Welltower Inc (WELL) — Q2 2018 Earnings Call Transcript

Thank you, Lori. Good morning, everyone, and thank you for joining us today to discuss Welltower's second quarter 2018 results. On the Safe Harbor, we'll hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business & Relationship Management; Shankh Mitra, SVP, 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 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 this 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. Before I hand the call over to Tom DeRosa, I want to highlight a few significant points regarding our second quarter results. First, as announced last night, Welltower and ProMedica Health System completed the acquisition of Quality Care Properties and HCR ManorCare for $4.4 billion. Second, we are increasing our normalized FFO guidance for the year to a range of $3.99 per share to $4.06 per share from our previous guidance range of $3.95 per share to $4.05 per share. Third, as previously announced, we entered into a value-enhancing restructuring of our Brookdale relationship, which will provide improved triple net lease coverage and operator diversification. We also converted our existing 27-property triple net relationship with Brandywine Living to an operating lease structure, which we anticipate will drive both long-term growth and value creation. And lastly, we've closed on a new $3.7 billion unsecured credit facility, improving pricing across our line of credit and term loan facility, extending maturities out to 2022 and 2023, respectively. And with that, I will hand the call over to Tom for his remarks on the quarter.

Thanks, Tim. Good morning. Earlier this year, I told you that Welltower was back in business. I hope you agree that last evening's announcement of the closing of our innovative ProMedica joint venture, our solid Q2 results, and the increase in 2018 FFO guidance all validate that statement. It's no secret that the operating environment for senior housing remains challenging. Nevertheless, the benefit of owning a premier major urban market-focused portfolio is that we still managed to deliver some growth over last year. Mercedes will give you some perspective on the current state of the senior housing industry and insights into why Welltower's operating platform continues to outperform. Welltower is well known for owning the best quality health care real estate in the REIT sector. Owning great real estate allowed us to announce a value-enhancing restructuring of our Brookdale relationships that helps put Brookdale on a more positive path going forward and brings down our exposure to Brookdale from 7.6% to 2.9%. As part of this restructuring, we will move 37 buildings to a new operator, Pegasus, which is owned and operated by our friends and highly regarded industry veterans, Steven Vick and Chris Hollister. We're also bringing the Cogir team, led by the very talented Matthieu Duguay, down from Quebec to run 12 independent living buildings in the U.S. We have also restructured our relationship with one of our long-term triple net senior housing operators to a RIDEA structure that will better enable Welltower to capture the long-term value in this excellent real estate located in the super-ZIPs of the mid-Atlantic. Shankh will tell you more about both transactions, but these are examples of how Welltower continues to deliver creative solutions to challenges in the market, thereby creating opportunities to drive long-term shareholder value. In both cases, we will sell non-strategic real estate and hold on to some very good highly strategic real estate. When you own that real estate, you can only kick the can down the road for so long until you hit a wall, so we are willing to face some short-term dilution related to both restructurings now as these efforts will dramatically improve our operating platform in 2019 and beyond. We could not be more excited to announce the closing of our joint venture with ProMedica to acquire the operating business and real estate of HCR ManorCare and Arden Court. The structure of this transaction significantly improves the credit quality of our income stream and demonstrates how a health care REIT and a super-regional health system can work together to reimagine the settings where health care services will be delivered. You will be hearing much more about this in the coming months. As John Goodey will discuss, the accretive nature of this transaction allows Welltower to increase our 2018 normalized FFO guidance from $3.95 to $4.05, up to $3.99 to $4.06 per diluted share. We remain very excited by the prospects for Welltower in 2019 and beyond. Mercedes will now talk about the current senior housing environment. Mercedes?

Thank you, Tom. Seniors housing operating performance in the U.S. market has been under pressure due to new supply, a severe flu season and growing labor costs. According to NIC MAP's second quarter data, there was an 80 basis point year-over-year decline in occupancy as quarter-over-quarter net inventory growth of 3.3% outpaced an otherwise strong absorption rate of 2.4%. Construction starts over the last 12 months have been trading at or below the rate of projected deliveries. Furthermore, construction as a percentage of existing inventory in NIC's primary markets decreased from 6.9% to 6.3% sequentially. These data points are consistent with the slowing trend in new starts. While the market settles into this new supply offering, overall rates have continued to gain, with NIC reporting 2.7% same-store asking rate growth. While not immune to these supply trends, Welltower's operating portfolio continues to show the resiliency we expect from our premier operators in top markets and submarkets. Welltower's REVPOR growth has been strong and consistent throughout this challenging period, and we expect that to continue. Construction as a percentage of existing inventory in our top 10 markets was 4.7% in the second quarter of 2018. That's 160 basis points lower than NIC's primary market statistics. In addition, our operating portfolio experienced 3.5% year-over-year growth in the quarter, or 80 basis points more than the market average. In addition to these reported statistics, our own real-time data indicates positive momentum in certain previously supply-impacted cities, such as Boston, that's a good example of this. As new supply is absorbed, best-in-class locations and care continue to be the most important factors in resident decisions. This helps us maintain and drive rate while recovering occupancy. Our portfolio's solid footing on rate helps us manage rising expenses more adequately, and we continue to work closely with our operating partners to leverage Welltower's scale and manage costs. For years now, we have grown our operator advisory services platform, expanding the service offering and driving greater partner participation. These programs target key operating expenses of labor, food, utilities, and insurance, and drive improvements in service and resident satisfaction. We continue to expand and build upon this platform, and the results are clear. Many operating expense categories were reported to be flat or lower this quarter compared to last. We are encouraged by the decelerating pace of construction and city deliveries reported by NIC. These trends combined should result in more balanced absorption. Our operating partners have a disciplined approach to managing the business, and equally as important, they continue to provide best-in-class care for the residents and families that we serve. I'll turn the call now over to Shankh.

Thank you, Mercedes, and good morning, everyone. I will now review our quarterly operating results across all of our business segments, providing details on our senior housing triple net business with additional background on Brookdale and Brandywine restructuring. As we have described to you, the peak impact of the senior housing supply cycle is flowing through our numbers right now, given the starts and delivery details that Mercedes described. Though we're not happy with our senior housing operating results on an absolute basis, within the context of peak supply, we think that 0.1% growth is respectable performance at the bottom of the performance cycle. It speaks to the high quality of the real estate we own and the quality of our operating partners. We will not venture to guess how 2019 might look like at this point in the year, but our sense is we're bouncing along the bottom right now. We're really excited about the growth trajectory of our cash flow when we come out of this bottom as we are at 86% occupancy in our SHO portfolio. Our triple net portfolio growth has been consistent and predictable. I'll encourage you to look past the coverage change in the quarter as we have significant first-quarter transactions that make the number still, and we should see significant improvement next quarter. I also want to point out that we have significantly derisked that cash flow stream as we have only $28 million of triple net, senior housing and post-acute combined leases rolling before 2024. However, $22 million of that is a well-covered Brookdale Sally lease, and we have effectively taken care of that. Last quarter, when we discussed with you the QCP-ProMedica transaction, we encouraged you to think about the impact of the transaction beyond just a standalone deal. This transaction has been transformational for our strategy and afforded us cash flow growth to offset short-term dilution from portfolio restructurings that we are finishing up to position the company for maximum near-term growth and long-term value creation. Moving on to Brookdale. We applaud their leadership team for their win-win transaction that rightsizes the relationship and leaves us with a Brookdale portfolio that's significantly covered, 1.3x on EBITDAR and 1.51x on EBITDARM basis. For the 60 assets that we are transitioning away from Brookdale, we see significant opportunity for growth as occupancy recovers from around 82% and rent levels are enhanced through the implementation of the new operating plans. We're very excited that senior housing industry's most well-respected turnaround specialist, Steven Vick, is partnering with Chris Hollister to form Pegasus and take over 37 of these buildings. We're equally excited that one of the best independent living operators in North America, Cogir, led by Matthieu Duguay, is taking over 12 of the lower-acuity buildings. The remaining 11 buildings are moving to six of our operating partners in a structure consistent with their existing lease or management agreements. This way, we'll be able to maximize the upside potential by matching location, acuity, and operating model to the appropriate operator. I'm also delighted to report that we have converted Brandywine Living from a triple net to a RIDEA structure. This portfolio of 27 communities centered around the New York MSA is amongst the highest-quality real estate in our portfolio. The Brandywine portfolio has an average of 13 years with a REVPOR of $7,500-plus. And through above-average margins, generates an annual NOI per unit of approximately $29,000, placing them at the top of our portfolio. Despite great operating metrics, the portfolio was over-leased and over-leveraged from day one and essentially was covering at 1.0. We executed a classic debt-to-equity swap in the PropCo, OpCo, and the management company. After this transaction, we owned 99.3% of the PropCo and OpCo and 34.9% of the management and development company. Brandywine will operate these buildings under a next-generation management contract, but we'll share the upside and downside together. We believe this structure significantly improves the alignment of interests. We'll have near-term dilution, mainly due to the conversion of rent to cash flow in recently developed lease-up assets in excellent infill locations. We believe our shareholders will enjoy significant upside from this extraordinarily well-located real estate in the near to medium term. After this transaction, we'll improve the construction of our diversified and balanced portfolio, led by SHO at 47.8%, senior housing triple net at 19%, post-acute at 10.4%, outpatient medical at 16.1%, and health systems at 6.7%. With significant embedded growth prospects from our 86%-occupied SHO portfolio, well-covered triple net leases, and a strong health system-affiliated OM portfolio, we will be positioned well to play both offense and defense. Our health system bucket, which is anchored today by ProMedica, is poised to grow in the future. We believe this investment-grade lease represents the highest quality of cash flow in our entire portfolio with substantial real estate value supported by our exceptionally low basis. As a reminder, we paid $93,700 per bed, blended for senior housing and post-acute, and specifically $57,000 per bed for skilled nursing. We believe this is close to 1/4 of replacement cost and salvage values of these properties. As a newly energized HCR management team turns around the performance of this portfolio, with full backing of the capital, health care delivery expertise, and the peer capabilities of ProMedica, our shareholders will enjoy significant value creation in this segment of our business. Over the last three years, we have made transformational improvement in our portfolio mix, asset quality, operating platform, and deal structures. We have dramatically changed our investment philosophy, built world-class data analytics capabilities that are integrated into our capital allocation process, and hired exceptional talent focused on our share, cash flow, and NAV growth as opposed to balance sheet growth. With these significant efforts that we have put into improving our platform, we're now poised to deliver outsized growth for shareholders. With that, I'll pass it on to John Goodey, our CFO. John?

Thank you, Shankh, and good morning, everyone. It's my pleasure to provide you with the financial highlights of our second quarter 2018. As noted, we continue to see some challenges in our senior housing markets in Q2. However, as Q1's tough influenza season and winter conditions abated during the quarter, we have seen a relative stabilization in sequential occupancy. Despite the challenges, the quality of our chosen markets of operation, our superior portfolio, and operating partnerships continue to deliver good REVPOR growth at 3.5% in Q2 year-over-year. Overall SSREVPOR growth remained elevated at 5%, driven by wage growth due to the strength of labor markets in general and increased demand for senior care staff. Overall same-store NOI growth was 1.4% for the quarter, near the midpoint of our full year guidance. And SHO portfolio same-store growth grew by 0.1% in Q2, which as you would expect, we are not satisfied with. Although it is within our full year guidance range of 0% to 1.5%, it is behind our midpoint expectation for the year. Senior housing's triple net growth remained solid at 3.1%, with long-term post-acute being 2.3% and outpatient medical growing by 2%. This quarter, same-store growth was augmented with in-quarter acquisitions and joint ventures of $172 million, $75 million in development funding, and loan advances of $5 million. 100% of our gross investments were completed with existing partners. We also placed four development projects into service, totaling $89 million in value at a blended stabilized yield of 7.0%. In addition, we completed $67 million of divestments and loan payoffs. Within Welltower, we continue to enact efficiency and automation programs and look for opportunities to focus and improve our operational excellence. These progressive measures enabled us to report G&A costs for the quarter of $32.8 million, being essentially the same as Q2 2017. Overall, we are therefore able to report a normalized second quarter 2018 FFO result of $1 per share. I would like to note that we do not include one-off income items, such as the $58 million lease termination fee received from Brookdale, in our normalized results. That alone could see a significant increase for this quarter's FFO. Turning to our balance sheet and capital activities. Our Q2 2018 closing balance sheet position was strong with $215 million of cash and equivalents and $2.5 billion of capacity under our primary unsecured credit facility. Our leverage metrics were at robust levels, with net debt to adjusted EBITDA of 5.4x and net debt to undepreciated book capitalization ratio of 35.6%, while our adjusted fixed charge cover ratio remained strong at 3.5x. In April 2018, Welltower placed a new $550 million 10-year senior unsecured note at T plus 148. This is the tightest spread that 10-year treasuries ever achieved by Welltower. Simultaneous with the notes offerings, we executed a U.S. dollar to Sterling cross-currency swap resulting in an effective rate on the bonds of 3.11%. Post our Q2 close, we executed a new $3.7 billion unsecured credit facility, improving the pricing across both the line of credit and the term loan facilities. The facility includes $3 billion of revolving capacity priced at LIBOR plus 82.5 basis points. We also signed a new $1 billion term loan B in preparation for closing the QCP acquisition. I would now like to turn to our guidance update for the full year 2018. We are increasing our normalized FFO range to $3.99 to $4.06 per share from $3.95 to $4.05 per share prior. This is based upon the closing of the QCP acquisition and ProMedica joint venture on 26 July 2018, certain anticipated refinancing activity associated with the QCP acquisition; updated current operational expectations, with the full year 2018 overall expected adjusted same-store NOI growth guidance range remaining at approximately 1% to 2% and disposition guidance increasing to $2.4 billion with a blended capitalization rate of 6.0%, primarily due to Welltower acquiring HCP held-for-sale assets due to the accelerated closing of the overall purchase. As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2018. Given the aforementioned projected changes in gains and losses from disposals and other normalizing factors, we're also increasing our expected full year 2018 net income attributable to common shareholders to $2.66 to $2.73 per share from $2.55 to $2.65 prior. On the 21st of August 2018, Welltower will pay its 189th consecutive cash dividend valued at $0.87. This represents a current dividend yield of approximately 5.4%. With that, I will hand it back to Tom for final comments. Tom?

Thanks, John. Why don't we go right to questions. So Lori, please open up the line. Thank you.

Congrats on closing QCP and the other deals. I know that involves a lot of time and effort. So obviously...

Thanks, Jonathan.

Yes, sir. Obviously, QCP and partnering with ProMedica was a pretty unique transaction. And you're very optimistic there, and I share your view. I noticed in the investor deck, and from this morning, this new slide about the increasing involvement of health care systems in postacute. I guess, my question is, have you had more systems call you looking to partner on postacute deals after seeing this one of ProMedica? And what would be your appetite or target exposure to health care systems within the postacute space?

Good question, Jonathan. First of all, we are very much looking to expand our business with large regional health systems. Several health systems are currently engaged in the postacute space and find it very effective for managing patient pathways. Yesterday, one of the largest regional health systems in the Northeast visited our offices in New York. This system has a postacute care division that includes assisted and independent living. They can direct patient flow between the hospital and these facilities while sharing staffing, making healthcare delivery very efficient. In response to your question, yes, we have received many inquiries. Numerous health systems are now reaching out to us after seeing the ProMedica announcement. They recognize the advantages that ProMedica has with HCR ManorCare, which includes both postacute care and an assisted living focus on memory care. These are significant challenges for health systems. They have also noted ProMedica’s successful insurance business, which many health systems are interested in pursuing if they are not already involved with Medicare Advantage and Managed Medicaid programs. The aim is to keep patients within a wellness framework to minimize future risks. This is a relevant and pressing topic. Many large health systems are already engaged in this area, although it may not be widely reported. I believe you will see many of them seeking to partner with Welltower in assisted living, which presents a substantial opportunity. The focus is on health systems shifting from merely treating disease in an emergency room setting. That strategy carries risks, especially as health systems face increasing margin pressures. We expect to see more cooperation and collaboration, with Welltower facilitating these discussions and opportunities.

Okay, that's great. I appreciate the color there, it sounds like a pretty interesting opportunity going forward. Just one more for me and I'll cede the floor. With SHO, the operating portfolio now almost half of the company after the Brandywine transition. I know I would find it helpful if we could maybe get additional disclosure on your new and renewal leasing spreads within that segment, something we get from apartment REITs pretty commonly. I know it's pretty single in the low single-digit range on an overall basis. But is this something you would be willing to provide us, either right now or going forward?

Jonathan, we always prioritize the best disclosure practices and will definitely take that into consideration. We are very excited about the direction of the business, considering its current performance cycle. So we will think about it.

I wanted to talk about the EBITDAR coverage on the triple net senior housing portfolio. It was 1.07x which is just over 6% below the 1.05 level. How much will these numbers improve post the Brandywine and Brookdale restructuring?

So Karin, as I mentioned in my prepared remarks, it will significantly improve. Just remember that Brookdale was above our average coverage for the portfolio, and Brandywine was lower, as I noted. However, you will see significant improvement when we report next quarter.

Give an estimate as to where coverage will go?

I'm not going to venture a guess, but I think once we will get there, you will like it.

Okay, great. And then my second question is can you update us as to the sources and the refinancings that are planned for the funding on QCP deal?

Yes, certainly. So to close the transaction, we put in place the new, where we re-stacked our credit line and term loan package, but we also took on a new two-year-term term loan B. So ultimately, that covers us for the transaction as it is today. You can imagine, we are not intending to sit upon a line drawn to that level and a two-year term loan B has historically been quite conservative financing out acquisitions over time. We have great access to capital markets and we will look to access the markets as we see opportunity to get great pricing. But the good news is we're fully financed. We have no significant sort of financial issue with affording this and our go-forward business plan if there was not access to capital markets. But I think you can anticipate us doing something in the future for obvious reasons.

And guidance assumes refinancing or no?

It does. It does. Yes, it does. So it assumes refinancing. The transaction, given where the spreads in bond markets versus the spreads on short-term financing structures is not massively accretive to sit on short-term financing like it may have been in the past. So we've built that into our reset of our guidance range today.

I wanted to spend a moment discussing Brandywine and see if you could clarify a few things for me. My understanding was that Brandywine was one of the highest-quality operators and owners in the sector and within your portfolio. I'm surprised by the recent developments, whether it was a default or another event that led to the restructuring. I’m curious about how you and we can be confident that now is the right time to increase equity exposure at this stage in the cycle, particularly from a RIDEA perspective, in senior housing properties.

Yes. If you consider our discussion about Brandywine, it is indeed our highest-quality real estate asset. The net operating income per unit is over $29,000, with revenue per occupied room exceeding $7,500, making it the best in our portfolio. You are correct in noting the strong performance of both the real estate and operating metrics. However, from the outset, this deal was over-leased and over-leveraged. We have been in discussions with Brandywine for quite some time regarding a shift from debt to equity. We believe this is the right moment to make this move because we are optimistic about where we currently stand in the business cycle. Business cycles differ from supply cycles, particularly for needs-based products like assisted living. While I can't say we're exactly at the bottom, we believe we are very close and are experiencing a low point. This is when we should focus on equity exposure rather than debt exposure. We are confident this is the right time, and we are not trying to time our moves on a quarterly basis.

Yes, we have been in discussions with Brandywine for quite some time. This business is very important to them, and they are carefully weighing their options. They understand that this was not a conversation about default. Instead, it focused on optimizing our partnership and exploring growth opportunities together. The discussion aimed to align the capital structure of that business to foster growth. From that standpoint, we view this as a significant opportunity, and we believe Brandywine will be an excellent partner.

This was not a default. Okay, so what were the terms under which Brandywine's prior ownership decided to sacrifice their equity stake to the shareholders at Welltower? So obviously, they wouldn't want to do that out of the goodness of their hearts. What's the driver there?

If you consider it, a 1x covered lease means you are at 100% loan-to-value. From the perspective of Brandywine equity holders, that equity isn't very valuable if you find yourself in that situation indefinitely. However, it's important to recognize the growth opportunities we have ahead. I wouldn’t want you to think that this is just Brandywine giving up. We have implemented a next-generation management contract which means that if Brandywine performs well, the equity holders will see significant benefits. As I mentioned earlier, now our interests are aligned; we will share the highs and lows together, which was not the case previously. They haven't lost the chance for upside; in fact, they stand to gain more than before if they perform exceptionally well.

And Jordan, there was an exchange. We have the loans in Brandywine's management company, and we've converted equity as part of our stake, that 35% interest. So there was a change in the economics for the management company's estate that we've come on with.

Is there a senior housing triple net lease within your portfolio that will survive this cycle without a RIDEA conversion or a recapitalization?

I think a lot of our triple net leases will survive this cycle.

Should we expect more conversions?

Not in any material amount. We are always looking to see what assets we own in what structures. Where it should be a leased or a debt structure versus an equity structure. You can feel from our conversation with you in the last 3 to 6 months, that we are getting excited about how the next cycle looks like, so we definitely think that there will be leases that, where our interests are aligned, will survive the interest.

Let me just add to that. When we talk about the future of this business, you hear us repeatedly talk about how assisted living will become much more consequential in the overall health care delivery perspective. And we are very much driving that for our senior housing operators. So in a RIDEA structure, we can, and even our shareholders, can capture the value that Welltower is driving to that senior housing operator. In a triple net lease, we don't capture the value, and a lot of this is about our optimism about where this industry is going. If you look in the rearview mirror of the senior housing industry, an industry that was built by real estate developers who believed their wealth would be based on flipping real estate at low cap rates to REITs, that is not the future of this industry. So we are restructuring RIDEA relationships with the operating platforms that we believe have the best opportunity to increase in value because of the role this real estate will play in the overall health care delivery spectrum.

That's helpful. I think we all look to your leadership and guidance on this topic because it's important and somewhat uncharted territory. We are currently seeing peak levels of supply. While we want to remain optimistic and understand the fundamental framework and demographics, we are also observing many leases being restructured, and uncertainties may arise in a downturn. This is a prolonged economic expansion, so we're trying to assess the risks and find confidence.

Yes, Jordan, I appreciate that, and that's very valid. The issue is that the population is shifting. The demographic of those aged 85 and older is set to increase rapidly in about 18 months. I understand your perspective, and like everyone else, we are concerned about the overall economy. However, if we don't find solutions to manage the health and wellness of an aging population, we will face significant challenges as a society. We believe Welltower is being structured to address this issue and create opportunities. You will hear more from us about this. When we mention that we are engaging with major health systems in the country regarding the assisted living business, it indicates that this sector is evolving. And this evolution is particularly relevant for Welltower.

You talked about this a little bit, but I just want to understand a little bit better the change in guidance. Because your initial guidance was for $0.20 accretion from QCP, and it just seemed like it would be a little bit higher, given the timing of the closing. So is that accretion just being offset by some of the changes you just talked about with Brandywine? Or is it more to do with timing of asset sales? Or if you could just speak to that a little bit.

Yes, it's John. I can provide some clarity on that. The answer is yes, we still expect long-term accretion to be around $0.20 per share. However, there is a minor adjustment due to a couple of additional asset sales. We have $400 million in assets that we are managing, which requires financing and slightly impacts our funds from operations since they are not providing immediate cash flow. Additionally, we have over $100 million in further asset sales from QCP's tail portfolio, which will contribute approximately another $0.01 in dilution for the remainder of this year. You're correct that the restructurings at Brookdale and Brandywine, along with the underperformance of the SHO portfolio, explain the discrepancy in our projections—leading to an expectation of $4.025 instead of $4.08. These factors are the main components affecting that figure, and we are being somewhat conservative in our estimates for caution's sake.

John, shouldn't you have a bit more benefit from that $0.20? You had a long-term debt cost of 4.5%. And clearly, you’re financing at least some short-term, and then you plan to go out further. So that would positively offset the impact of some of these dilutive assets on your balance sheet. It seems like there's a significant gap; that figure should be closer to around $4.10 for the year instead of the $4.025 midpoint. Can you provide more specifics about the building blocks or each component involved? Additionally, since you moved your earnings announcement a week earlier, can you discuss whether that indicates any intentions regarding your market positioning, either in debt or equity?

Certainly. Warehousing the $400 million does not provide any benefits from an earnings perspective; it only results in downsides since these are not income-generating assets. We are merely managing the ownership of that amount. You are correct that if we maintained our line and the TLB, we would see a slight increase, but it is quite minimal given the recent expansion of LIBOR. We are at 82.5 on the line and 90 on the TLB, which shows that the spread is not as significant as one might expect. We have factored a refinancing of those into the $4.025 midpoint based on the various actions we believe are necessary. The reason for moving up our earnings release is tied to the announcement of the closing, as we were essentially ready to share our quarterly earnings. It felt disjointed to announce the closure of the QCP and ProMedica joint venture and then update our guidance. Remember, we committed to providing guidance once we understood the impact on the 2018 full year after closing. Delivering guidance just a week before our financials creates potential issues. Therefore, we decided it was best to move our earnings release up, assuming QCP closed before we were set to release our results. This allows us access to the markets as needed. I want to emphasize that we plan to be careful when we raise capital, and we’ve left ourselves a reasonable timeframe to refinance short-term borrowings. When we see favorable conditions in the markets available to us, we will act accordingly, but moving earnings up should not be interpreted as an immediate action.

And Michael, I will just add that as we have mentioned, the equity portion of the ProMedica-QCP deal will come from disposition, and our assumption remains the same. So that's how we'll be thinking about it and will continue to approach it. We're not anticipating common equity to fund that deal.

I wanted to take a moment to discuss Brandywine and would appreciate your insights. My understanding was that Brandywine has been one of the top-quality operators in the industry and within your portfolio. I'm surprised to hear about yet another issue—I'm not sure if it’s classified as a default or another event that led to the restructuring. I'm interested to know how we can gain confidence that now is the right moment to increase equity exposure in senior housing properties from a RIDEA perspective at this point in the cycle.

Yes. When we discuss Brandywine, it's indeed the highest-quality real estate in our portfolio. The NOI per unit is over $29,000, and the REVPOR is more than $7,500, which are the best metrics we have. You are right about the quality of the real estate and the operating metrics. However, this deal has been over-leased and over-leveraged since the beginning. We have been in discussions with Brandywine for a long time about converting debt to equity. We believe this is the right moment, not just for Brandywine but in general, as we are excited about the current cycle. Business cycles differ from supply cycles, especially in need-based sectors like assisted living. While I won't claim we are at the absolute bottom, we believe we are very close and hovering around it. This is the optimal time to opt for equity exposure rather than debt exposure. We are confident that this is the right time and are not focused on timing it quarter-to-quarter.

Yes, we have been discussing this with Brandywine for quite some time. This business is very important to them, and they are evaluating all available options. They understand this was not a conversation about default but rather about enhancing our relationship and exploring growth opportunities together. It involved aligning the capital structure of the business in a way that promotes growth. From that standpoint, we view this as a significant opportunity, and Brandywine is poised to be an excellent partner.

This was not a default. What were the terms under which Brandywine's prior ownership decided to sacrifice their equity stake to the shareholders at Welltower? Clearly, they wouldn't do this out of the goodness of their hearts. What is the reason behind this decision?

If you consider it, a 1x covered lease means you're at 100% loan-to-value. From the perspective of Brandywine's equity holders, that equity isn't very valuable if that situation persists. However, there are growth opportunities ahead. I want to emphasize that Brandywine is not giving up. We have initiated a new management contract that, if Brandywine succeeds, will lead to significant gains for its equity holders. As I noted in my earlier remarks, we are now aligned and our fortunes will rise and fall together, which was not the case previously. Therefore, I believe they still have substantial potential for profit. If they excel, they will experience greater upside than they did before.

And Jordan, there was an exchange. We have the loans in Brandywine's management company, and we've converted equity as part of our stake, that 35% interest. So there was a change in the economics for the management company's estate that we have come out of this with.

Is there a senior housing triple net lease within your portfolio that will survive this cycle without a RIDEA conversion or a recapitalization?

I think a lot of our triple net leases will survive this cycle.

Should we expect more conversions?

Not in any material amount. We are always looking to see what assets we own in what structures. Where it should be a leased or a debt structure versus an equity structure. You can feel from our conversation with us in the last 3 to 6 months, that we are getting excited about how the next cycle looks like, so we definitely think that there will be leases that, where our interests are aligned, will survive the interest.

Let me just add to that. When we talk about the future of this business you hear us repeatedly talk about how assisted living will become much more consequential in the overall health care delivery perspective. And we are very much driving that for our senior housing operators. So in a RIDEA structure we can, and even our shareholders, can capture the value that Welltower is driving to that senior housing operator. In a triple net lease we don't capture the value, and a lot of this is about our optimism about where this industry is going. If you look in the rearview mirror of the senior housing industry an industry that was built by real estate developers who believed their wealth would be based on flipping real estate at low cap rates to REITs that is not the future of this industry. So we are restructuring RIDEA relationships with the operating platforms that we believe have the best opportunity to increase in value because of the role this real estate will play in the overall health care delivery spectrum.

That's helpful. I think we all look to your leadership and guidance on this topic because it is important and somewhat uncharted territory. We are currently witnessing, as Shankh mentioned, peak levels of supply. While we all want to be optimistic and are aware of the fundamental framework and demographics, we're also noticing a lot of these leases being restructured. Who knows what might happen during a downturn? This is a prolonged economic expansion, so we are trying to understand the risks and gain comfort.

Yes, Jordan, I appreciate your insight, and it's very valid. The population is changing, and the demographic of people aged 85 and older will start to increase significantly in about 18 months. I understand your perspective, and like everyone, we are concerned about the overall economy. However, if we don't find ways to manage the health and wellness of an increasingly aging population, we will face significant societal challenges. We believe that Welltower is being structured to address this issue and to create opportunities from it. You will hear more about this from us in the future. When we mention that we are engaging with major health systems in the country regarding the assisted living sector, it's an indication that this business is evolving, particularly for Welltower.

You talked about this a little bit, but I just want to understand a little bit better the change in guidance. Because your initial guidance was for $0.20 accretion from QCP and it just seemed like it would be a little bit higher given the timing of the closing. So is that accretion just being offset by some of the changes you just talked about with Brandywine? Or is it more to do with timing of asset sales? Or if you could just speak to that a little bit.

Yes, I can provide some guidance on that. Essentially, the answer is yes. The anticipated long-term accretion remains in the range of $0.20 per share, with a slight adjustment due to some additional dispositions. We have about $400 million that we are currently warehousing, which necessitates financing and puts some pressure on FFO, as these assets are not generating cash flow for us. Additionally, we have included just over $100 million in new dispositions, not yet undertaken by QCP, which will contribute approximately another $0.01 of dilution for the remainder of this year. The restructurings at Brookdale and Brandywine, along with the underperformance of the SHO portfolio, account for the difference in our numbers, explaining why we are at $4.025 instead of $4.08. These factors are the components leading to that figure, and we are being somewhat conservative in our projections. Yes, certainly. Holding onto the $400 million unfortunately does not provide any benefits from an earnings perspective, only drawbacks since these are not income-generating assets. We are merely managing the ownership of that. If we were to maintain that line and the TLB, we would see a minor increase, but it is quite small considering the LIBOR has risen significantly. Currently, we are at 82.5 on the line and 90 on the TLB, which creates a spread that isn't as large as one might expect. We have factored in refinancing those into the $4.025 midpoint due to various actions we believe are necessary. We decided to move the earnings release forward because we had the announcement of the closing and we were prepared to announce our earnings for the quarter. It seemed uncoordinated to close the QCP and ProMedica joint venture and then update our guidance. We promised to provide guidance once the closure happened and we understood the impact on the full year 2018, so giving guidance a week before our financials would have been risky. Therefore, we thought it best to expedite the release, as QCP was set to close before our earnings would otherwise have been shared. This allows us to access the markets when needed. We intend to be careful with our capital raising and have created a considerable timeline to refinance the short-term borrowings. We will take action when market conditions are favorable. The timing of moving up the earnings was not about any immediate actions; it was simply a strategic decision.

And Michael, I will just add that as we have told you, the equity portion of the ProMedica-QCP deal will come from disposition, and our assumption has remained so. That’s how we’ll be thinking about it and will continue to think about it. We’re not anticipating common equity to fund that deal.

Just wondering if you guys can clarify on the RIDEA sort of business, why the total number of assets went down in the same-store pool. I didn't get the explanation for that. And then secondly, as part of that, how are you feeling about guidance? You didn't change the range. Are you just more comfortable at the low end at this point given the first half trajectory? Or are you expecting a ramp-up in the second half to get to the midpoint?

Yes, I will address the first part of your question. Out of the 26 assets, 12 are being sold in New England, which is why they are classified as held for sale. Additionally, the Brookdale assets are being transferred to another operator, contributing to the change. You have an understanding of how this will affect our NOI performance. It's important to consider both the number of assets and the NOI per door. The operator we are selling the 12 assets to has a high single-digit growth rate, whereas Brookdale was experiencing a decline. This calculation of NOI per door will influence our overall numbers, leading us to a favorable outcome. John, would you like to address those guidance questions?

Yes, Juan. And so on guidance, I think we noted in the remarks, and also Tim said, that we do not generally re-forecast the component parts of same-store NOI in total during the year. And we did say that with obviously a 0.6% print in Q1, a 0.1% print in Q2, we're not anticipating that we will be in the upper end of our range, but more likely to be in the lower end of our range. And that's why we said we'd probably be $0.015 or so behind expectations on NOI for same-store. So we're not anticipating. Our numbers do not include a rebound in the second half of the year to get us back to midpoint.

I wanted to see if I could spend a second on Brandywine or if you guys could help explain to me a little bit. I guess my perception was that Brandywine, and this may still be the case, was among the highest-quality operators/owners in the space and within your portfolio. And I'm just curious, how do we, and how do you, get confidence that now is the right time to be taking incremental equity exposure at this point in the cycle from a RIDEA perspective in senior housing properties?

Yes. If you consider Brandywine, it indeed represents the highest-quality real estate in our portfolio. The NOI per unit is over $29,000 with a REVPOR exceeding $7,500, which is the best in our portfolio. You're right about the perception of the real estate and operating metrics. However, the deal was established from the beginning as being over-leased and over-leveraged. We have been in discussions with Brandywine for a while regarding a transition from debt to equity. We felt this was the right moment because we are optimistic about our position in the cycle. Business cycles differ from supply cycles, particularly for need-based products like assisted living. While I can’t say we are exactly at the bottom, we believe we are close and bouncing along it. This is the ideal time to pursue equity exposure rather than debt exposure. We see this as the right opportunity and are not focused on quarter-to-quarter timing.

Yes, we have been discussing this with Brandywine for a significant period. This is an important business for them, and they are carefully considering all possible options. They understand that this was not a situation of default. Instead, it was a discussion focused on optimizing our relationship and identifying growth opportunities together. The aim was to align the capital structure of the business in a way that encourages growth. From this standpoint, we view this as a fantastic opportunity, and Brandywine will be a valuable partner.

This was not a default. So what were the terms under which Brandywine's prior ownership chose to give up their equity stake to the shareholders at Welltower? Obviously, they wouldn't have done it out of the goodness of their hearts. What was the reason behind that?