Welltower Inc (WELL) — Q3 2017 Earnings Call Transcript

Thank you, Dorothy. Good morning, everyone, and thank you for joining us today to discuss Welltower’s third 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 John Goodey, 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 assurance those 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 third quarter 2017 results. First, we reported 4.1% year-over-year same-store growth in our senior housing operating portfolio, supported by greater than 3.5% growth across all three of our global geographies; second, driven by senior housing operating performance, we reported total portfolio same-store growth of 3.4% in the quarter, allowing us to raise full year total portfolio same-store guidance for the second time this year to 2.5% to 3%; third, as a result of the continued strong property performance, we are increasing normalized FFO guidance to a range of $4.19 to $4.25 per share from our prior guidance range of $4.15 to $4.25 per share; and fourth, we finished the quarter at 5.19x net debt to EBITDA, representing a half-turn reduction in year-over-year leverage. And with that, I will turn the call over to Tom for further remarks on our quarter.

Thanks, Tim. As Tim just highlighted, we are pleased to report a strong quarter characterized by industry-leading results from Welltower’s premier seniors housing portfolio, which is concentrated in major metro markets. The REIT sector appreciates the resilience of A-quality real estate in most industry categories, and our performance supports the fact that healthcare real estate is no different. While the overall environment remains challenging, our same-store seniors housing operating portfolio registered 4.1% growth, with the U.S. posting 3.7%. Keep in mind that we have 423 properties in our same-store operating pool, which is by far the largest same-store operating portfolio in the industry. So our numbers are statistically significant, consistent from quarter to quarter, and financially reliable. The unique hands-on operations and data and analytics-focused approach we employ in the senior housing space is validated by our continued outperformance, and we continue to attract top-quality operators to the Welltower family. Together, Welltower and our premier operating partners deliver excellent results. I’m proud to announce that Sagora Senior Living, a resident-first centered operator based in Fort Worth, joins our bench of RIDEA operators. Donny Edwards, Bryan McCaleb, and Robert Bullock have built an outstanding business with some of the highest quality next-generation assets I’ve seen in this industry. For Sagora, we used the security of a triple net lease to incubate this exceptional team and their business plan. Now as Sagora has achieved critical mass, we employ the RIDEA structure to share the future upside in the value of Sagora and the real estate. This new joint venture better aligns Welltower and Sagora to grow and enhance investment returns. We also welcomed Encore, a U.K.-based operator of assisted living and independent living, this quarter. Many of you know, Welltower dominates the high-end private pay senior housing business in the U.K., and Encore further solidifies our position there. Welltower is quite bullish about the future of healthcare real estate, so in the current environment, we are taking every opportunity to enhance and derisk our business platform so that we can take full advantage of the significant strategic opportunities to deploy capital we see in the future. We have continued to strengthen our balance sheet, reducing leverage to 5.19x net debt to adjusted EBITDA this quarter. We continue to sell assets in non-core markets and assets where CapEx investment does not offer an appropriate risk-adjusted return. Further, we have continued to look for ways to limit our exposure to assets subject to government reimbursement. And while we work with our operating partners to better manage expense growth, we also continue to tighten our own belt. This quarter, you saw us donate our headquarters building in Toledo to the University of Toledo, which will allow us to maintain our corporate headquarters on this beautiful campus, while lowering our annual operating expenses by several million dollars per year going forward. Along with other efforts to improve the efficiency and effectiveness of our business model, we are tracking overall G&A to decline from $155 million to below $130 million for the year. Keep in mind, we are undertaking these initiatives from a position of strength, all with an eye toward driving growth and shareholder value in the future. I’ll now hand the mic over to my colleague and friend, Mercedes Kerr.

Well, thank you, Tom. I would like to start today by describing the organization’s resolve, which we witnessed from our operating partners and Welltower’s own property management team last quarter. Hurricanes, floods, and forest fires put many people at risk, and it put about 100 Welltower outpatient medical properties and senior housing communities in the path of these natural disasters. We saw first-hand what great team preparedness and good property maintenance can do to minimize losses and protect our residents, tenants, and buildings. Our property management team ran around the clock surveillance during the worst of the storm, and without hesitation, our seniors housing operators took in dozens of residents who had to be evacuated from other area communities. There was an impact to our quarter earnings resulting from these storms. However, we viewed this as a cost of doing business, and the numbers are included in our financial statements as an ordinary expense. We are grateful to Welltower’s and our operators’ staff for keeping our tenants and residents safe and our properties in good order. Turning to Welltower’s investment activities in the third quarter. We continue to expand our existing partnerships and also added a new one, which I will describe in a moment. 95% of the $381 million of new investments that we reported involved existing relationships. We acquired $304 million at a blended yield of 6.5% and funded $70 million of construction, with an expected stabilized yield of 7.9%. We also funded $7 million in loans with a combined yield of 7.8%. Dispositions of $84 million included $51 million of loan payoffs at an average yield of 8.3% and $33 million of property sales, with a blended yield of 8%. Welltower’s relationships continually produce desirable off-market opportunities with above-average returns and a reduced risk. It makes our repeat business model exceptionally valuable. As we look to 2018, and we study the specific transactions available with our partners, we’re optimistic about the new business opportunities that we will source for our shareholders. In addition, some of our investments in 2018 will also bring in new relationships. It is something that we do selectively, but consistently through the cycle. A good example of this is Encore Care Homes in the UK, which we added to our family of operators in the third quarter of 2017. Our first investment with this quality operator marks the beginning of a long and fruitful relationship, which we expect to expand significantly over the coming years. We are pleased to have joined forces with this innovative team and are excited to grow our platform together. Lastly, on the asset management front, we continue to drive efficiency wherever possible by supporting our operating partners so that they can perform even better. We recently hosted 12 operating companies for one of our Welltower collaborative events, where we shared proprietary lead generation tools and presented new technology to help reduce employee turnover. This work, combined with our operator strength and willingness to participate, is the great differentiator which drives Welltower’s superior performance. I will now turn the call over to Shankh Mitra, who will provide more color on our portfolio results.

Thank you, Mercedes, and good morning, everyone. I will now review our quarterly operating results for different segments of the business and provide you with an update on our continuing portfolio repositioning efforts. We’re very pleased with our results and are increasing our same-store NOI guidance for the overall portfolio to 2.5% to 3% on the back of significant outperformance on our SHO portfolio, which grew 4.1% year-over-year. I will remind you that we do not update our outlook for the segment level NOI growth throughout the year, but we are tracking towards the top end of our original 1.5% to 3% guidance for the SHO portfolio. Same-store NOI increased 3.4% year-over-year for the entire portfolio. The triple net portfolio continued its reliable performance as our senior housing triple net segment grew 3%. The payments stream remained secure despite a 2 basis point optical decline in coverage. This decline was primarily driven by the removal of the Sagora portfolio, part of which was converted to a RIDEA joint venture as Sagora had higher coverage than the overall triple net portfolio. While industry debate is often focused on RIDEA versus triple net, we have combined the best of both worlds in structuring this relationship. Newer assets in the best markets are now structured as RIDEA joint ventures, while more middle-market assets where we can earn reliable and consistent returns are part of a triple net portfolio. Alignment of interests and downside protections were two of the most important pillars of restructuring. We’re extremely confident in Donny and Bryan’s ability to drive significant value here. The outpatient medical portfolio reported 2.4% NOI growth in Q3. Growth rebounded from Q2, as we expected, due to strong leasing and high tenant retention. Our steady performance and continued growth demonstrates why institutional investors are flowing into this asset class. Our post-acute portfolio, which constitutes 13% of our NOI and approximately 7% of our value, grew same-store NOI by 3.1% for the quarter. Our payments stream remained secure at 1.55 times on EBITDARM and 1.24 times on EBITDAR basis. I would like to remind everyone that management fees are subordinate to rent as defined in our master leases. This decline in coverage was driven by our skilled nursing portfolio as well as our small LTAC portfolio. Specifically focusing on Genesis, it is no secret that skill mix and occupancy have been materially impacted by the evolution of the reimbursement model over the last few years. However, we are really encouraged by the sequential stabilization of EBITDAR in a majority of our Genesis portfolio. We are confident that Genesis will be a winner in the new value-driven landscape because of its superior clinical abilities. We and other Genesis-graded parties understand that the current capital structure is suboptimal. As you know, we’re going through a disposition program that will provide a substantial deleveraging event for Genesis. We have selected the counterparty, we have selected the counterparty, and largely negotiated the economics and structure and are currently working towards documentation. Given the current status of this transaction, we cannot further comment on this topic other than to say that upon successful completion of these deals, Genesis will receive approximately $25 million of rent credit and reduced escalators, as you have seen from our last two Genesis transactions. This meaningful deleveraging of Genesis will put the company in a sustainable capital structure and accelerate market share gain, which will help our joint venture partners and our retained interest while crystallizing value for our shareholders today. As a reminder, we own real estate assets, loans, and some equity interest in Genesis. While we cannot guarantee any outcome, we’re confident in our ability to execute and hopeful that you as our shareholders will keep the same faith in us as you did last year to maximize the value of our total capital deployed with Genesis. We are encouraged and grateful for your support in our path of maximizing value for our existing shareholders rather than the short-term temptation of solving fund exposure equation only to attract new ones. Our senior housing operating portfolio is the highlight of the quarter, with meaningful outperformance relative to our budget. Occupancy trends were slightly lower than we expected, about 20 basis points, weaker in Canada and U.K., but better in the U.S. This favorable occupancy trend was significantly offset by our pricing power, 30 basis points above budget, which resulted in strong rate growth, up 3.9% year-over-year, and significantly better expense trends, up only 0.8% year-over-year. Both Canada and U.K. outperformed expectations in terms of rate growth. As we mentioned before, our premier operating partners are consistently optimizing the rate and occupancy equation to maximize revenue. We’re very proud that they have achieved this growth while keeping expenses in check. As our operators strike the right balance between excellent care delivery and efficient staffing models, our labor cost continues to moderate from the highs, up 3.6% this quarter versus 4.1% last quarter relative to a peak of 7.4% in Q1 of ‘16. Our group repurchasing and other cost consolidation initiatives are being realized through expense savings in food, professional services, insurance, utilities, and incentive management fees. We believe our data and analytics-driven asset management approach will continue to help us produce superior results in the long term. Southern California, Northern California, Toronto, London, Vancouver, and Seattle were significant drivers of growth this quarter. The greater New York MSA has bounced back and produced better-than-portfolio results for the first time in a handful of quarters. New England continues to be challenging, though it is improving sequentially for the second quarter in a row. With respect to different product types, we have observed significant outperformance of both revenue and NOI growth in assisted living versus independent living this quarter. We continue to be encouraged by the greater stickiness of residents in assisted living and memory care assets. So overall, we’re very pleased with the operating performance of our portfolio, innovative structuring with Sagora, and progress on our disposition efforts in the post-acute segment of the business. With that, I’ll pass it over to John Goodey, our CFO.

Thank you, Shankh, and good morning, everyone. It’s my pleasure to provide you with the financial highlights of our third quarter, and I’ll take you through our guidance for the remainder of the year. Our strong Q3 2017 financial performance once again shows the superior quality of our real estate and operator relationships as well as the strength of the Welltower platform to allocate capital and deliver results. We continue to produce resilient same-store growth, maintain a strong balance sheet and liquidity position and improve our own corporate operational efficiency. The highlight of our quarter was the performance of our senior housing operating portfolio, which saw same-store NOI growth of 4.1%, driven by REVPOR growth of 3.9%, aligned with good operational expense control. Growth was delivered across the three countries of our operations, with the U.S. recording same-store operating NOI growth of 3.7% against a challenged overall market backdrop. This growth, combined with good results from our senior housing triple net and outpatient medical businesses augmented with in-quarter growth investments of $381 million, have enabled us to report a solid normalized FFO result of $1.08 per share. In addition to this quarter’s acquisitions, we completed three seniors housing developments at $48 million of total costs, bringing year-to-date deliveries to $506 million. We expect an additional $76 million in conversions through the remainder of the year at a stabilized yield of approximately 9.3%. Although Q3 was a slower period for dispositions with only $84 million realized, we continue to see strong investor interest in our sectors, and we will continue to derisk our portfolio through targeted dispositions. In alignment with this, today we announced an increase in our disposition guidance for 2017 to $2.4 billion, an increase of $400 million. This represents an expectation of a further $1 billion of dispositions before year-end or soon thereafter. We anticipate a blended disposition yield of 7.4% for the year overall. Welltower continues to focus on our own corporate operational efficiency by optimizing systems, processes, people, and physical infrastructure. Our G&A for the quarter was $29.9 million, a 19% reduction over Q3 2016. As such, we have further reduced our full-year G&A expectation to be below $130 million, this being below the bottom end of our already lowered range of $130 million to $132 million. Clearly, we have systemically and durably reduced the cost base of Welltower’s corporate operations, and we will continue to implement further initiatives to improve our efficiency. Our balance sheet remains in great shape, and we will continue to maintain balance sheet strength and financial flexibility. We ended the quarter with cash of $236 million and $2.6 billion of credit line availability. Our leverage metrics remain at historically low levels, with net debt to adjusted EBITDA of 5.19 times and net debt to undepreciated book capitalization ratio of 35.5%, while our fixed charge coverage ratio remains strong at 3.65 times. All metrics have improved significantly over 1 year ago. Our strong liquidity affords us significant flexibility to pursue value-enhancing acquisitions, development opportunities in core metro markets such as Manhattan, London, and Los Angeles, and to reinvest in our portfolio to drive growth. On November 20, 2017, Welltower will pay its 186th consecutive cash dividend of $0.87. This represents a current dividend yield of approximately 5%. I will conclude my remarks with our outlook for the rest of the year. Given our strong senior housing’s operation performance year-to-date, we are increasing our full-year same-store NOI guidance again, to 2.5% to 3% from 2.25% to 3% prior. We are also increasing our 2017 full-year guidance for normalized FFO to $4.19 to $4.25 per share from $4.15 to $4.25 prior. This is based on the strength of our same-store NOI growth, our G&A focus, and reprofiling of divestiture timings. As usual, we do not include unannounced acquisitions in our forecast but we do include expected dispositions. On that positive note of upward revision, I will hand it back to Tom for his closing comments and look forward to seeing many more of you in person before the close of the calendar year and continuing our open dialogue. Thanks, Tom.

Thank you, John. Before we take your questions, I’m proud to tell you that the Welltower Foundation and our community relations fund donated approximately $100,000 to a number of our operators to help support their employees whose lives were profoundly impacted by the hurricanes in Texas and Florida and the fires in California. We hope that life there gets back to normal soon as well as in Puerto Rico. Now Dorothy, please open up the line for questions.

Just picking up the Sagora conversion from triple net to RIDEA. You converted 11 properties. What was the coverage on those properties? And then, was this always in the plan or is this opportunistic? And then should we expect them to convert more of these remaining leases to RIDEA over time?

Yes, it's Mercedes. I want to discuss Sagora a bit more. We began our relationship in 2010, and as Tom mentioned, this triple net structure served as somewhat of an incubator process. We identified a group of 11 properties that we converted to RIDEA, which stood out as they showed significant growth compared to what is otherwise a very solid and consistent portfolio. These properties fit well into the RIDEA model. As you probably know, we are very selective about what we choose to own in this joint venture structure. Our goal is to manage volatility by selecting properties that we believe have the potential for exceptional growth and performance. The remainder of the portfolio seemed well-suited for the triple net lease structure, as they are highly profitable for Sagora but lack the same growth potential. This was the decision we made with them. You’ve seen what we consider our version 2.0 of RIDEA joint venture structuring tools, particularly regarding alignment and management contracts. Sagora played a key role in helping us design some of these new tools that we believe will be very beneficial moving forward.

Mercedes, the outsized growth expectation, is that because these were in process of stabilization? Or they’re outperforming in some other way?

No, these properties, Chad, are in the best of markets in the footprint, and so we expect this portfolio that we have in RIDEA to outperform because they’re in the best submarkets as well as the best demographics.

Yes, Chad. It’s Tom. Let me comment on your broader question. We have built our business model around owning RIDEA assets. For Welltower, we view this as a lower risk structure because we have developed the necessary skills, tools, and technology to maximize real estate value within a RIDEA framework. Therefore, we will continue seeking operators that we might incubate in a triple net lease format before transitioning them to a RIDEA structure. You will likely see us move away from operators where we don’t foresee a future opportunity to transition either the operator or the real estate into a RIDEA framework. Sagora is a great example, and I’m looking at my friend, Joe Weisenburger, who has been instrumental in nurturing this relationship and helping the business grow to facilitate this transition. This is a clear representation of what our company accomplishes, and you can expect to see more of this in the future.

And then, just thinking about your SHO fundamentals. They’ve pretty much outperformed the industry. Do you think fundamentals have bottomed here coming into the fourth quarter of ‘17? Or should we expect more pressures in 2018?

It’s too early to comment about 2018. We don't have a clear picture of what the flu seasons will look like. We're currently receiving operator budgets and we have an extensive process that we follow with each of our operators. Therefore, it's premature to discuss 2018. However, I can say that we are optimistic about our ability to continue outperforming the industry and our peers due to our current position, as well as the asset management and systems and processes mentioned by Tom. Considering the supply impact, 2017 was a peak year for deliveries, which will have implications for the next 12 months. While this will affect operations, we firmly believe that our properties will perform better than both the industry and our competitors.

So if we can’t take about 2018 yet, fourth quarter 2017, what occupancy and rate assumptions are baked into your guidance?

We do not give quarterly guidance on rates and occupancies, but we are pretty optimistic about the rest of the year as far as our SHO portfolio is concerned.

So one more for me. On the disposition guidance, you raised it from $2 billion to $2.4 billion. What asset classes are you expecting in that increase?

That is in the senior housing, triple net portfolio.

I guess, looking at the Sagora acquisition cap rate of 7.3%. Can you just use that as a starting off point to talk about where you see cap rates for SHO assets at this point? And kind of how that fits into the mix?

So this is Justin Skiver, SVP of Underwriting. Just to give a little color on cap rates. And obviously, there are many factors involved, but generally speaking, we see Class A seniors housing trading at a 6% cap, plus or minus 50 basis points. And Class B seniors housing is trading at a slight discount to Class A, probably by about 25 basis points. But we view that delta as being too small, and there should be a larger spread between A and B class properties.

And I want to add to that. That’s the beauty of this Sagora transaction, is the fact that we were able to have this relationship and build the trust and build the structure together that I described before, allowing us to take what we consider to be terrific assets with a lot of upside potential at a great price compared to market.

Got it. And how new are they? And how occupied are they? The ones that were acquired for the 7.3?

Yes, the three are about three years old, on average, with occupancy in the low 60s. And I think, an important point to make here is that, we are acquiring these at below replacement cost. So we see a tremendous value upside in making this acquisition with Sagora.

And Justin is specifically talking about the three new assets that we bought in Texas.

Yes, okay. And then just last question for me. Just any sort of update on the Manhattan development?

Yes. I can tell you that we continue to make progress. I think our assumptions continue to be validated, both on the cost side as well as with what we see happening in terms of a lack of supply and demand. So we feel very good about the progress. The construction, I think I already reported this last quarter, is underway with a demolition and so on underway. So just things continue to progress, and like I said, our assumptions are validated.

I think, Shankh, you referenced the disposition program that went through Genesis assets. Can you maybe comment on the magnitude of the sale as far as what percentage of your Genesis exposure you’re looking to sell?

Yes, John, as I mentioned, this is a live situation. It's difficult to discuss the specifics or our retained interest at this moment. I can say that we have a clear idea of our direction, including the economics and structure. However, due to the current circumstances, I prefer not to comment further. We look forward to providing more details about this situation soon.

But this is separate from the $1 billion of dispositions for this year?

Yes.

Right, okay. And then you also referenced the $25 million rent credit. Is that an annual figure? And when does that start taking place?

That will take place at the close of the deal. So when the deals close, that’s when we get the rent credit.

Is it a one-time or an annual figure?

It’s a one-time.

On the expense side, you’ve had two quarters of strong expense controls. Can you provide more details on the various factors involved? Shankh, you mentioned the compensation control, but could you elaborate on that? How sustainable is this control? Is there more improvement expected, or is this a good ongoing rate?

I would not consider 0.8% to be a strong run rate. I wanted to point that out. We've experienced significant labor cost growth over the past few quarters. As discussed, all the deliveries are aligning, and we are also facing the impact of the law of large numbers. In late 2015 and 2016, labor costs increased, but at that time, the year-over-year comparison was quite low, resulting in extraordinary year-over-year growth. We are now approaching more stable figures, where labor costs will remain high but not at the previous levels. Regarding utilities, we are implementing several focused retrofit programs to reduce costs. We have a Group Purchasing Organization and are putting substantial effort into managing our property taxes with help from our asset management team. There has been a noticeable decrease in our other expense categories this quarter. As I mentioned last quarter, we are concentrating on reducing professional management fees, including those for lawyers, accountants, and consultants. We've also seen a significant drop in workers' compensation costs, reflecting overall improvements. We are evaluating everything and working to refine the business, much like what you're hearing about our corporate strategy. We are assessing where the business stands and what a sustainable cost model looks like moving forward. While I cannot promise that all costs will continue to decrease, we believe many of these savings will not be one-time benefits.

Okay. That’s helpful. And just on the dispositions, I wanted to clarify, I think to an earlier question, that the $1 billion that you are expected to close by year-end, that includes any Genesis sales as well? Or is Genesis over and above that?

Genesis is over and above that.

Okay. And then just maybe last one for me. Any update on some of the legal proceedings that you outlined last quarter? Any update on sort of where we are today? And anything on economics?

Sure. Vik, as you know, it was disclosed that Welltower filed a lawsuit against Scott Brinker, alleging that he had breached his separation agreement with us in connection with the announcement that Mr. Brinker would start at HCP on January 4, 2018, which was the end of his non-compete period. So we’re pleased to report that we’ve recently reached the settlement of this lawsuit. Some of the terms are confidential, but I can say that under the terms of the settlement, Mr. Brinker is not permitted to begin work as the Chief Investment Officer of HCP before the date that we issue our Form 10-K for our fiscal year ending in December 31, 2017, which will be on or around March 1 of 2018.

I don’t want to say anything further about this matter beyond what Matt said, but let me add that the first principle of how we approach everything at Welltower, including litigation, is that we do everything we can to protect our shareholders. That’s what we will always do as a company, and you should not expect anything less than that.

Shankh, did you provide the Genesis’ rent coverage or EBITDAR rent coverage today?

No, we didn’t. You will find that it’s disclosed in our supplemental.

I was looking for it but couldn't find it. Can you provide an idea of how that will change after sales, or is that too much information right now?

No, it’s not. I think I said this before as well that the market is about 1.3 times coverage going forward. So it will be reset to 1.3 times coverage going forward.

Well, just from my perspective, and you’ve always heard us say this, Brookdale is not one of our operating partners. We’ve never looked at Brookdale as an operating partner. That has always been more of a financial transaction. Our Brookdale exposure largely arose from the fact that Brookdale acquired some of our smaller operators. Look, we are cheering for Brookdale. We hope they can turn their business around because the fact is, their issues affect the view of the entire industry. Never say never. But they are not one of the operators I was referring to beforehand. So ones that we will come in and grow with, grow out of that triple net lease structure into a RIDEA structure longer term. They’re very different situation for us, they always have been. So again, never say never. But likely, we’re not looking for growth opportunities there.

Let me discuss Brookdale for a moment. They've released their numbers, and we're always concerned when any of our operators face challenges. It's important for the industry that they succeed, and we are hopeful for their improvement. However, we are not worried about our own investments with them. Their triple net EBITDAR coverage exceeds the Welltower average at 1.15 times. We have some protective measures in our portfolio and maintain ongoing discussions with Brookdale about their performance and potential strategic options. Our relationship with them is collaborative, but as Tom mentioned, we prioritize protecting our shareholders' interests. We're constantly exploring our alternatives and are reassured knowing that two thirds of our portfolio with Brookdale is located in California, Washington, or a CON state, where we have strong operators ready to step in to manage the buildings if the need arises.

Through the press release today, several items related to UK investing, is that just coincidental timing? Or do you, as a firm, looking to expand there?

It’s John. I’ll take that one in my prior hat on, if I may. And I think the answer is, yes, we continue to expand in the UK. We have a number of ongoing construction projects with...

John, let me just interrupt. Expand disproportionately more than where you’re at today?

I believe it's quite challenging due to our portfolio being only 8% in that area. We need to leverage our efforts to overcome this. However, we have seen strong performance in the UK, thanks to our excellent operating partners there. Growing our investment as a proportion is difficult compared to the current growth in the U.S. Nevertheless, we are indeed looking to invest more in the UK. This is evident in our conversion of construction projects into operational assets. We are also bringing in Encore as a new development partner, with whom we aim to achieve significant growth in the future, alongside supporting our existing partners like Avery, Sunrise, and Signature.

And then last one for me, the $95 million of non-capitalizable transaction costs, what is that?

I’ll address that as well. Since we already owned the real estate, we didn’t purchase any new buildings from them. According to U.S. GAAP, specifically under ASC 805-10-51-21, we are unable to capitalize those additional proceeds from the transaction onto our balance sheet. I want to clarify that if we had acquired those assets in a straightforward transaction, that amount would have appeared on our balance sheet, and we would have had a capitalized rate on those RIDEA assets. That would have been quite appealing to Welltower, and it would have been a non-issue. The limitation arises solely from GAAP accounting.

Before the next question, I just want to clarify. This is Tim. I was intending to clarify something from a question earlier. In our current disposition guidance, we have a $1 billion in dispositions for the fourth quarter. We’ve kept $400 million in there, as most of you know, from a Genesis purchase option, that was an option going into the year. And we kept it in there to communicate to the market the intention to sell Genesis after that option expired. That $400 million is still in our guidance from a nominal dollar amount, and Shankh, I think, was intending just to say that the scope of what he described in his opening comments goes beyond that. So there are Genesis dispositions in our guidance for right now.

I just wanted to go ahead, and given Tom’s earlier comments about the business platform being built around senior housing operating, and then with Sagora, the increase in NOI from seniors housing operating, should I read anything into that in terms of how you think that the seniors housing industry will recover from the down we are in now? Without specifics, obviously, on 2018, that you don’t want to give out, but how should I be thinking about where you think fundamentals will be in a couple of years? And how much RIDEA you want in your portfolio going forward?

Well, I’ll start off the answer to that by saying, we’re very optimistic about the senior housing industry and we’ve been taking this opportunity to lighten up in markets and around operators that we do not see strategic to our business model in the future, and we invest behind operators and markets that are strategic. We have a core metro market strategy in the U.S., Canada, and the U.K. And it is no secret that it is our intention to dominate those core markets. We believe the demographics, starting in about two years, are all in our favor, and they’re not going to reverse.

Dan, I want to add that if you analyze the current numbers along with the population growth trends, especially among individuals aged 75 and older, you will notice that over the last seven years, this segment has grown at about 1.5%. In contrast, the demand for assisted living and memory care has exceeded 5%. This indicates that the uptake of these services is growing at a much faster rate than the overall population growth. Coupled with what Tom mentioned about the broader population growth, we are very optimistic about the future of the industry.

Okay. And I should expect RIDEA to become a larger part of the portfolio generally from your 42% or so now it’s...

Yes.

Okay. Is there a top limit of that?

Hard to say.

Not to corner you.

We are opportunity driven, not necessarily equation-driven that we’re trying to sell for.

I mean, look, if there was some phenomenal triple net lease opportunity that had really strong coverage in the right markets or with the right operator, we wouldn’t turn that down. So as you keep hearing us say, we’re opportunistic and keeping all our options open. But clearly, Dan, for us, we have built a model around maximizing the returns that wanted to derive from this operating lease or RIDEA structure. That is, if you don’t have the infrastructure and the systems and the right people, that means it’s riskier than a triple net lease. But we’ve made those investments, and we’ve seen, as you’ve seen in our results quarter-over-quarter, particularly this quarter, we’re able to get a return on that investment because we have the system. But it’s not magic. We don’t make it up. It doesn’t come out of the air. It’s real. And it’s real because we roll up our sleeves and we work hard alongside our operators, and that’s what drives our results. And if you’re not willing to do that, you should own this top category of real estate in a triple net restructure.

No. I can appreciate that. One more quick question regarding Brookdale. Could you talk about the trend in their lease coverages? And do they have any purchase options that can be exercised in, say, the next couple of years, two years?

In terms of trends, we’ve seen some stabilization sequentially. Their corporate performance is likely indicative of broader issues in their portfolio, particularly pressures on occupancy. However, within our portfolio, they have successfully managed costs, which has been advantageous. Overall, they appear to be in a stable position. Regarding purchase options, there are some available in the future, with possibly one or two remaining from older lease structures at the end of certain leases.

With regard to Sagora, did you disclose how much compensation you provided to the tenants who moved those 11 assets into the operating structure?

No. We haven’t disclosed that.

Can you discuss it?

I think it’s part of the contractual negotiations. I believe that’s not disclosable. However, if you take a step back and look at the overall income from the revised triple net lease and the additional net operating income from the excess coverage of the triple net lease, the rate there is probably 50 to 100 basis points better than what is currently available in the market if you were to buy this quality of assets with this quality of operator. That’s the sort of guidance I can provide. Overall, it was a good transaction.

And the other thing that I could add is we reinvested in the structure on both the lease side and the RIDEA side. They are staying in as joint venture partners with us. So they have basically reinvested a book of whatever it is that they’ve received in proceeds.

And that was Joe Weisenburger who manages the Sagora relationship.

I think Michael, it’s John. One thing I want to highlight is that we have consistently segmented the market between assets that will grow with the market and those that will grow faster than the market. If an asset grows faster than the market, we generally prefer to have it structured as a RIDEA partnership. For assets that will grow with the market, a triple net lease is more suitable. You can see this approach reflected in how we have structured Sagora. We needed to work with one partner to remain aligned with our portfolio profile. They have a different asset profile, and we categorized them into triple net lease and RIDEA, aligning with our broader market perspective.

My question is really about the SHO portfolio. Over the past 12 to 18 months, you've experienced significant rent growth, not only in your portfolio but also among some of your peers. I'm trying to understand how, when looking at your residents, many of whom are retired and on fixed income, you still manage to increase rents without significantly affecting occupancy.

So Tayo, I would describe it a bit differently. We are observing the impact on occupancy, which has decreased by 170 basis points. It comes down to balancing rates and occupancy. This is a need-driven business, particularly in our senior housing operating portfolio, where a significant portion involves memory care services. We are focusing on markets where we are recognized as a top provider of care with a strong reputation, and where families are willing to pay for what they view as the best quality care for their loved ones. However, not everyone is willing to pay, which explains the decline in occupancy. We are confident that it's about optimizing both rates and occupancy. Our goal is to maximize revenue, and if we determine that we can gain more traction by increasing occupancy at competitive rates, we will pursue that strategy. Our approach relies heavily on data analytics, as we aim to optimize and increase our overall revenue rather than just focusing on one aspect. We will assess what the market presents to us in the coming year.

And Tayo, this is Justin Skiver. I’d just like to add to that, that you have to remember that the average length of stay in these buildings is 18 to 24 months. So it’s not as though these people are getting increases upon increases for 5 to 10 years. It’s a set amount of time. Then new residents are turning over.

Tayo, let me add to that point I mentioned at the beginning of the call. We have 423 properties in our portfolio. It would be beneficial to compare this with other portfolios to better understand the reported numbers. Our large sample is very consistent, which I believe is crucial for understanding the dynamics of the industry.

Okay. Are you finding when you’re qualifying residents to live in your facilities that their children or other dependents are having to kind of contribute more towards the payments now?

I don’t think that has changed. When you consider that they mainly rely on fixed income, our communities are located in affluent areas. While they do rely on fixed income, they also possess significant wealth in terms of assets. Therefore, we haven’t really observed or heard of many changes.

Tayo, I don’t know if you’ve seen the report that we commissioned not long ago about aging in cities. It corroborates a lot of our strategy, the reason why we focus on these urban centers is that what is attracting, engaging population at double-digit rates into this core centers. That alone, the demand and the desirability, for all the reasons that we found out in our survey, are the reasons why our pricing is more consistent. That’s why people really feel like there’s a value proposition that they’re willing to pay for, and so we don’t have that sort of slippage that maybe you hear others talking about on rate or having to lock rates for life or whatever other people might have to do.

First, I just wanted to clarify, the rent abatement that Genesis will receive at close will be 25 million or 30 million? I’m sorry.

$35 million.

That’s perfect. And then on transaction activity, so you’ve laid out the dispositions here plus, obviously, there are some incremental potential dispositions if they’re to close from Genesis. I’m trying to think about, as we look forward, how we should be thinking about your leverage, which remains very low, and whether or not these dispositions will be offset by incremental investment or if we should just expect leverage to head further south?

Yes, thanks. This is John. I’ll take that one. So you’re right, we have very significantly strengthened our balance sheet, nearly 0.5 turn deleveraged over last year or so. Look, we continually look at our capital structure to refine that, to provide shareholder value and to remain well capitalized to take advantage of, I say in my script, of acquisitions or new developments. And you’re right, I mean we will look to redeploy capital, clearly, to drive our earnings growth as we dispose off of assets and realize that capital. I think we’re very comfortable in the sort of ZIP Code where we are right now, and we’ll navigate around that sort of area going forward. So no significant sort of major changes, but we would say that we’ll look to redeploy the majority of the funds that we do see coming in through the dispositions that we have ongoing.

Is it correct to say that new investments will primarily focus on senior housing and particularly senior housing operating? Or are you identifying more appealing opportunities in other segments?

What we’re seeing are opportunities in both the senior housing space and the outpatient medical space. Right now, we have a fairly robust pipeline of opportunities to evaluate in both sectors.

And what is your appetite for the outpatient medical business in the 5% or mid-5% cap rate range?

We are interested in assets if they are strategic, which means either that they are assets that are associated with health systems that are in markets that are strategic for us or there’s ability for us to bring our very experienced outpatient medical management processes to these assets to create upside. So that’s how we look. We’re not just looking to grow that outpatient medical portfolio by acquiring low cap rate assets where there’s no upside or strategic value for us. That’s why you’ve not seen us participate in a number of the auctions to date.

I wanted to follow up on the comment you made about the medical office. Regarding your strategic markets, are you considering adding medical office spaces in areas where you already have senior housing and post-acute facilities that you can utilize across those sites, similar to what you've suggested with the Johns Hopkins relationship?

Our strategy focuses on major metropolitan markets where we hold senior housing assets, and we are likely to pursue the accumulation of outpatient medical assets in those locations.

Is the eventual migration that was talked about earlier from triple net senior housing to RIDEA, is that going to be more of an opportunistic endeavor that will still take quite a long time? Or is there something a little bit more systemic or something that happens more quickly on that front?

It will be opportunistic and will depend on one asset at a time. I want to clarify that we are not looking to convert our triple net senior housing portfolio into RIDEA. This depends on specific transactions, like the Sagora deal, where we identified a subpool of assets with significant growth potential due to their specific submarket. As John mentioned, if we believe the assets will grow with the market, they will likely remain in the triple net portfolio. If they are expected to achieve market-plus growth, they will probably be included in the RIDEA portfolio. However, there is no push within our company to convert all leases to RIDEA moving forward. It will be approached asset by asset, operator by operator, and market by market.

When it makes sense.

Right, okay. And then last one from me. Are you willing to give any guidance on where your skilled nursing, post-acute, NOI percentage of the portfolio will land after these planned dispositions?

Stay tuned. As I said, I hope that we’ll have a very robust conversation about this topic soon. But as you can appreciate, Michael, it’s hard to comment on live transactions.

Sure, okay. And then, maybe that same comment will apply to this one, but do you plan or expect that there’ll be further SNF dispositions later in ‘18 after this current round is finalized?

We are very focused on asset management and optimizing our portfolios. A portfolio of this size will always experience some sales, but we believe that if we can reach the target level we are aiming for with different asset classes, product types, and operators, we will likely achieve a more stabilized portfolio soon. From that point on, it will be about taking advantage of opportunities as they arise.