Welltower Inc (WELL) — Q1 2018 Earnings Call Transcript

Thank you, Kim. Good morning, everyone. And thank you for joining us today to discuss Welltower's First Quarter 2018 Results. Following the safe harbor, you will hear prepared remarks from Tom DeRosa, CEO; John Goodey, CFO; Shankh Mitra, Chief Investment Officer; and myself. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements in 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 that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in 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, you may access it via the company's website at welltower.com. And with that, I will hand the call over to Tom for further remarks in the quarter.

Thanks, Tim. Good morning. I'm pleased to report to you a solid quarter completely in line with our expectations. The Welltower business platform continued to deliver positive same-store growth through completing over $600 million of acquisitions and developments, generated growth capital through profitable property sales and loan payoffs of approximately $1 billion and further deleveraged our balance sheet to a ratio of 35.3% net debt to undepreciated book capital, the lowest level in our history. We run this company for our shareholders and never lose sight of our goal to deliver high-quality, durable and growing cash flow. Our commitment to delivering results from our core business is self-evident in these results. That said, the current operating and capital markets environments make this hard. You have to make hard decisions about where you invest shareholder capital. These decisions do not always make you popular. Nevertheless, the easy money asset aggregation models of the past are not a strategy for the future. You have to work harder and you have to work smarter. You've heard me discuss our strategy of aligning Welltower's seniors housing and post-acute assets more closely with health systems. We believe this is an imperative if we are to drive down the cost of health care delivery and improve health outcomes, particularly in view of the aging of the population. This is at the core of our strategy. And today, we are excited to tell you about a transformational transaction that demonstrates our leadership position in driving the future of health care real estate. Before I turn the call over to Shankh to discuss our new ProMedica Health System joint venture that we announced in the wee hours of last evening, John Goodey will take you through the highlights of our first quarter. John?

Thank you, Tom. And good morning, everyone. It's my pleasure to provide you with the highlights of our first quarter 2018. As noted by Tom, we saw challenging conditions in our senior housing business in Q1, with new supply continuing to affect the U.S., which was also impacted by a tough influenza season. Canada was also challenged by flu, as was the U.K., which also had to contend with the worst weather seen there in over a decade. Despite these challenges, our high-quality real estate portfolio, superior operator relationships and the strength of the Welltower platform managed to deliver solid growth for the quarter. Our SHO portfolio same-store NOI grew by 0.6% in Q1 with senior housing triple-net being 3.0%, long-term post-acute being 2.4% and our patient medical growing at 2.9%; overall same-store NOI growth was 1.8% for the quarter. As we have seen in previous quarters, our seniors housing operating portfolios' geographic diversity helped to stabilize our overall performance, with the U.S. growing at 1% and Canada at 1.8%, partially offsetting weaker performance in the U.K. Within the SHO portfolio, strong REVPOR growth of 3.5% exceeded our expectations for the quarter but was tempered by higher-than-anticipated occupancy loss of 1.9%. Growth at 4.8% was at the higher end of our expectations, driven mainly by labor. This quarter, same-store growth was augmented with in-quarter acquisitions and joint ventures of $476 million, $59 million in development funding and loan advances of $43 million, alongside $987 million of divestments and loan payoffs. Total gross investments with existing partners accounted for 67% of capital deployed. Overall, we are able to report a normalized first quarter 2018 FFO result of $0.99 per share. I would like to comment on the particularly strong returns achieved on our $895 million of Q1 divestments. Aggregate gain on disposition was $338 million with an average unlevered IRR being 13%. In addition to this quarter's acquisitions, we completed developments totaling $137 million of total investment with an average projected yield of 9.3%, and anticipate completions of total investment volume of $384 million for 2018 with an average projected yield of 8.2%. We continue to focus on our operational corporate efficiency. Our G&A for the quarter was $33.7 million, being slightly elevated due to LTIP accounting charges. We are excited by initiatives our colleagues are working on to further automate numerous functions within the firm to durably reduce our cost base. Our balance sheet remains in great shape. During the quarter we repaid $450 million of senior unsecured notes due in March and $183 million of secured debt. We ended the quarter in a strong liquidity position with cash of $203 million and $2.1 billion of credit line availability. Our leverage metrics are at strong levels with net debt to adjusted EBITDA of 5.4x and a net debt to undepreciated book capitalization ratio of 35.3%, while our fixed charge cover ratio remains strong at 3.5x. After the quarter closed, Welltower placed a new $550 million 10-year senior unsecured note. Despite volatile markets, initial launch of the bonds with a $400 million placement volume and pricing in the neighborhood of T plus 1.70% generated initial orders in excess of $2 billion, facilitating upsizing of the bonds by $150 million and tightening of price to T plus 1.48%. This is the tightest spread the 10-year treasury's ever achieved by Welltower. Simultaneous with the notes offering, we executed a U.S. dollar to Sterling currency swap resulting in an effective rate on the bonds of 3.11%. With a committed bridge financing of $1 billion in place and our available credit line, we are fully financed to complete the acquisition of QCP and to complete our other business and investment plans. We anticipate turning elements of the short-term financing structure before and after the closing of the acquisition, by the bank and debt capital markets, dependent upon the availability of attractive financing. Completion of the QCP purchase, expected QCP dispositions and increased Welltower dispositions will see our expected pro forma net debt to adjusted EBITDA ratio increase slightly to approximately 5.6x. This level is well within our covenants and the construct of our BBB+ ratings. So overall, despite tough senior housing operating conditions, we are maintaining our full year 2018 overall expected adjusted same-store NOI growth guidance range of approximately 1% to 2%. We are also maintaining our full year 2018 expected overall normalized FFO range of $3.95 to $4.05 per diluted share. Due to gains made on dispositions and other normalizing factors, we are increasing our expected net income attributable to common shareholders to $2.55 to $2.65 per share from $2.38 to $2.48 prior. As noted in our earnings release, the purchase of QCP and our increased disposition guidance are not factored into the aforementioned 2018 guidance due to timing uncertainty. We will update guidance once timing and financial impacts are more certain. On May 23, 2018, Welltower will pay its 188th consecutive cash dividend of $0.87. This represents a current dividend yield of approximately 7%. With that, I will hand it over to Shankh to discuss the exciting joint venture with ProMedica and purchase of QCP.

Thanks, John. Shankh will take you through the ProMedica transaction and the positive impact it will have on Welltower. But before I hand the mic over to Shankh, I'm delighted to introduce Randy Oostra, President and CEO of ProMedica Health System, who will give you a brief overview of ProMedica and comment on our new joint venture. Randy?

Good morning. I’m very excited to be with you today. For those who may not know much about ProMedica, we are an integrated delivery system driven by our mission, primarily focused on providing acute and ambulatory care. We also operate an insurance company with a health plan and have both post-acute and academic business lines. Our strong management team has been together for over 20 years, managing our network of 13 hospitals. We employ 17,000 individuals and collaborate with about 2,700 physicians and advanced practice providers, along with over 900 providers in our physician group. Our operations are centered in Ohio, Michigan, and Indiana, but we also have a presence in other states. In addition, our insurance payer serves over 600,000 members under our medical and dental plans. Today, we are announcing our acquisition of HCR ManorCare, the second largest provider of post-acute and long-term care in the nation, which will elevate ProMedica to one of the top 15 largest health systems in the United States. This acquisition not only provides us immediate scale but also doubles our revenue to $7 billion and expands our employment base to approximately 70,000 people, broadening our reach from a Midwest footprint to 30 states. We plan to invest $400 million into HCR ManorCare over the next five years. This acquisition positions us to invest in the next generation of care, which we believe is essential. We aim to deliver this care in a responsive, dignified, and cost-effective manner. Additionally, we partner with three Toledo-based companies, including Welltower, who shares our vision of enhancing outcomes through collaboration. This partnership will enable us to drive efficiencies across the continuum of care. The real estate capital and transaction with Welltower are transformational for us, allowing us to expand our service offerings and provide wellness-focused strategies beyond our traditional acute care scope. This collaboration will help redefine the settings for future healthcare delivery. As you can imagine, we are incredibly excited about this transaction and our partnership with Welltower, which we believe will lead to a long-term profitable relationship for both organizations.

Thanks, Randy. Now over to you, Shankh.

Thank you, Tom. And good morning, everyone. When we last spoke at our fourth quarter call, we talked about the early offshoots of significant shifts in the post-acute sector with the recapitalization of Genesis and the acquisition of Kindred. In these transactions, we saw both unique and sophisticated players such as Humana, Welsh, Carson, TPG and Apollo deploying their capital and expertise in this space. As we said, the post-acute industry needs to be reinvented with the proper capital structure provided by patient and strategic capital and health systems sponsorship that believes in the lower-cost care settings. Today, we are very pleased to announce the continuation of that trend with the first of its kind transformational transaction, which will define the future of this space. For the first time ever, we have a leading health system, ProMedica, and a major real estate investor, Welltower, entering into a partnership which spans the full spectrum of care, from self-acute, to acute care, to post-acute. It is an alignment between ProMedica and Welltower's vision of the future of health care delivery that brought us together. Yesterday, ProMedica announced their acquisition of HCR ManorCare in conjunction with forming a joint venture between ProMedica and Welltower to acquire the real estate assets of Quality Care Properties. As you may know, ProMedica is an A+ rated health system that is headquartered here in Toledo, Ohio with us. ProMedica owns and operates 13 acute care hospitals as well as many outpatient medical facilities, as you just heard from Randy. ProMedica is one of the 2 health systems in the country with 3 5-star hospitals, other than Mayo Clinic. After this transaction, ProMedica will have $7 billion of revenue, making it the 15th largest health system, an elite company of many market names in the industry such as Penn Medicine, Geisinger, and Henry Ford's of the world. As part of this transaction, ProMedica will acquire HCR ManorCare, and simultaneously, Welltower and ProMedica will acquire QCP's ManorCare real estate in an 80-20 joint venture. This real estate spans across 18 states and 160 post-acute communities and 58 assisted-living facilities, with an EBITDAR split of 70% to 30%. ProMedica will enter into a 15-year master lease with the joint venture. This lease will be fully backed by ProMedica's corporate guarantee and will include an annual escalator of 2.75% after a year 1 escalator of 1.375% as ProMedica will undertake significant capital improvement plans of roughly about $200 million in the first 2 years. ProMedica's business plan includes investing $400 million of growth and upgrade capital into the portfolio over the next 5 years. Welltower will also wholly own the non-ManorCare part of the portfolio, representing less than 10% of the transaction value. The transaction provides Welltower with an 8% cash yield with an investment of $2.2 billion and an above-market EBITDAR coverage of 1.8x. We will enjoy double-digit unlevered IRR out of this investment due to a good going-in yield, attractive growth and lack of CapEx in a base-case scenario. We also believe there is significant upside to this base case as occupancy is at its cycle lows. This is demonstrated by the attractive basis that we are investing into this portfolio. And we are doing this in a very accretive structure where we are protected by significant creditworthiness, A+ of our partner. This transaction will also be very accretive to our cash flow to the tune of more than $0.20 per share. We will also enjoy a secure and growing cash flow for years to come. HCR ManorCare and Arden Courts have long been considered premier operators in the industry and now, with a substantial investment and a viable long-term capital structure, we are excited to see a performance of that management team that their management team can drive. We can see this partnership as an avenue for growth between ProMedica and Welltower across multiple property sites and geographies, which will be greatly enhanced by the combined scale and expertise of ProMedica and Welltower teams. As dispassionate capital allocators, we believe you, our shareholders, pay us to produce alpha. Alpha can never be produced by investing capital in consensus ideas. Consensus, by definition, is priced-in for risk and reward. At the same time, we need to protect our downside with an appropriate structure, rights and basis. We strongly believe that this transaction, which diverges from popular belief, delivers on that promise of outsized risk-adjusted returns for our shareholders. We're extremely proud of our team, who pulled off one of the most complex transactions in the history of this industry by navigating the complications of 2 asset classes, a bankruptcy process involving an operator, and 4 diverse parties ranging from publicly traded entities to a not-for-profit health system and a private equity sponsor. Our ability to creatively manage and navigate the challenges is what's allowing us to generate this significant outsized return for our investors. With that, I will pass it over to Tim who will walk you through the financing aspect of the deal. Tim?

Thank you, Shankh. Before walking you through the sources and uses of last night's announced transaction, I wanted to emphasize 2 points that drove our financing strategy and our view of the levered economics of this transaction. First, we raised approximately $1 billion in equity over the 6 quarters from the third quarter of 2016 through year-end 2017 at an average net price more than 40% above where our stock closed yesterday. We took advantage of an excellent environment in the REIT equity capital markets over this period, despite the temptation to lever up to offset dilutive asset sales and tighter life-cycle acquisition spreads. This very purposely put us in a position to take advantage of a large, unique, off-market deal like this without having to raise value-destructive equity or putting our balance sheet at risk. Second, because of our excellent liquidity position and our ability to access efficiently priced flexible bank capital, we are able to pledge funding of this deal without taking any prefunding risk. But we did not underwrite this deal assuming short duration floating-rate financing. We assumed the entire $1.3 billion of permanent debt is financed consistent with our current long-term cost of debt. As highlighted on the sources and uses slide of the deck released last night, at $20.75 per share, total QCP equity of net debt equates to a $3.5 billion cash outlay. As an offset to this, the cash balance at QCP is expected to build significantly through the time of close as they execute on their previously disclosed non-core disposition program. They currently have 74 HCR ManorCare skilled nursing assets being sold, all of which have either signed PSAs or are in the later stages of negotiations. We expect proceeds from these sales to reduce our acquired cash outlay to approximately $3.1 billion. For the remaining portfolio, ProMedica will contribute approximately $950 million in cash through a combination of the payment of HCR ManorCare's outstanding deferred rent obligation and their 20% ownership in the real estate joint venture. After ProMedica's contribution, Welltower will fund its share of the joint venture and its 100% ownership of the non-HCR ManorCare assets, totaling $2.2 billion through a combination of asset sales and debt. The details of Welltower's planned asset sales are as follows: As updated in our 1Q '18 earnings release from last night, we increased our full-year disposition guidance to indicate $895 million of further dispositions in the year. This number consists of $428 million of properties held for sale at the end of the first quarter, $40 million of expected loan payoffs through the rest of 2018, and an additional 2 portfolios of properties, identified post-quarter, representing another $428 million of expected proceeds. While asset sales always carry risk, the disposition processes for the held for sale assets are all in very late stage, and the additional assets we have identified for sale after the quarter represent high-quality portfolios which have already garnered significant institutional interest. For the remaining debt financing, we have a fully committed $1 billion bridge facility, in addition to our significant line capacity. And we will actively look to place permanent financing as the transaction progresses. In closing, this transaction highlights why we aim to run our portfolio leverage counter to equity capital cycles, which allows us to use the balance sheet as a countercyclical tool to ensure we can take advantage of cycle-agnostic opportunities like today's, as well as be prepared to take advantage of any significant pricing breaks driven by capital market dislocations. And with that, I will hand the call back over to Tom for closing remarks.

Last quarter, I reminded you why we made the decision not to abandon the post-acute care sector. While the consensus view was to cut and run, we have always maintained post-acute is a critical component of the health care delivery continuum. However, we recognize that the broken capital structures of the past ultimately pushed over-levered post-acute operators to the edge. We also realized the sector needed sponsorship to reemerge and a health system could be the most impactful sponsor. That is why we are establishing our joint venture with ProMedica. My earlier remarks reflected on the challenges of delivering growing cash flow and earnings in this macro environment. However, as you have heard from Shankh, we are bringing you a large investment that provides safe and growing cash flow and is strategically and significantly earnings-accretive. Today, you just can't find accretion from bond-like health care assets sold through auctions. Opportunities like this come about through connectivity with the health care complex, innovative thinking, smart structuring, and good old-fashioned hard work. That's what differentiates Welltower. We created and structured an investment here that is $0.20 accretive, backed by an A-rated health system. And in order to do this, you have to be creative, roll up your sleeves, understand real estate deal structures and, yes, understand health care. Last quarter, you heard from Shankh that we expect 2019 to be an inflection point for senior housing fundamentals resulting in accelerating Welltower NOI. What this transaction ensures is that 2019 will also be an inflection point for earnings growth. So Welltower continues to be open for business, our assets continue to perform and we continue to execute on our strategy of partnering with the best-in-class health systems and operators to transform care while delivering superior returns to our shareholders. Thank you. Kim, now open up the line for questions.

It seems like a lot of work went into doing this deal, so congrats on getting it done.

Thanks, Vikram.

Can you discuss your thoughts on the risk-adjusted return of this deal in light of the current situation in skilled care? Specifically, what implications does this have for the Genesis assets?

Vikram, when considering this investment, we focus on risk-adjusted returns in two main ways: cash flow and real estate perspective. From a cash flow standpoint, we're entering this investment at an attractive base yield, with an anticipated annual growth of about 2.75%. This is underpinned by a strong absolute triple-net master lease, making the cash flow very secure due to its credit rating and backing. This aspect makes it highly accretive in terms of cash flow. On the real estate side, we believe we are acquiring this asset at a very favorable basis. Evaluating the potential upside and downside, if we maintain the cash flow for the next 15 years and assume a worst-case scenario of writing off the real estate to salvage value, we still achieve a strong single-digit internal rate of return (IRR). In a base case where the cash flow remains steady, we expect a low double-digit IRR. However, it's important to note that the portfolio's occupancy is currently at an all-time low, and there's a significant capital expenditure requirement. Additionally, we face a demographic shift, often referred to as a silver tsunami. Crucially, this health system and operator will be supported by one of the top 15 health systems in the country. The associated synergies and cash flow growth are likely to position us within a significant double-digit unlevered IRR range. We are extremely enthusiastic about this deal and believe it will generate substantial returns for our shareholders.

And just a follow-up on the Genesis?

Yes, go ahead.

We believe this is a very favorable transaction for the post-acute industry. The unique aspect of this deal is the acute care health system's commitment to the post-acute sector, which is beneficial for all operators, including Genesis. We hope Genesis will see significant benefits from this. Currently, Genesis contributes about 5% to our cash flow, and this transaction will adjust that to around 4%. We are enthusiastic about the Genesis assets we have retained, which are currently covered at approximately 1.35 times. We're looking forward to the future developments, but I don't have any additional updates on Genesis at this moment.

Okay, great. Just with the unusual nature of the QCP share price closing above the deal price yesterday. Do you expect any issues with the vote there? And then, can you just maybe just touch on the protections you might have with any termination fees and anything that would be relevant along those lines?

Michael, I'm going to ask Matt McQueen, our General Counsel, to comment on that.

Yes, you noticed the increase in the middle of the day. We believe that due to a leak that occurred during the day, we are confident in all the deal protections. Regarding those specific protections, you will see an 8-K later today that details them in the agreements, so we will refer you to that for now.

Okay, thanks. And then, if I can just throw 2 more quick questions out there for you at once. Tom, I'd love to hear you talk any more about the implications of what you think this deal might mean for future opportunities with ProMedica and then, more broadly, in terms of investment. And then, also any comments you guys can provide on how you're thinking about the SHO business 3 months into the year, sort of a net-net basis would be helpful.

This is an exciting opportunity for both Welltower and ProMedica. ProMedica views this real estate as more than just traditional skilled nursing facilities. They see these as new care sites that will allow them to expand their health care delivery model to 30 states. They perceive this real estate as well-located and efficient health care delivery sites, rather than the negative connotation often associated with skilled nursing facilities. I urge you to evaluate this investment in light of its comparison to traditional skilled nursing investments; this is fundamentally a health system investment. The asset level shows very strong EBITDAR coverage, alongside the support from a robust A-rated health system that ranks among the most significant in the United States, joining esteemed institutions like Johns Hopkins, Cleveland Clinic, and Geisinger. We also recognize the potential to connect this network with our top-tier senior care operators. Health care delivery is shifting away from acute-care hospitals, and ProMedica sees this as a chance to broaden its reach without purchasing hospitals, focusing instead on cost-effective, consumer-friendly care delivery locations. Recently, a major health system, Beecken, announced a plan to admit seniors undergoing hip replacements directly into their owned skilled nursing facilities, performing surgeries there and providing rehabilitation within those facilities. This shift marks just the beginning; the landscape of health care delivery is evolving, which makes this opportunity even more exciting.

I'll make a quick comment. Just to follow-up on Tom's point, if you think about health care today, you are seeing vertical integration across the board. ProMedica, as you heard from Randy, is an extremely well-respected provider, and they will be a provider from self-acute to acute care to post-acute to home health and hospice. But they're also a payer. So that integration you're seeing across the value chain in health care. Now regarding your question on the SHO, we still feel very comfortable with the guidance we provided about three months ago. The story remains the same. Occupancy is better than we expected, rates are better, and expenses are better. Overall, we're aligned with our previous expectations, and we'll see how the rest of the year unfolds.

I appreciate you providing your partner to make some comments. I hope to direct a question to him, but if not, perhaps you can answer. Regarding the previous topic, I'm interested in understanding what kind of expansion in the skilled nursing facility sector this represents for ProMedica. I know they own 13 hospitals, but I'm unclear on how many skilled nursing facilities they had before this. Additionally, as you discuss the evolution of care delivery, what might happen regarding potential changes in the payment mix for these facilities due to ProMedica's ownership?

Well, Jordan, this marks ProMedica's first significant investment in the post-acute care and assisted living sectors, making it an important new venture for the organization. It's important to note that the existing management team at HCR ManorCare, led by Steve Cavanaugh, will remain in their roles, ensuring stability in management. While it's still too early to determine ProMedica's specific plans or how they may alter operations within these facilities, I can confidently say they are enthusiastic about collaborating with the HCR ManorCare management team to rethink strategies aimed at improving service and generating profitable activities within these care sites.

Okay, that's helpful. And then, I guess one more for you, Tom. I'm curious about your thought process this time around. You mentioned that this could make you unpopular. You were on the board many years ago when HCN made the initial investment in the Genesis portfolio, and at the time when HCP purchased the HCR portfolio, I believe you were close to that as well. I know the basis here appears to be about half the purchase price paid at that time, which likely provides some comfort, so I appreciate that. However, my question is more about your comfort level regarding the direction of fundamentals here. The trend in occupancy has been quite poor for a while, influenced by obvious factors, despite the fact that the bed count has been declining for 20 to 25 years. Do you have any thoughts on that?

The first thing I want to mention, Jordan, is that these assets and this business have been underfunded for many years. The issues with the deals made nearly a decade ago stemmed from a time when health care REITs were evaluated based on how quickly they could accumulate assets rather than the underlying business fundamentals. I won't go into all the changes that have made operating in the skilled nursing sector more challenging in terms of reimbursement. However, ultimately, these companies were over-leveraged. I believe we've wrongly judged a business based on profits generated from excessive leverage. It's important to view this as real estate where effective health care can be delivered. We need to think differently about this. And yes, you are correct. We are acquiring this at half of what HCP originally paid for it.

Every business experiences cycles, and the post-acute sector follows a different rhythm compared to general economic trends. A significant portion of our cash flow, about 30%, comes from assisted living and memory care, which correlates more closely with business dynamics and supply chains. The critical factor to consider is our purchase price, as we are acquiring assets near the low point of the cycle. While we don't claim to have purchased exactly at the bottom, we have substantial protections in place. Our properties are backed by strong cash flows supported by top-tier health systems with excellent credit ratings. Our focus is not merely on the past five years, but rather on the projected demand over the next 15 years, particularly when looking at demographic trends. Regarding supply in the post-acute sector, it has not been a concern. We see considerable potential for cash flow growth. ProMedica is investing capital in this sector, and it's crucial to recognize that patients typically come from health systems, which will influence market share as our brand evolves and capital enhancements take effect. We are enthusiastic about these developments, but we won't claim that the current cycle, this month or quarter, represents the bottom. Our protections are in place, and we have complete confidence in the leadership of Steve Cavanaugh at HCR ManorCare, as well as Randy and Mike at ProMedica, to elevate this business significantly.

A lot of questions on the deal have, I guess, been answered and asked. I guess one question, just in terms of FFO guidance. I know that you guys didn't change it and I can understand why you wouldn't necessarily put this deal into earnings guidance just yet, given the uncertainty on timing of the closing, plus the sales. But you guys did and were active in the first quarter on the acquisition front, and I'm just trying to figure out what kept you from at least changing for that? Is there something else? Or is it just kind of early in the year and you just kind of want to roll things in, maybe closer to midyear?

Yes, I think that's the case, Steve. I think, 90 days doesn't give you a whole picture of how the year will run out. And obviously as you said, with uncertainties around timing and financial impacts of the transaction, it seemed premature to start changing the rest of the year's guidance when we will obviously have to update it for business evolution as well as transaction evolutions later on in the year. So yes, the answer is it's just too early really to make substantial changes after 90 days of operations.

Steve, regarding acquisitions, the transaction activity in the first quarter was revealed at the end of the previous year and was already included in our projections. Most of this activity stemmed from the Sunrise CCRC transaction announced at the end of 2017, which is being completed in several phases. Additionally, we brought on a new operator, Cogir, in Canada, which involved a $200 million investment that also closed in the first quarter. Both of these deals were included in our full-year guidance since they were reported in our fourth-quarter 2017 results.

Okay. And I guess, not to beat a dead horse on this, kind of regional operator now growing national. But, I guess, Tom, just to kind of boil it down, is the comfort factor with having ProMedica expand into basically a national player, the fact that the HCR ManorCare management team is sort of staying in place there and kind of running the business under the guidance of ProMedica?

Exactly, Steve. HCR ManorCare has an excellent management team, and this is bringing new life into their business model. The capital that ProMedica will invest in that business model and the real estate will truly propel it to the next generation of care.

And I guess, if you just sort of think of the risks, I mean, just sort of thinking about the downside, sort of what are the, I guess, obvious or maybe not so obvious challenges of sort of trying to take a regional health system and expand them and sort of do an expansion like this?

From the beginning, we have a business that has been starved of capital. We believe that investing new capital into the business will reduce risks associated with the current business model. As I mentioned earlier, changes are occurring in health care delivery. I would like to take a moment to turn this over to Mark Shaver, our Head of Strategy, who many of you have met. He joined us earlier this year from the Johns Hopkins health system. I think it would be beneficial to hear Mark's insights on this matter.

So good morning, everyone. Mark here. First time here, just joined the team after being at Hopkins for almost 20 years. And what I'd like to share is this is exactly the type of transaction that brought me to Welltower. We're spending time thinking about the integration of HCR ManorCare into ProMedica, a traditional health system. But the payer component that Randy mentioned earlier is important. The combination of SNF plus memory care plus home health to create that integrated network, this national platform for integrated care, is very important. So while there's been some capital starving, as Tom mentioned, and some challenges in SNF, memory care continues to grow and we all know the demographics that are going to continue to grow nationally. So to have a 58-site, 12-state platform for growth for memory care is quite exciting. And the growth nationally in home health is significant. And what we're starting to see, both with our other operators and here, the opportunity to create integration across the health care delivery system, is starting to accelerate the savings but also improve quality and outcomes. So what I think the ProMedica team did and we're quite confident we will help accelerate, is the integration of care across that platform and the ability not just to work and coordinate with the ProMedica health system but other health systems across the country to really improve outcomes for patients.

I wanted to delve deeper into the capital expenditures required for the facilities. Specifically, regarding the integrated health system in Michigan and Ohio, within ProMedica's area, what integration opportunities do you foresee with skilled nursing, memory care facilities, and home health? Are these related to bundled payments or any other type of integration with managed care or insurance within ProMedica? I'm trying to grasp the potential benefits that ProMedica and Welltower are identifying in these assets.

Dan, I think it's too early to discuss the specifics of the business plan. Over the past decade, the assets have lacked adequate capital under different ownerships. This isn't merely about a fresh capital infusion; it's also about investing in people. ProMedica is an integrated payer and provider network that has a plan to significantly enhance these assets and its various business lines. We believe this will lead to substantial cash flow growth, although we haven't factored that into the numbers we've discussed. With that, I'll turn it over to Mark to share more insights about the business plan.

Yes, Dan, it's Mark. I think you're exactly right in terms of the opportunity here. So ProMedica having Paramount, which is their insurance managed care payer entity, and the increasing role that both skilled nursing and home health have nationally and regionally with regards to bundled rates and value-based care initiatives of getting patients both seen surgically in the hospital then transitioned quickly to skilled nursing in the home is absolutely right where the nation is going and where we need to go to improve outcomes and lower costs. So absolutely, we think ProMedica has those components.

And then, I just wanted to quickly ask, the 1.8 EBITDAR coverage, is that pro forma, or is that in place?

That's in place.

It's in place. And then, one more quick question on the SHO portfolio. Clearly, there was an early flu season with an early peak. Can you provide any information regarding the occupancies in March and April? Did you notice a turnaround there? I'm trying to grasp some of the trends observed in the first half.

Okay, Dan. Mercedes, who's on the road, is going to answer that question for you. Mercedes?

Yes, Tom, thank you. The recent flu season was quite significant, and we're encouraged by how our operators reacted. Following the 2015 season, the company has greatly improved its response and containment measures. In our portfolio, the greatest impact was seen in the higher acuity areas, especially in California and the Southwest. In some instances, vacancy rates due to death were higher this season than in previous years, and those operators will continue to feel the effects in the short term. However, based on the metrics we are tracking, such as outpatient visits and mortality rates, it seems that the worst of the season is behind us. We likely won't fully understand the impact until we gather data for April and May. In the U.K., outbreaks have also declined in recent weeks but remain elevated compared to past seasons. Our operators are working to leverage their referral networks and sales strategies to lessen the impact on occupancy. We will continue to monitor the situation and provide more definitive information as it becomes available.

Thanks, Mercedes.

And Dan, it's John. I'll just add one comment alongside Mercedes. The way the industry actually works is that as the flu season ends and infection rates decrease, there isn't an immediate surge in building occupancy for several reasons. One reason is that community infection rates, outside of the senior community, were extremely high this year. There were also significantly high rates of deaths and hospitalizations in general community settings, as you've seen reported by some hospital operators in the U.S. and elsewhere. This situation affects the pool of new residents that would typically be entering buildings in Q2. Therefore, Q2 will still be impacted by the flu, just like Q1 was. We are closely monitoring the data from our operators and the industry. However, there is not likely to be a quick recovery in Q2 following Q1 due to the flu. It usually takes some time, often extending into Q3 or Q4 after a severe flu season, for operators to return to their desired occupancy levels.

Just going back to the CapEx that is planned to be invested in the ManorCare assets. Is there any return you guys expect to generate from that CapEx or that's fully being funded and paid for by ProMedica? And with regards to the CapEx, like what gives you guys a certainty that, that is in fact going to drive better performance? I mean, you guys had the history with the HealthLease and Mainstreet deal delivering new assets, and that didn't work out exactly as planned. So I'm just a little curious as to why the CapEx would change the weaker trends in skilled nursing?

ProMedica is the one investing that capital, not us. I believe they are looking for returns, not just financially but also strategically, by investing in people, systems, processes, buildings, and various business lines. I'm sure they have expectations for those investments. Regarding the HealthLease transaction, each asset can be categorized as a buy, hold, or sell based on its price. The HealthLease deal was executed at a very high cost, and it's not surprising it didn't turn out as we had hoped. In contrast, this new transaction is priced reasonably. If you do the calculations, you'll see that even in a worst-case scenario, we are looking at a high single-digit internal rate of return, which is rare in most current transactions. This highlights the importance of evaluating risk versus reward, credit quality, and potential salvage value in adverse situations. Our investment approach involves capital investment, which inherently carries some risk. The key is how we structure these investments and safeguard against potential downsides, which is a core principle of our investment strategy.

Regarding the 1.8 EBITDAR coverage, does that take into account any income from the home health and hospice business? It's unclear if that falls under the joint venture or is wholly owned, and I'm curious how that impacts the EBITDAR calculation for the 1.8 figure. Specifically, does it solely reflect the skilled nursing facilities and senior housing EBITDAR, or does it also include some earnings from home health and hospice?

Another great question, Juan. ProMedica will own 100% of the home health and hospice business. And the coverage we mentioned is pure income from assisted living and post-acute business. It has no income above the line. So it is facility-level EBITDAR that has no other income from the home health and hospice business.

Okay. And then, one more last quick question for me. Just switching gears to the RIDEA business. And just on the vintage portfolio, if you could comment on how that's tracking relative to underwriting and kind of where the current occupancy is in that portfolio. Any sort of update there?

Yes, Juan, as we discussed in our last call, we are currently investing in the vintage portfolio starting in the fourth quarter, which is leading to lower occupancy. We noted that the growth from vintage may negatively impact our overall same-store growth in the short term. However, as we approach the end of this year and move into 2019, we expect vintage to contribute positively to our growth. This process will take about five years, and these buildings have been in need of significant capital expenditures. We've factored those expenses into our projections. It's still early to assess how we're performing against our initial estimates. This is the first year we anticipate growth in the second half; a more relevant assessment will come next year as we observe how things develop.

Tom, I know you said that you didn't want to run away from the post-acute care space last quarter. And obviously, you just agreed to buy QCP. But is the company interested in making additional investments in the post-acute care space after this deal? Or was this transaction just more of a good opportunity that you saw in the marketplace?

We are long-term strategic investors in health care real estate, and it's important to understand the direction of the industry. I wouldn't say we are entirely dismissing any sector; the timing of investments is crucial. As you heard, we are acquiring the real estate at half the price it was originally purchased for. Therefore, we will continue to deploy capital in ways that benefit our shareholders, whether that is in seniors housing, medical office, or post-acute care. However, it’s important to distinguish this investment from the current post-acute care structures in the REIT sector. This represents a very different opportunity, characterized by strong coverage and supported by a high investment-grade credit health system.

One thing I want to add, Mike, is that from our viewpoint, the key assets are clearly post-acute care and senior housing, but we aren't getting cash flow from these assets directly. Instead, we receive cash flow from our partner, ProMedica, which is an integrated payer-provider health system. It's crucial to recognize that while the underlying asset base is significant, the future of these assets, especially if the lease isn't renewed in 15 years, is something to consider. Over the next 15 years, the basis remains important, and I emphasize this point. It's essential to realize that there isn't another deal like this in the market. We worked with our partner to create this opportunity; it wasn't available for other buyers and was never put on the market. We and ProMedica developed this opportunity for both our stakeholders and ourselves.

Great. Shankh, regarding the 1.8 coverage ratio that was mentioned, what does that indicate about the occupancy rate and the skill mix in the portfolio?

As I mentioned, that is the current situation. The EBITDAR coverage you refer to is also the current figure. Furthermore, this is the lowest occupancy rate we've seen in over a decade. I won't elaborate further on this. QCP is publicly traded, and you can analyze its financials directly. From our viewpoint, while we won't state definitively whether this will be the year with the lowest cash flow, we believe there is substantial potential for their cash flow over the next 5, 10, or 15 years.

Okay. And then, just last question, real quick, on the senior housing operating portfolio. Can you kind of describe what your team does researching supply within the portfolio? Were you surprised that NIC revised their supply data higher? And it does look like your supply within 5 miles of your communities jumped a bit this quarter. Did you expect that to occur? And then, does that impact your outlook for your portfolio here in the near term?

Yes, Mike, we probably will do an Investor Day at some point to introduce you to our data science team, as we have mentioned that we have assembled an extraordinary data science team from people from different backgrounds, from different industries. And jokingly, Tom said that we have hired more science and maths Ph.D.s in the last few months than finance types. So we do have a different view from NIC. You have seen 2 quarters ago, NIC had a different view. Then the view went up and now it has come back from where the supply is. Our view, NIC data is obviously one of the inputs, but obviously our systems and processes are not based on NIC data. We have a very granular view of where supply is. The jump that you saw in our supplemental that you're talking about is a pure function of assets going in and out. Remember, this is a view of what's under construction. So when things get delivered, that changes. I would not read too much into it. And as I mentioned to a previous question, our view of the year is still the same.

You're in Cleveland, right?

I am, yes.

You should drive to Toledo and spend half a day with our data science team, who will show you the various sophisticated analytical tools we use to manage our business. We can arrange that at any time.