which represent 3% to 5% growth over normalized 2015 results. So, in conclusion our focus on capital allocation entering 2016 prioritizes enhancing the quality of our portfolio and private pay mix, maintaining a strong balance sheet and low leverage and retaining ample liquidity until the broader capital markets environment improves. At this point Tom, I'll turn it back to you for your closing remarks.

Thanks, Scott. I want to leave you with the message that we are confident in our ability to create shareholder value in 2016 and beyond. Let me remind you that when senior housing was in disarray because of lack of capital post-financial crisis or because of oversupply in the early part of the century, our shareholders benefitted tremendously and we grew exponentially by recapitalizing the industry. Today, we are in the strongest position we have ever been with our leading balance sheet, long-term institutional capital partners, like CPP and PSP, our portfolio of best-in-class operators, significant local scale in top markets, and a deep understanding of how all these work together as a real operating platform, not a financially engineered yield portfolio. I cannot be more excited about what lies ahead for Welltower. So, for the Q&A we have a few other folks in the room here. We've got two that are well-known to you, Paul Nungester and Steve Schroeder, and two that are new on the Q&A but who I think are well-known to lots of people on the phone, Tim Lordan and Shankh Mitra. So, now Colia, please open up the line for questions.

Good morning and thank you for addressing all the key topics in the prepared remarks. I have a question regarding the same-store cash NOI, which is projected at 2% to 3% for 2016. I would like to understand the factors contributing to this forecast and how you view its long-term sustainability. I know you have mentioned a range that might be slightly above this, and you have previously performed better than that. Additionally, during last quarter, you mentioned five facilities in the Northeast experiencing flu issues that resulted in a 130 basis point drag. Is there any update on those facilities, and do you believe the flu situation has improved?

Yes, that's for sure. Less flu and less snow this year in the markets that kind of crushed us last year with snow removal costs and labor costs because of difficulty in getting to and from the facilities.

Great, I'm happy to answer that, Scott Brinker. There are a couple of questions, so I will address them one at a time. The first question was about the 2% to 3% growth outlook and how we arrived at that. Currently, our same-store occupancy is slightly above last year, which is a positive starting point. I've mentioned several times that over 90% of NOI in the seniors housing sector can be explained by three factors: occupancy, rate, and labor. I've already discussed occupancy, which looks solid, but we've taken a conservative approach in our guidance and assumed that there will be no change in occupancy throughout the year due to economic conditions and some new supply coming in. Hopefully, we will perform better than that, but that’s the basis of our guidance. On the rate front, we continue to see growth in the 3% to 3.5% range, which is generally what we anticipate for 2016. The labor component is where we have some concerns, not that we are overly worried, but it may be somewhat higher this year than in recent times. Several states and cities have increased their minimum wage, and the new supply in certain markets does affect the labor pool. Therefore, we're expecting that compensation expenses will exceed rate growth this year in our budget, which informs our 2% to 3% projection for the year. Looking longer term, we initially projected a growth rate of 4% to 5% when we made our first RIDEA investment over five years ago, and we have generally outperformed that expectation. There will be fluctuations, and we probably did not anticipate that inflation would be nearly zero in many of our core markets, yet we are still achieving low 3% growth. We are confident that we will continue to outperform the sector, which we have done consistently, and we expect to outperform our peers as well. It's challenging to predict exactly how the overall economy will perform, but it's essential to consider the markets where our assets are located. Major metro areas are quite challenging for new supply to enter. We are focused on these major metro markets where we already own assets and are looking to expand our supply. Given the aging population, there will be increasing demand and limited options, particularly for those with dementia and Alzheimer’s disease. This is one of the reasons we remain optimistic about our portfolio and its long-term performance.

Got you, that's particularly good. And then just one quick follow up on Genesis and I think the answer to this is no just based on your prepared comments. But will you guys think about sort of joint marketing a few assets or I know you talk about dispositions as part of the strategy, I don't know if it's in that $1 billion but is that something within the relationship that you guys are talking about?

Yes, we have ongoing discussions with the Genesis management team and their financial partner Formation Capital about how to effectively position both Genesis and Welltower. We are considering all options, Josh.

Hey guys, good morning. I have a couple of questions. First, regarding Genesis, they reported their Q4 numbers on January 25th. Why are you still reporting the September 30 coverage? Is there any chance we could get that updated in real-time, and can you share any insights about how the coverage changed in Q4 based on those results?

Yes Ross, I'm happy to answer that, it's Scott Brinker. They pre-announced their corporate results a couple of weeks ago, but it was quite limited in what they disclosed. Unfortunately, until they announce their full earnings next week, we are not in a position to provide more details. We have the data we would like to discuss, but we cannot share it at this time.

That makes sense. Number two, Scott can you talk a little bit about those loan advances you made in the fourth quarter, you guys lent out a $183 million or as to the full year total up to over a $700 million. Can you talk a little bit about what type of loans were these? Were these construction loans, bridge loans, term financing and then maybe talk about the underwriting? What were the LTVs, interest coverage, can you give us some color on all that? Thanks.

Be happy to Ross. These are mortgage loans that are very similar to what we did to help them finance the Skilled Health acquisition in early 2015. So when they closed on the portfolio acquisition with Revera in the fourth quarter we provided some short term fully secured mortgage financing to help them accomplish that transaction. Now, the long term plan in both cases is that they will bring these properties to HUD and replace our, I'll call it high-cost financing at 8% plus with very high escalators with lower-cost in the 4% range HUD financing that's non-recourse and has a 30-year term. So that's what the majority, the vast majority of the loan volume in the fourth quarter represents, Ross; it is just a mortgage loan to help them finance that Revera acquisition and we expect it to be repaid over the next call it 12 months.

Okay, and then last question from me, just based on kind of sources and uses of capital, if I look at the remaining development spend it looks like you've got just a little over, maybe $550 million something for 2016 and '17 to fund in the development side. So if I think about match funding and capital recycling of call it a $1 billion, that just in rough numbers would leave another call it around you can say $400 million that could be deployed toward acquisitions on a leverage controlled basis. Is that a wrong way to be thinking about in rough terms what the acquisition volume would be on leverage neutral basis without returning to the equity markets or increasing dispositions?

I think that's generally correct. One thing not mentioned is that we have $400 million of debt maturing in March, so the only other aspect included in the guidance is that we will refinance that at current rates. The 10-year debt for us today is likely in the 4.4% to 4.5% range. Additionally, the other sources include retained earnings, approximately $300 million from our DRIP, and $1 billion from dispositions.

So you are going to leave the DRIP on?

Yes the DRIP, yes. Not the ATM.

Thank you. Good morning. On your joint venture with CPPIB, can you just discuss if there was any discussions on partnering on your existing assets rather the new acquisitions?

We have many discussions with CPP. They are a close partner of ours now and so you should assume that any and all possibilities are discussed with CPP.

And then what about right of first offers in Florida? Do they have any as far as new acquisitions for you or dispositions?

Yes. John, it's Scott Brinker. There are mutual rights of first offer based on defined radii around the properties that we acquired that is limited to independent living buildings since that's what we acquired with them.

Can you elaborate on the current buyers in the market for your $1 billion disposition guidance and how to think about cap rates, particularly with regard to the 9% in dispositions for the fourth quarter and the 7.2% on assets held for sale? How should we view cap rates moving forward?

A significant portion of the $1 billion consists of loan repayments, with HUD being the buyer, which is not typically expected. The other buyers involved are primarily private equity groups, and you would need to inquire with them about their return expectations. We have seen a slight increase in our own expectations. However, I believe they do not engage in enough transaction volume, particularly in seniors housing, to accurately gauge cap rate trends. In contrast, the medical office sector is very liquid, with a multitude of buyers. Hence, I don't think the share prices of public REITs or the fact that non-traded REITs are not raising funds significantly affect that market. Recently, we have observed several transactions in skilled nursing portfolios occurring at cap rates similar to those we have seen consistently over the years in that sector. However, there has been a slowdown in seniors housing, leading many to question where cap rates will ultimately trend.

Okay. And then finally on Genesis, I appreciate that they haven’t reported full-year results yet, but they did guide to a sequential decline in EBITDAR in the fourth quarter. Can you just elaborate why are you feel confident that their headwinds are not the same as ManorCare's given the patterns seems like it's very similar?

Yes, I mean there are a long list of things that are different. Now I know a lot more about Genesis but not about ManorCare. So I will this time focus my comments on Genesis. But it gets back to the comments, I made in my script, John. They clearly are facing some industry headwinds but those headwinds are not new. Medicare Advantage has been an issue for years and years putting pressure on length of stay and rate and Genesis has stayed ahead by getting out of certain assets, acquiring assets that are better fits for the current environment and actively managing their labor costs, which again is the most significant operating expense. And the other thing I would mention is they have a much lower Medicare mix and that probably has an impact on why they have held out better over the past four years, because a lot of the pressure has been on the Medicare side of the business. And the other distinction I would make is the results at the corporate level. So I talked about property level cash flow being more than adequate to pay the rent but there is also a huge difference in terms of the corporate cash flow which provides a significant security blanket for our rent payment. And they've been able to grow that cash flow through merger synergies and they will grow it going forward through refinancing and probably some asset buybacks.

Can you just remind us what percentage of the Genesis equity that you own?

It's just over 4%, John.

Good morning, all. So just looking at the shop portfolio occupancy has actually improved for the past couple of quarters. What are you seeing or expecting that you are factoring in to get to your flat occupancy in 2016?

Chad, we like the market position of our buildings in the vast majority of our locations. But I just remember just 12 months, when it seems like the day after we hung up on our fourth-quarter earnings call, occupancy started to drop pretty quickly because of the flu. So there are just some things you can't predict and we're taking a conservative approach here. I mentioned earlier that occupancy today in the same-store pool is above last year. So, that implies that we should be in a good position and we continue to see positive trends really in all three countries.

All right, so speaking of three countries, I think Scott you might have mentioned that you expect a rebound in the U.K., how should we think about that given your occupancy starting at a much lower level now and how should we think about that growth?

Yes, it is and it will probably ramp up over the course of the year. When I get back to the comment I made about the three variables that really impact performance; the first is occupancy and there's clearly a rebuilding that was necessary after the flu season last year but we've seen it, across that portfolio occupancy is coming back very strongly. The second variable being rate and we continue to increase rates in the 3% range if not higher this year. The third variable is more challenging and that's labor because of the impact of the living wage which is up 7% throughout the country and even higher in other markets. So, unrelated to anything that Sunrise can control, there's just an external factor that's going to be a headwind on NOI growth this year.

All right and then just one last one. So you've done several JVs with capital partners now, can you just talk about your thoughts on what these capital partners are bringing to the table and why don't just go it alone?

They bring some of the largest pools of capital in the world, and we believe there will be an increasing demand for senior housing in major metropolitan areas. Considering the significant costs of building in locations like Midtown Manhattan, Central Washington, D.C., or San Francisco, it's critical for institutions like CPP to understand the rationale for investing in senior housing. Additionally, we firmly believe that it will require trillions of dollars to revamp the acute-care hospital system in this country to integrate current and future technologies that can significantly reduce healthcare costs and improve outcomes. Much of the hospital infrastructure in the country is outdated. While I would like to think we could manage this independently and that the capital markets would provide all the funds we need, we aren't taking that risk. Therefore, it has been essential for us to engage with institutions like PSP and CPPIB, and we plan to involve others because they recognize our expertise and the unique opportunities we offer that they cannot find elsewhere. They will also see attractive chances to invest capital in ways that may not be available in traditional real estate sectors, where they hold significant ownership.

And Chad, the other thing I would mention is they give us a lot of flexibility. Keep in mind that as a Healthcare REIT we can't own operating companies. At least we can't own more than 35% of them. So Sunrise is an example, we'd love to own the whole thing but we can't. So, this is a company that's worth probably $500 million plus, this is a big profitable company and the question is if Healthcare REIT Welltower can only own up to 35% of that company who owns the rest? There are very limited people that could write a check that size; private equity is one but frankly generally speaking they don't align with our approach to business. So, PSP acting through Revera owns the balance of Sunrise alongside of us and that's just one example of how we are I think controlling our own destiny, helping shape the future of the industry through these ownership stakes that without a group like PSP we would not be able to do.

Scott just said it, we're a long-term investor and these are long-term investors, they're not managing to a 7-year fund return. So we think we are much more aligned with this investor class and I think you'll see more of that from us.

Just going back to the RIDEA growth across the different geographies, could you maybe just give us a range of how that 2% to 3% would pan out in the three different regions?

I will be happy to. The U.S. is 70% of that portfolio and drives the majority of the growth rate so you should expect it to be right in the middle of that range. The U.K. probably a bit higher but backend weighted in the second half of the year and then Canada a bit lower, mostly because of the economy there. Inflation is zero.

You mentioned the expense or wage pressures in parts of the U.S. and the U.K. Are there any similar trends or pressures in Canada?

We haven't seen as much in Canada, Vik, probably driven or just by the health of the overall economy there, the labor market is much more reasonable. It's really the U.K. because of the change in the living wage and then particular markets in the U.S. which have a higher minimum wage.

The U.K. has a particularly tight labor market, especially in London, with a high demand for individuals with nursing skills. This situation is complicated as many of these nurses come from other countries, leading to discussions about immigration. Thus, the pressure in the U.K. is quite significant.

Could you explain the methodology you use to derive your RIDEA growth numbers and the impact of supply? I believe some of your competitors incorporate a 3% absorption rate in their calculations. I'm curious about your approach and if you could provide more insight into the industry trends you consider in that model?

I think the number that you're referring to is in the supplement. So I'll just use the 3-mile radius as an example because we still think that's the most appropriate for our urban locations based on where residents usually come from. We had a more suburban or rural market portfolio I think 5 to 10 miles is more appropriate but for Welltower I think 3 miles really is the best radius to be looking at. So in this quarter's supplement, we say that 1.7% of our total NOI is impacted by new supply, okay, and that assumes that all of the NOI from the properties that we own will be impacted 100% by the new supplies. So it's kind of a worst-case scenario, meaning if you take all the properties in our portfolio that are impacted by new supply, that 1.7% assumes that NOI at those properties goes to zero, which is obviously not going to happen. In fact, our history is that properties in our portfolio that are subject to new supply have actually held up quite well when new supply enters the market and we studied it for years, looked at their performance before and after the new competition enters the market. And on average, occupancy is pretty much flat and NOI has been up 4% on average. So it's not the draconian downside necessarily that people assume.

Okay, that makes sense, and then just last one on Mainstreet, correct me if I'm wrong but I believe when you had announced this in '14 you talked about potentially a $1 billion worth of acquisitions or at least the option to buy them and you baked in if I'm not wrong about a $160 million. Can you just talk about incremental opportunities from over and above that?

Yes, there were two different pipelines. There were 17 buildings that we are committed to acquire and now closed on 12 of those, so there are five more to come. And then there were 45 additional properties that had yet to be started and those are starting to roll out and the structure on those is that we provide a small mezzanine loan. Mainstreet puts in a lot of equity and then obtains a third-party construction loan and when those 45 buildings open, one at a time we have the option to buy each one at a 7.7 cap rate. So it's one building at a time, our option.

Hey guys. My question's been answered actually, thanks.

Thank you, good morning. Question on the proposed acquisition mix, I mean I know there's nothing embedded in guidance today, but I'm curious given sort of the dislocation at least in the public markets related to the ManorCare news if you will. If there's any opportunity to get any opportunity in post-acute if you'd look to get bigger there, invest incrementally and then maybe any other comments of any other vertical within the portfolio you'd be interested in? Sort of the deploying incremental capital.

Not sure I understood. You're saying has there been interest from other parties in our skilled nursing assets either buying them from us or investing helping us fund development of skilled nursing?

I'm more interested to know what you want to do with your capital as you look forward, so obviously we saw DSL but I'm curious what you would do in the post-acute space?

So what we're interested in post-acute is investing in the next generation of post-acute care. We are not interested in owning lots of low-quality mix nursing assets and we sold lots of them over the years that Scott mentioned, that's been a component of the $4 billion in dispositions we've made. We believe in the post-acute sector. We do not think it's going away. And so we will deploy capital into the next generation of post-acute of which Genesis is one of the operators that is offering that product through its PowerBack facilities. We think that is a good place to commit capital. We think - recently just this past Monday we were with Cleveland Clinic and they mentioned that they had just formed a relationship with Select Medical where they are actually in a new suburban setting, where they have an outpatient in a smaller hospital they are actually putting Select Medical post-acute bed attached to the hospital that Select Medical will run. So hospitals more than ever need strong post-acute operators and so that's where we will deploy capital. We are not looking to acquire skilled nursing beds because the cap rates look attractive. That is not what we do as a company and I think that's a very important differentiating point about Welltower.

I might answer that question Jordan in a little bit of a different way to that of Tom's comment just focused on post-acute. But really in a time where capital is more precious we are really focused on our existing partners. You all know that we have a partnership-based approach and we have 30 partners that we have been growing with historically. So if you had to think about asset mix, as Tom said, post-acute maybe a part of it but I think primarily seniors housing is where we have our largest share of relationships. We are always going to be I think focused in seniors housing area first and foremost.

Just for probably for Scott Estes. You have about $170 million of properties included in the available-for-sale bucket. Just because dispositions seem high this year, what kind of visibility do you have on the remaining portion of assets and what's in that available-for-sale group?

We have two portfolios held for sale, totaling around $170 million: approximately $110 million in medical office buildings and a $60 million senior housing Triple Net portfolio. This could bring us close to half of our total disposition target through potential loan payoffs, although there's some variability mainly due to the timing of Genesis going through the HUD process. The remainder is quite flexible, and we want to keep that flexibility. We have time on our side and are satisfied with our leverage position. If you have a more specific question, feel free to ask, but we aren't identifying specific assets at this time. There are various options we can explore, and we can be opportunistic based on market pricing. We're also open to actions that could enhance the quality of our portfolio.

Now that you're going into Florida with the CPP deal, any overlap with your existing footprint down there?

No, we don't have much in Florida actually. It hasn't historically been one of our targeted markets. We just happen to like these assets in particular. These are big campuses that stay virtually full 100% of the time and equally important Discovery as good as we've seen, especially the marketing side of the business and controlling costs. So it’s I think a reminder that our business is driven not by real estate but also by the quality of the operations and that's what we found so attractive about this particular portfolio.

Hey guys, thanks for taking my question, long call. I just had one. I know you laid out your strategy and rationale for exiting U.S. hospitals and that was very helpful. But would now be possibly a good time to increase exposure to the asset class given operators better understand the ACA impact and hospital value is probably more attractive than before last year's 2Q peak? I'm just trying to understand your strategy to remove exposure to that sector while one of your competitors is selling out now.

So this is where we come out on that. The hospitals we would want to own are not available. You can only buy hospitals that we consider to be poor long-term investments. We believe that much of the hospital supply available in this country will be taken out of service, similar to what we've seen happen in other sectors of real estate. There are many empty department stores in struggling malls across the country. Remember when every city in America had its own unique department stores that were a part of the social fabric? Those have largely disappeared, with most of them going away or becoming Macy's. I predict that many communities, which currently have numerous acute care hospital systems, will see very few in the next 10 to 20 years, with only the major not-for-profit healthcare brands like Cleveland Clinic, Mayo Clinic, and Johns Hopkins expanding into other markets. Looking at history from a real estate perspective, a lot of the hospital supply available for purchase today will become more attractive in the future, as they are taken out of service. Therefore, we will not be deploying capital in this area, as we believe it's not the right strategy for our shareholders.