Welltower Inc (WELL) — Q2 2017 Earnings Call Transcript

Thank you, Dorothy. Good morning, everyone, and thank you for joining us today to discuss Welltower's second quarter 2017 results. Following my brief introduction, you will hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business and Relationship Management; Shankh Mitra, SVP, Finance and Investments; and Scott Estes, CFO. 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 assurances as 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 this morning's press release and from time to time in the Company's filings with the SEC. If you did not receive a copy of the press release this morning, you may access it via the Company's website at welltower.com. Before handing the call over to Tom DeRosa, I wanted to point out four highlights regarding our 2Q 2017 results. First, we reported 3.5% year-over-year same-store growth in our seniors housing operating portfolio, driving total portfolio same-store growth of 3% for the quarter. Second, we increased full year total portfolio same-store guidance to a range of 2.25% to 3%, lifted by first half seniors housing operating performance at the high end of our additional expectations. Third, we paid down $182 million of debt in the quarter, bringing year-to-date retired debt and preferred securities to $1.275 billion at a blended rate of 5.6% and a cost of less than 3% of principal. Finally, as a result of this stable core operating performance and efficient balance sheet management, we finished the quarter with debt to adjusted EBITDA up 5.17 times. And with that, I will hand the call over to Tom for further remarks on our quarter.

Thanks, Tim, and good morning. We are pleased with our operating results for the second quarter, as well as the success of our efforts to further improve our balance sheet and drive operating efficiencies across the Welltower platform. The strong year-to-date performance of our seniors housing business, which has resulted from strong rate growth, focused asset management and a rebound in our UK business gives us the confidence to announce the increase in our same-store NOI guidance for the year to 2.25% to 3%. We are broadcasting to you this morning from Welltower's offices in Beverly Hills, California. When you walk the streets here and see scores of signs on the windows of high-end shop space, you cannot help but be reminded of the disruptive impact e-commerce has had on traditional retail real estate. There are clearly disrupted forces at play in healthcare as well, but Welltower's real estate portfolio stands to benefit from this disruption. As healthcare delivery moves from a high-cost acute care hospital-centric model to smaller, more efficient disease management sites of care connected to ambulatory, post-acute, seniors housing, memory care, and home care, our current real estate assets become even more consequential and valuable. Further, this phenomenon calls for a new class of real estate to be developed. Welltower has uniquely positioned itself at the table with the leading providers, payers, distributors, data, and technology companies that are transforming healthcare, so that we can deliver a next-generation class of real estate. This potentially represents the largest capital deployment opportunity we have seen in decades. I'll come back with some closing remarks, but it is now my pleasure to hand the mic over to my colleague, Mercedes Kerr.

Thank you, Tom, and good morning, everyone. The Welltower team completed $292 million of investments in the second quarter of 2017, as we remain disciplined in our approach to the market. This amount consisted of $110 million of acquisitions at a blended yield of 6.5%, $163 million of development funding with projected yields of 7.8%, and $20 million in loans with a blended rate of 6.6%. Our investments continue to be made with existing operators such as Legend Senior Living, Sagora Senior Living, and Ascension Health. But we were also pleased to welcome a new partner to the Welltower family, the University of California Irvine Health through the acquisition of an outpatient medical office building less than a mile from the highly regarded Hoag Hospital in Newport Beach, California. This acquisition advances our stated strategy to increase our participation with the Academic Medical Center Community. In addition, we put ten high-quality development properties into service during the quarter, representing total invested capital of $273 million and a blended stabilized yield of 7.6%. These properties operated by well-known Welltower partners such as Sunrise Senior Living, Brandywine Living, and Kisco will enhance our operating results for years to come. We remain committed to working with our partners to fund development and acquire best-in-class properties on a more off-market basis across our countries of operation. This relationship-focused strategy delivers its highest value during market periods like the one we are currently experiencing, where widely auctioned portfolios generally don't seem to offer acceptable rates of return for our shareholders. We completed $160 million of dispositions in the quarter. This activity consisted of $43 million of loan payoffs at an average yield of 8.9% and a $117 million portfolio sale of 11 skilled nursing facilities with a yield of 9.3% and an unlevered IRR of 11.4% and a gain of $42 million. To provide some context for our investment decision-making process and how we behave across cycles, I would like to share a glimpse into our multi-disciplined investment committee and how it works. When we scrutinize underwriting results, we focus as much on ongoing in-cash yield as we do on the long-term growth potential of an investment opportunity and the CapEx required to sustain that cash flow growth. This results in a total return or unlevered IRR driven investment process. As we review new investments and dispositions, the committee also focuses on diversification of operators, asset type, and geography, which we believe enhances the stability of our portfolio returns. The rating agencies seem to agree, as evidenced by our recent upgrades after the reduction of our concentration in certain operators. Our often-used RIDEA structure gives us the opportunity to optimize operating performance more directly. You have heard us speak about our initiatives around this before. We have invested in people, systems, and infrastructure to actively manage our RIDEA portfolio, and we have Welltower boots on the ground, enhancing our shareholders' interest in the markets where we have strong concentration such as London, Toronto, and Beverly Hills. Our market leadership position ensures we see the vast majority of what is marketed, and we consider each opportunity carefully, relative to our cost of capital and standard real estate metrics such as replacement costs. In periods where we don't see a positive balance between the market's pricing of risk and return, we may report modest results - at least when measured against Welltower's own history. We may also monetize selected investments opportunistically during these periods to crystallize value for our shareholders. And importantly, we always seek to drive value from our existing portfolio. We feel confident that our approach and discipline through these cycles will prove to be the correct strategy to drive sustainable shareholder value in an enduring way. Our off-market investment pipeline for the balance of the year is promising and will meet the criteria that I have described. We look forward to sharing our news of progress. I will now turn the call over to Shankh Mitra for a discussion on portfolio performance.

Thank you, Mercedes, and good morning, everyone. I will now review our quarterly operating results with an emphasis on our outpatient medical and seniors housing business. We're pleased with our operating results and the increase in our overall portfolio guidance to 2.25% to 3%, which we believe is appropriate given the strength of our shop portfolio. I'll remind you that we do not provide our outlook on segment level NOI growth through the year, but we are tracking towards the top of our original 1.5% to 3% guidance for the shop portfolio. Our overall same-store NOI increased 3% for the year. Our Triple-Net portfolio continued its reliable performance. Our seniors housing Triple-Net segment grew 3%, and the long-term secured portfolio grew 3.1%. Our outpatient medical portfolio reported 1.6% NOI growth in Q2, which was below our expectations. New leasing is ahead of our expectations for the year, but we had some delays in rent commencement due to tardy tenant fixturing and a few move-outs in the quarter that are shifting our economics to later quarters. Despite this quarter's performance, our expectation for the outpatient medical segment remains unchanged for the year. We remain confident in our team's ability to execute and expect growth to bounce back in the second half. Our seniors housing operating portfolio is the highlight of this quarter with meaningful outperformance relative to our budget. Occupancy trends were lower than expected; however, those were significantly offset by our pricing power, which resulted in strong rate growth of 3.9% year-over-year and better expense trends of 1.7% a year. Our operating partners are constantly optimizing rate and occupancy to maximize revenue at this point in the cycle. We're very proud that they have achieved this growth while keeping expenses in check. While labor costs remain elevated, they continue to moderate from the highs as our partners strike the right balance between excellent care delivery and efficient staffing models. Our group purchasing power and other cost initiatives are realizing expense savings in food, professional services, insurance, utilities, and management fees. Geographically, the U.S. and Canada were neck and neck in performance, both contributing solid growth at 2.6% and 2.8% respectively, while the UK has been the clear winner as we continue to benefit from our UK team's significant asset management efforts over the past 18 months. We anticipate UK outperformance in the quarters to come. Overall growth was driven by our core markets, which have bounced back as we hoped and discussed last call. Southern California, Northern California, Toronto, London, and Seattle were significant drivers. Following up on our conversation from last call, the New York MSA has started to demonstrate better results, but New England continues to be challenging, although it is improving. With respect to different product types, we have observed significant outperformance of both revenue and NOI in assisted living versus independent living this quarter. Much has been written about the supply stats in AL versus IL, which is appropriate and relevant, but as long-term owners of class A real estate, we have observed greater thickness of demand in AL versus IL when new competition opens around a given asset. We would also like to point out the recent absorption metrics for both product types as reported by NIC. For Map 31 and Map 99 respectively, absorption for AL was 4.3% and 4.2% for the quarter and 2% and 1.9% for IL for the quarter. These absorption numbers are more than 2X the current 85+ population growth, signifying a greater acceptance of this need-based product and validating the value proposition that community-based care provides to our residents versus alternatives like receiving care at home. This above population demand growth indicates the true long-term growth potential of our asset class as acceptance of the asset class augments the acceleration of 85+ population growth in the decades ahead. Overall, we are very pleased with the operating performance of our portfolio. We allocate capital across geographies, product types, and operating partners, so that you as our shareholders can enjoy sector-leading inflation-plus growth through the cycle. We believe our results so far this year are proving that strategy. With that, I'll pass it over to Scott Estes, our CFO. Scott?

Great, thanks, Shankh, and good morning, everyone. From a financial perspective, I think the highlight of the first half of the year has been our ability to maintain our capital allocation discipline. Most importantly, it's allowed us to take advantage of the current market dynamics to both sell assets and raise equity opportunistically to further enhance our balance sheet. As a result, we're uniquely positioned to capitalize on high-quality investment opportunities as soon as they become available in the future. I'll start my comments today by emphasizing three financial highlights from the second quarter. First, our strong total portfolio same-store NOI growth is at 3%, and $292 million in growth investments allowed us to report a solid normalized FFO result of $1.6 per share. Second, we utilized disposition proceeds in the equity capital raise to further strengthen our credit metrics and reduce our undepreciated book leverage to 35% at quarter end. And third, we ended June with over $3 billion in liquidity, providing considerable financial flexibility as we move into the latter half of the year. In more detailed remarks, I'll begin with some perspective on our segment financial results and dividends. As second quarter financial results did exceed our expectations, generating normalized FFO of $1.6 per share versus $1.15 per share last year. Year-over-year earnings were supported by our solid same-store cash NOI growth and $2.8 billion of growth investments completed over the last 12 months, but declined as expected due to the $3.7 billion of dispositions completed over the same period. Importantly, these dispositions and equity raise allowed us to significantly lower our leverage, by over 4 full percentage points over the last 12 months. Our G&A came in at $32.6 million for the second quarter. This represents a significant 18% year-over-year reduction from $39.9 million in Q2 2016, as we continue to enhance our operational efficiency. Based on our strong first half of the year, our G&A forecast is now tracking closer to the $130 million to $132 million range for the full year versus our initial guidance of $135 million. We recognized significant gains on asset sales of $42.2 million during the quarter. This was partially offset by $13.6 million in impairments on several seniors housing properties currently held for sale, and some minor charges related to secured debt extinguishment and the loss on derivatives during the quarter. In terms of dividends, we will pay our 85th consecutive quarterly cash dividend on August 21st of $0.87 per share, representing a current dividend yield of 4.8%. Turning now to our picture on the balance sheet. During the quarter, we generated $160 million in proceeds from dispositions through $117 million of property sales and $43 million in loan payouts, which included an additional $28 million of Genesis loan repayments. In terms of equity, we generated over $190 million in net proceeds under our ATM program during the quarter. We did use the majority of our net proceeds to reduce our line of credit borrowings by $137 million and to extinguish $182 million of secured debt at a blended rate of 4.4% during the quarter, while we issued or assumed $172 million of secured debt at a blended rate of 3.1%. As a result, we sit today with over $3 billion in current liquidity based on $2.6 billion of credit line availability and $442 million in cash on the balance sheet. Our balance sheet continued to strengthen during the second quarter. As of June 30th, our net debt to undepreciated book capitalization declined another 80 basis points on a sequential basis to 35%, while net debt to enterprise value declined 160 basis points to 27.2%. As Tim said, our net debt to adjusted EBITDA improved to 5.7 times, while our adjusted interest and fixed charge coverage for the quarter increased to 4.5 times and 3.7 times respectively. Our secured debt declined by 10 basis points to 9.5% of total assets at quarter end. That concludes my comments today with a brief update on the key assumptions driving our 2017 guidance. I think in short there are relatively few changes this quarter, in terms of same-store NOI growth. As the team said, based on the solid performance across the portfolio highlighted by the seniors housing operating portfolio in particular, we are increasing our blended growth forecast to 2.25% to 3% from the previous 2% to 3% range for the full year. Consistent with our normal practice, there are no acquisitions other than those completed during the first half of the year in our 2017 guidance. Our guidance does include an additional $173 million of development funding on projects that are currently underway and an additional $143 million in development conversions at blended projected stabilized yields of 8.8%. In terms of our full-year disposition forecast, we continue to anticipate a total of $2 billion of disposition proceeds at a blended yield of 7.6% based on $1.3 billion completed year-to-date and $700 million of incremental proceeds through the remainder of the year. As a result of these assumptions, we're maintaining our normalized FFO guidance of $4.15 to $4.25 per diluted share. So, in conclusion, I think we're in an excellent capital position with an even stronger balance sheet and over $3 billion of current liquidity, providing us the significant financial flexibility to execute upon our plans as we move into the second half of the year. Tom, I'll flip it back to you for your closing comment.

Thanks, Scott. Since the start of our call, the sun has now come up on the West Coast and we can see outside our windows, which are just one block from the drive, many of those empty Beverly Hills street retail storefronts I mentioned at the top of the call. So, like you, we wonder about the future demand for this premium retail space. Our street retail space here on Bedford and Brighton Way, formerly leased to traditional clothing and jewelry retailers, is about to be occupied by a next-generation pharmacy with fusion therapy capabilities and a surgery center walk-in clinic for one of California's largest academic medical centers. This major health system realized they need to have a more consumer-friendly retail-facing ambulatory care strategy. They chose Beverly Hills, and they chose to be at Welltower. Yes, the four buildings we own in Beverly Hills are branded Welltower. And people here talk about seeing their doctors at Welltower in one of the world's most sought-after retail destinations. The new anchor is Welltower. This is an important indicator of where healthcare delivery is headed, and we cannot be more excited about the opportunities before us. So now, Dorothy, please open up the line for questions.

Quick question on development; it looks like you have about $1.6 billion of unstabilized developments, and out of curiosity, how long is the average property staying in that bucket? Are there any changes in terms of the trends staying in there longer or shorter periods of time?

Traditionally, our development projects might take roughly 18 months to complete, and we traditionally also expect anywhere between 18 and 24 months for lease-up. I'm talking now about seniors housing; as you probably know, in outpatient medical when we develop properties, we find large tenants are 75% or more pre-leased before we even commence construction. So, I hope that gives you some rough estimates of how we see our fill up and so on.

Okay, but nothing is really changing, or it's taking longer or shorter periods of time, it's fairly - is that right?

No, nothing has changed in those kinds of standard assumptions; I think they prove out consistently.

Got it, okay. And one other question in terms of shop same-store occupancy, it ended the quarter at about 89.5%. Can you talk a little bit about where you see that going through the balance of the year and even into 2018, if you could?

So, without being too specific, Michael, as you know there is seasonality in the business. So, if it's purely thinking sequentially, we would expect some occupancy improvement through the year. As I mentioned before, occupancy trends have been lower than what we expected. To be honest with you, we're not trying to optimize or maximize occupancy; we're trying to maximize revenue. So, we will see what the market gives us; but definitely, you will see sequentially slight improvement through the end of the year.

Okay. That was it. Thank you.

Thanks. Good morning. I guess just wanted to talk, I know you guys have been very active with overseas partners and investors and the Chinese in particular, and I'm just wondering if you've seen any change in their appetite given all of the rhetoric that's come out of the country about deploying capital overseas?

That's a great question, Steve. If you think about the two or three categories of overseas investors, we have seen a material increase in the larger companies or larger insurance companies with very large balance sheets and overseas operations, including sovereign wealth funds. They are very, very active. I have never seen them this active before. However, if you look at the smaller insurance companies and asset managers, their capital control might have some effect on private equity. But most of the money is in Hong Kong; there has been no change, not an increase or decrease; that capital seems to be pretty steady and interested in U.S. healthcare assets.

Okay, thanks. And then, I guess maybe a question for Scott, just on the issuing of equity. Obviously, the balance sheet was in great shape before you tapped the ATM. How are you guys thinking about the usage of the ATM raising equity capital at these levels? What are the primary drivers to ensure it's FFO accretive, NAV accretive? I mean, how do you guys think about that, and what should we think about going forward?

Sure. I think NAV accretion is a good benchmark. When you think about it, we were just being opportunistic. If you think about it, we did complete about $300 million of gross investments this quarter. We have a pretty active development pipeline; we have about $540 million in projects underway and there are some more coming. So again, I think in small amounts, if it's NAV accretive that's how we've chosen to deploy the ATM.

Okay, thanks.

Hey, good morning, all of you. So, just thinking about the seniors housing occupancy trends, which have been getting lower. Are you seeing anything that indicates the change in the trend of rising any acceleration or deceleration?

No, Chad, as I said that sequentially we would expect the improvement. But year-over-year, I think you will still see a decrease, obviously I'm talking about the U.S. We're seeing significant improvement in occupancy in the UK. So, we're trying to maximize revenue, not occupancy. I cannot emphasize enough how we are thinking about this.

Yeah, Chad, from a leading indicator standpoint, I think you'll have to look at capital availability for construction in seniors housing. The supply you're seeing today has a lot to do with capital availability that started back in late 2013, 2014, 2015, which has driven the supply that's really started coming on the market last year. Anecdotally, we've been told that capital availability for new construction in seniors housing is back to 2009 levels, which means it's minimal. So, if you think about that with the aging curve, the 85+ cohort starting to accelerate in just about 2.5 years from now, you would have expected that the supply of capital would be today to meet that demand. But that's not the case. So, we think there potentially is a supply-demand imbalance when the demographics start really propelling our business.

All right, so capital availability getting tighter - and absorption is steady.

We're pretty encouraged. Yeah, I would say that it's very market specific. We keep harping on the fact that we have, and I'll use Mercedes' word, curated our portfolio. It's concentrated in high barrier to entry, more resilient regions of the U.S., Canada, and the UK, and that is what is behind our performance. You can't paint the U.S. or any of the other markets with one brush. We also said that we were seeing spikes in labor costs in the major markets earlier than you were seeing in smaller secondary markets. We always believed we were seeing these spikes last year and into early this year. Now we've started to see that moderate. It's hard to predict that. However, I think the major markets that Welltower is focused on are behaving differently, and that's what's driving our performance.

All right, so now I'm going to ask a granular question that hopefully either you or Mercedes can answer, which is if you're talking about the MSAs that you are in. Are you seeing any difference in what NIC map is recording in those MSAs and then your performance in those MSAs?

Chad, if you don't mind me answering that question, we definitely - as you know, we have very significant concentration in great submarkets. So, when you think about NIC map, you think mostly MSA. We do not think about business in MSA terms. We think about our business in submarket terms, even more granular than that. And we are in very wealthy locations in the markets, so obviously their reports are significantly higher than the average MSA. So, we're seeing outperformance, but I would not just attribute that to a very different MSA positioning; it’s submarkets and wealth locations driving that. We're definitely seeing very significant demand growth in many locations that I mentioned: Southern California, Northern California, Seattle, and everything else. There is one place, however, that we are not seeing that. I think I mentioned that is New England; there is some supply pressure in New England, so their MSAs are under pressure. We're seeing that too. The New York MSA is starting to bounce back in our portfolio, and we are hoping to see that New England follow very soon.

All right, thanks for taking the questions.

Thank you. Shankh, just following up on the RIDEA side, would you be able to give us what the change in occupancy was across regions?

Yes, if you look at, we usually don't do that. But I want you to think about our business as a diversified portfolio where we allocate capital, not just U.S. or UK or Canada. We don't focus on one particular country because it's doing well; all are doing well. But just throughout this, I'll give you the numbers; the occupancy in the U.S. is down 180 basis points just this quarter, Canada is down 120 basis points, and the UK down 180 basis points.

Okay. And just sticking to RIDEA, you obviously had great cost control. Can you elaborate a bit on that and what for the exact drivers that I saw on the other bucket that was down about 6%? Could you just give us some color for what that was?

Yes, so I think I tried to mention that in my prepared remarks. If that bucket consists of A, first is we saw a very significant cost control success in raw foods and utilities by moving to the other buckets; we are seeing some very significant improvement in worker's compensation, insurance, marketing, professional services, and our internal management fees. So, we have seen that pretty much across the board. We now enjoy the fruits of our efforts in group purchasing and others that we have been talking about for years to come, in addition to significant focus on asset management efforts in this area. So, across the board there is not one line item that I can talk about that is driving that; we're seeing it across the board.

No, go ahead.

No, I was just going to say no, it's actually very strong performance across the board. So, congrats on that.

Vik, this is a business that really requires the real estate partner to be very hands-on. I know Mercedes mentioned this in her remarks. We have made significant investments on the asset management side here. Our UK turnaround has a lot to do with the people that work in our UK office. We have 10 people in London, they are very hands-on. There were a number of management challenges that were negatively affecting the performance of our UK portfolio. Those issues would not have been addressed had Welltower's team been on the ground there, making sure that the right initiatives were being implemented so we can turn that performance around. That is the same story across Canada and the U.S. This is a roll-up-the-sleeves real estate business, and we feel that because of that investment we've made, we take some level of risk out of this business.

Tom, I want to include that our operators, I think over time at some of these initiatives I was trying to play through, have really grown more and more comfortable with our ability to collaborate in these projects. It's an evolution that we feel very comfortable about, and I just want to mention that our operating partners naturally are an important component of it.

So, that makes sense. And Tom, I have to ask you, since you talked about Beverly Hills and Welltower, when you changed the name of the company, did you think people would be going to the Welltower store?

Of course they would think about it, but it's very interesting here. At some point, we'll bring some analysts to see what we have here. What we are doing is in a sense creating a wellness district through the real estate that we own here in Beverly Hills. Now the retail, which again, if you came here five years ago, you would have seen typical retail in medical office buildings. What's happening is we are starting to drive a new class of retail here. People even on the mall and shopping center sectors have been talking about how they want to drive healthcare to the traditional mall or street or strip center, we're actually doing it here. I was very surprised how quickly people have grabbed onto the Welltower name. It's interesting again, looking at our windows, I see Neiman Marcus and Fifth Avenue on top of buildings, and across the street, our four buildings say Welltower, so people are starting to recognize this name. What we hope it stands for is quality real estate; if you are in healthcare, being in a building that says Welltower stands for quality and stability.

Okay, thanks, guys.

Good morning. First of all, congrats on the really solid quarter; it's good to see. I have two questions. First of all, the shop portfolio, could you talk specifically about the outperformance in the UK? What are the market fundamentals doing in the UK that are making it kind of have this consistent outperformance versus the other markets?

Yeah, hi there. It's John Goodey from the International team. So, it's a good question. Morning. The market dynamics are relatively benign right now with a rough balance between supply and demand in the sector that we care about, which is the first-class business equivalent of the industry. The big difference, I think, is the partnership, as Mercedes said, we have with our operating partner Sunrise that runs the Sunrise and Gracewell branded buildings there. So, we've been working diligently with them for the last 18 months on how to maximize the performance of those buildings in the context of the markets. Shankh used the term neighborhood, this is a neighborhood relative business. It's been real diligence and hard work on cost and positioning those buildings on the revenue side as well and seeking to maximize the overall revenue from the buildings, not just occupancy or rate growth. So, because of the superior locations, you'll see it in some of our supplemental disclosure, our ability to drive the revenue per occupied room in those buildings has been impressive this year. It was good last year; it has been very good this year and that's just aligned with overall occupancy growth of nearly 2 percentage points across the portfolio. This is durable; it's not going to change, at least not for now until the basis of performance changes. We feel good about H2 as well.

Okay. But how do you end up measuring incoming supply versus the competitive property side versus your assets?

Yeah, so unfortunately, we don't have a NIC database in the UK, but as you can imagine, we have our ears to the ground on performance all across the portfolio. That is also around what our competitors are doing and what's coming on and there are local clusters where there is strong supply growth because there's strong demand growth as well. We have - Welltower is not operating in a vacuum. We have people doing what we do in the UK; I think we do it best. However, we are imbalanced in many of the markets, and what we are seeking to do, as I think I've said this before, we own a small fraction of the facilities in the UK but a very high fraction of the quality that Welltower likes. We are doing selective infill acquisitions but also acquiring a lot of construction and that takes hard work. Like we did in Manhattan and other high-wealth areas, this is where the operator relationships and Welltower capabilities come together to build buildings in areas of London, for example, that are really hard to access. They take multiple years just to find a site and then to construct. The competitive advantage is finding these high-barrier-to-entry markets with real resilience to entry and then working hard to plant the Welltower flag there.

And I'll just add one more point to that. If you think about our UK business, it is primarily London-focused. London is probably the toughest market to build that we operate in, even perhaps other than the West side of LA. It is significantly harder to build in London than in the New York MSA, for example. So, you're seeing the UK; I don't want you to think just as UK results. This is more greater London-centric results.

Got you. That's helpful. And one more from me, Shankh. The MOB portfolio - you did talk about a turn around and performance in the back half of 2017. What specifically are you looking at that's going to result in acceleration in same-store NOI growth for the MOB portfolio?

Yes, I mean, as I said, if you think about the quarter, obviously we're not so pleased with 1.6% NOI growth. But it's just a question of timing. If you think about every quarter is a snapshot of 90 days. We, as long-time owners of real estate, don't run our business for 90-day increments. Leasing has been pretty strong and running ahead of our expectation. But there have been a couple of unexpected move-outs as well as it's taking longer for tenants to come into the space and commence. It’s just a question of timing. You will see the economics shift from quarter-to-quarter. We don't really focus too much on that, but you will see the acceleration, of course.

Yes, Tayo, the MOB portfolio has been unbelievably consistent for years and years and years. The occupancy has been 94.5% to 95%, and we have consistently generated 2% to 2.5% growth. So that’s what we continue to expect in the short-term here.

Got you. Thank you very much.

Thanks, Tayo.

Thanks, Tom. I think with your balance sheets so strong, it's been for a while and it’s getting stronger in the near term. I was wondering if you could elaborate on what you're seeing in terms of investment opportunities as far as the investment type and timing.

We have been working for some time. I think I mentioned earlier that we are reticent to participate in widely auctioned processes where there seems to be some exuberance and a little bit of a frothy market; not enough growth for what we think our shareholders deserve. So what we have been working on instead is this off-market, more proprietary type of pipeline. We are actually very encouraged by what we see. Some of that will take longer to materialize because the relationships we have, for example with top health systems, are ones that we are building from scratch. However, we have some real momentum in that case. Then there’s what we sometimes refer to as our shadow pipeline, which is the ongoing business that we get from our existing operating platform with our partners which is very consistent again, largely off-market. So, we are not knocking ourselves out trying to compete in the market with others. There is a very solid pipeline ahead. In some cases, I think we will be able to talk about it this year and in other cases, these are opportunities like the ones that Tom was describing about the disruption of healthcare real estate that may take just a little longer to materialize but will be significant.

Mercedes, you've mentioned increasing your exposure to academic and medical centers. Is life sciences an asset class you would consider entering back in again?

It's not something that we're considering at this time. It is such a unique and different asset class, even though I know sometimes it's considered into the healthcare category. I understand why, but from our perspective with respect to how it is underwritten and managed, it's just such a different animal from what we're focused on right now.

Great. Thank you.

Hi. Thanks. So, I'm going to follow up; you mentioned your Welltower health district in Beverly Hills, and I was just wondering if that kind of strategy of creating a consumer-friendly healthcare facility is one that you could formally be targeting other U.S. markets to create a similar kind of concentrated healthcare facilities.

Definitely, Smedes. We think that it's really important that healthcare and the concept of wellness is hard to be really come to mainstream, and that's what we are seeing here in Beverly Hills. We clearly think there are other markets for that. The concept of wellness is finally rising to a priority, not only for major health systems but also for the healthcare industry at large. If you think about the only institutionalized wellness model that we now exist in the senior housing industry, when I say wellness, I mean nutrition and hydration and physical movement and social engagement; usually elements that we deliver to the 85 plus cohort, but other populations need that wellness model as well. We think there is an opportunity in partnership with health systems and major health insurers to start taking wellness and bring it to mainstream and into the consumer. So, we are very excited about that.

Okay, thanks. And I just want to ask one more on your shop via comparisons; I know there are some fitness here, but I should be starting if you could provide a little more color around the adjustments to last year's number, let's say healthcare to bring 60% growth for the U.S. portfolio. Could you just walk through that a little bit more?

Sure Smedes, this is Scott. It sounds like you're just referencing the normalizing adjustments. For everyone's benefit, we have a strict policy that we review with the audit committee every quarter, and these are just really unusual items. A lot of the things that happened in 2016 were benefits that we didn't take like we received some insurance reimbursement proceeds of almost $8 million that came out of last year's number. There are some minor adjustments like worker's compensation and payroll approvals that we didn't take the benefit of. They're all listed in the footnotes on page 24, and if you wanted to spend more time, we would be happy to do it; that is pretty straightforward. But we're not reporting this quarter; there were more things reported in our supplement in Q2 2016.

Okay. All right, thank you.

Sure. Thanks, Smedes.

Thank you. Good morning. So, the next data suggest that the under-construction pipeline continues to win, and HCN's portfolio looks relatively good on this basis. It seems to show up a little bit in your sequential performance year-over-year at least. So, do you believe that show fundamentals have bottomed here and who are we setting up for 2018?

Jordan, it's too early to comment on 2018. But we definitely believe that the supply fundamentals for the year have definitely bottomed last quarter. Overall, I mean, if you think about the numbers, as we said, our starts peaked in Q3, Q4 of 2016 and they are coming down; it usually takes about 18 to 24 months to impact. I still think we have a few quarters to go through a tough operating environment. We're very pleased with the performance we are generating even in that environment. However, I would not say from the supply impact has bottomed just yet; we hope to see it in the next 12 months. It's very hard to predict, but definitely in our time horizon, we are very excited that it could be near-term.

Okay. Regarding the acquisition of the on-campus medical office building in Austin, which is an Ascension Health asset, it appears to have a solid yield. I'm curious if that yield represents the stabilized number and if there are significant one-off opportunities for outpatient medical purchases.

Yes, that's actually there; it's a multi-tenant building, but there is a master lease to support master lease from the health system in place that is bridging a very small difference between what the actual occupancy or the real occupancy of the building is and what we would consider stabilized. So, we have a support mechanism in place, but it will probably soon be of no need because have the same occupied with the final users. So, that's sort of, but the property that you're asking about in Texas, the Ascension property. You're right, we are so; Ascension is a system with which we have large relationships. We have actually many of those, and to the extent that we can be helpful to them, even on a one-off basis given the existing relationship, the nature of the existing contract, etc. It just makes it efficient for us to, from time to time, to a single property, a single development or acquisition; whereas sometimes we might look to try to move the needle faster. But this is more efficient; that you said it's a good yield. There is no reason why we wouldn't be doing a follow-on business here, and so we really enjoy that that's part of the shadow pipeline I was referring to earlier.

Okay, so that seller provided the master lease?

No, it's actually the health system that’s it, and like I said, it's a really small amount of space; I'm talking about maybe 5,000 square feet or something like that. I think largely that space is now occupied. I don't have the number in front of me, but if you would like more details about that we can speak separately.

Okay. Thank you for the color.

Hi, good morning, everyone. Shankh, maybe just a question for you back to the optimization of the shop; seems the revenue growth was at 2.3% in the quarter. How close do you think you are to opting more at this point, or do you think we could see occupancy dip maybe even more below where we're used to seeing most real estate prices and power?

Yes, so I think, thanks for your question, Vin. If you think about it, we have to say this is not something we do sitting in front of a computer and deciding more on our optimized revenue occupancy or rate should be. You have to see what the market gives you. You have to see what the demand is, and you are doing this on a daily basis. Our operators are very sophisticated; they understand the market; they are doing it on a daily basis. This is the way asset management in sense of business works. So, you have to see that. I can't tell you where things are going sitting today. I'll tell you how things have played out. Sequentially, we should expect some occupancy improvement and, as I said, year-over-year, the occupancy is down. Can we see that it will be down more? We absolutely can see. We are trying to maximize the revenue, not occupancy and, sequentially, we would probably see improvement from here from an occupancy perspective. It’s too early to talk about 2018.

Okay. And then maybe a question on the pipeline, Mercedes. It sounds like there is a pretty healthy pipeline there, but investment volumes, as you said, are below by historical standards for yourselves. What do you think is the delta? The pipeline is strong; is it just seller expectations are too high at this point?

I hope that not in the pipeline that I'm talking about. This is off-market pipeline we think is going to provide adequate returns. I would almost, as we sit at our table and talk among ourselves, we sometimes think that as we continue to remain disciplined as I described before, we are likely to do much better even with the lower investment volume than others will, who might be putting more dollars to work with a lot less stock, if you will. We actually feel like this proprietary pipeline that we are describing is going to not only show an opportunity for us to put money to work but for us to put money to work really above average.

Okay. Thank you.

Great. Sounds like I just made it this time. For Shankh, could you go real quick? I think last quarter you talked about you had three term sheets out for the Genesis portfolio, or at least portions of the Genesis portfolio. Can you give us an update on that?

Yes, we are still negotiating a lot of this term sheet. We see very significant demand, as I said, from overseas as well as domestic sources. It's too early to comment; unfortunately, real estate transactions take longer than a 90-day period to get done, but we have a lot of interest from a lot of investors, including those three.

Okay, great. And then just last question on the remaining portfolio; is there much of a difference between what you have left versus what you sold in the prior quarters?

Yes, absolutely. If you think about our crown jewel in our Genesis portfolio, that's our power back asset. We have retained most of those assets in the remaining portfolio.

Thanks. So, we're going to wrap up here, and please reach out to us with any questions you have.