Welltower Inc (WELL) — Q3 2018 Earnings Call Transcript

Thank you, Regina. Good morning, everyone, and thank you for joining us today to discuss Welltower's third quarter 2018 results. Today, we will hear prepared remarks from Tom DeRosa, CEO; Shankh Mitra, CIO; Keith Konkoli, SVP Real Estate Services; 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 these 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 his remarks on the quarter.

Thanks, Tim, and good morning. I am pleased by the financial results and improvement in operating metrics that we report to you this morning. Continued positive NOI growth across all our business segments has given us the confidence to raise our 2018 FFO guidance by $0.03 at the low-end and $0.01 at the high-end or a raise of $0.02 at the midpoint from $3.99 to $4.06 to $4.02 to $4.07. Despite the fact that we raised $232 million in equity in the quarter under our ATM and DRIP programs at a weighted average share price of $66.07. We’ve been discussing for a number of quarters about dispositions and restructurings. These initiatives enabled us to delever and improve the quality of our cash flow. In 2018, we have shown our ability to reinvest accretively in assets and operator relationships that are aligned with our well-articulated strategy and will drive earnings growth. Welltower’s value proposition connects senior housing, post-acute and ambulatory sites of care to dominant, financially strong health systems. This proposition is embraced by the broader healthcare delivery sector and truly differentiates us from REITs and other capital sources. A knowledge-based strategy aligned with our proprietary data and analytics capabilities is enabling Welltower to drive hundreds of basis points better relative operating performance from our senior housing assets even in a challenging new supply and labor environment. Shankh will go through our operating performance in greater detail, but we are encouraged by our positive results in this part of the cycle. Our strategy has enabled us to attract a next-generation of senior housing operators and assets as we have sold or restructured over $8 billion of non-strategic real estate on misaligned legacy operator relationships in the last 24 months. In a sector that is seeing little capital deployed into long-term real estate assets, Welltower has completed approximately $3 billion of high-quality accretive investments and developments year-to-date and the year is not over. In addition to the $2.2 billion ProMedica joint venture that closed this quarter, today, we announced nearly $0.5 billion of new medical office investments including an expansion of our growing portfolio with the Johns Hopkins Health System and Provident St. Joseph Health. Keith Konkoli will tell you more about these investments. John Goodey will take you through our third quarter results, and I hope you will agree that the investments we have made in people and technology, as well as having made tough decisions, have best positioned Welltower to drive shareholder value as healthcare delivery transitions to lower-cost sites of care that will improve health outcomes, particularly in view of the aging of the population. You will be hearing more about this at our Investor Day to be held at the St. Regis Hotel in New York City on December 4. Now, over to Shankh.

Thank you, Tom, and good morning everyone. I will now review our quarterly operating results and provide additional details on four topics. Number one, SHO results and trends; two, senior housing triple net business; three ATM managed care for medical joint venture; and four capital deployed in the Medical Office segment. We remain confident in our ability to execute at this point in the cycle, especially given our unique data science capabilities and are excited about the path towards further value creation which I will detail for you here. In our Q2 call, we told you that we are encouraged by the return of seasonality to our occupancy trends. Our year-over-year occupancy declines went from 200 basis points in Q4 of 2017 to 190 basis points in Q1 of 2018 to 110 basis points last quarter. I am delighted to inform you that the gap is only 10 basis points in Q3 and it’s actually up 10 basis points in the month of September. And perhaps more significantly, we have been able to effectively close the occupancy gap by holding the rate growth for the overall portfolio at 2.8%, driven by major U.S. markets which is up 3.2%. This speaks to the exceptional quality of our real estate and our operating partners. We had a strong summer where we saw seasonal strength not seen over the last few moving seasons because of the heightened deliveries that have absorbed typical seasonal demand. To provide you some more context, Q3 over Q2 sequential occupancy growth of 80 basis points is the best we have seen since Q3 of 2014. This allows for year-over-year revenue growth of 2.9%, which accelerated for the first time since Q3 of 2014 on a sequential basis. So, clearly, we are encouraged by the trend. Having said that, I would caution you not to draw any conclusions from one quarter of numbers but to focus on longer-term trends. Senior housing is an operating business, and we will continue to see some volatility as with any other cyclical business. But our extremely diversified portfolio across geographies, operators, product set, and equity does provide unique diversification benefits that others cannot even remotely replicate. A second topic I would like to discuss is our senior housing triple net leases. Many of you asked whether any lease will survive this cycle and how many leases will be converted into RIDEA structure. Our answer has been and remains that real estate and operators come first and structure second. We continue to believe that in the triple net structure, when a well-aligned lease exists, both operators and Welltower shareholders can make money. In that context, we are delighted to inform you that Brookdale has agreed to renew our Sally master lease for the next eight years. As I mentioned in the last quarter, with $28 million of cash rent, this was our biggest exposure in our entire triple net business. The lease is signed to commence on January 1, 2019, at which point rent increases at the contractual amount thereafter. Welltower has the opportunity to fund some CapEx on a contractual market return as Brookdale remains responsible to fund CapEx at the existing terms of the lease after that. We continue to believe that Brookdale, which makes money from the lease today, will improve performance and will drive even more profitability as it leases out from a cyclically low occupancy. This renewal effectively eliminates any material REIT maturities for Welltower until 2024. This brings me to another topic, and the rhetoric that if an operator has low EBITDA coverage, they will walk away from a lease. That sounds a lot like the pundits who predicted that anyone with negative equity in their house coming out of the last recession would return their keys to the bank. I would like you to consider that the operators see their cash flow in terms of EBITDARM, not EBITDAR. They consider cyclically low cash flows relative to their long-term potential. They have G&A and scale implications to their broader business and often, they have dealt great business over many years that they wouldn’t necessarily want to give up right before a multi-year recovery of the economy. A majority of businesses that go through cyclical lows do not return their keys, as this foregoes their ability to participate in the recovery. Welltower has a unique platform with many operating partners in all major markets. We have alternative plans for every asset and are happy to execute on those plans if need be. However, we will not place any asset in our SHO portfolio unless we believe it will have superior long-term growth prospects. There are definitely other toolsets of alignments, as we have demonstrated from the Sally example. We can also leverage structuring rights such as rent resets, which drove the senior housing triple-net growth this quarter, subordination of interest, or other tools that are available to us. To the next topic, we are excited about the closing of the HCR ManorCare transaction in Q3. The integration process has started with a great plan and is on target. The only financial update we want to provide is that ProMedica and HCR leadership now expect higher synergies than we expected previously. You will hear more about this topic directly from Randy Oostra and Steve Cavanaugh at our Investor Day on December 4. We are encouraged by the green shoots in the skilled nursing industry and the improving occupancy picture throughout the Arden Court portfolio, even before our CapEx program is executed. We continue to believe it will create extraordinary value for our shareholders in the long term from this transaction—perhaps even more than what we anticipated. Lastly, we are very pleased to highlight that after a long hiatus, we are in agreement to deploy about $0.5 billion of capital into very accretive medical office transactions, and we are confident in some additional off-market transactions in Q4 and Q1. We mentioned to you before that we like medical office business very much, but the pricing of recent trends has not made any economic sense to us, especially given many of these portfolios include as much as 20% to 25% of hospitals and other assets that command significantly higher cap rates. We have been disciplined and invested all our efforts to build new relationships and expand existing ones, which we believe will bring additional opportunities to deploy capital in the near future. We are extremely happy we have under contract for approximately $400 million on a very high-quality portfolio of 23 Class A medical office properties affiliated with major high-quality healthcare systems with an average age of ten years. Keith, who has a longstanding relationship with the principals, will provide you more details on the portfolio. While we are very encouraged by the going in cap rate and total return of this transaction, we think the IRR will be significantly enhanced by the already identified development opportunities. In addition to the announced acquisition of a high-quality medical office building on the campus of Johns Hopkins Howard County Hospital, we are delighted to inform you that we have signed a development agreement with Johns Hopkins to develop new complementary sites of care on the land under bridge transaction and three others we currently have with the health system. Over the last two years, you have heard from us how we are positioned for cash flow and NAV growth. We trust all our actions this quarter demonstrate to you that we are squarely on the path to capture the next level of value. While we cannot sound the all clear on fundamentals, we are encouraged that the outlook for value creation is getting better. With that, I will pass it over to Keith Konkoli, Head of our Outpatient Medical business.

Thank you very much, Shankh, and good morning everyone. I appreciate the opportunity to be able to spend a few minutes on our outpatient medical business. I recently joined Welltower after spending nearly 20 years with Duke Realty. At Duke, I oversaw all facets of the medical office business, including development, leasing, asset and property management, and consultant sales in June 2017. Having led the very successful exit at Duke, I took the time to evaluate the right next opportunity. It was important to me to join a forward-thinking company, and I was very intrigued by Welltower's mission: to partner with health systems to reduce costs and improve delivery of care across the continuum using creative real estate solutions. I felt fortunate to have the opportunity to be part of this team. I’ve spent my first 180 days getting to know the portfolio, the teams, and the systems that Welltower built over the last 17 years. I am happy to report that we have a fantastic high-quality portfolio that is affiliated with some of the best healthcare providers in the country. Naturally, as with any large portfolio, we have work to do. But we have a best-in-class team that can tackle any challenge and has built systems to provide best-in-class service to our tenants and health system providers as we drive growth in our future. Our team truly understands how to operate a real estate portfolio in a way that balances client satisfaction and value creation. We build our portfolio by taking a very disciplined approach—sitting on the sidelines when pricing expectations become unrealistic and stepping up our activity as we find the right, high-quality accretive opportunities. I believe one of the most exciting things about our portfolio is the embedded opportunity. We have been very purposeful in partnering with financially strong leading health systems that will be the drivers of change in the evolving healthcare environment. Shankh highlighted some of our recent activity in the outpatient medical space. Specifically, he mentioned the 23 properties portfolio that will be closing shortly. I am particularly excited about this acquisition as it strengthens our relationships with several of Welltower’s existing partners and introduces new partners into our fold. These represent some of the most financially strong, successful, and forward-thinking health systems in the nation, all of whom have a history of partnering with third-party capital. I had the pleasure of working with all of these systems in my time at Duke Realty and look forward to making the full power of the Welltower platform available to them. Shankh also mentioned our impending acquisition, adding a fourth building and over 160,000 square feet to our Johns Hopkins affiliated portfolio. This Class A building is in partnership with one of the nation’s leading institutions in an outstanding network of distinguished physicians. In parallel, and Shankh also mentioned this, we recently signed a development agreement with Johns Hopkins Howard County General Hospital that calls for the exploration and development of alternative sites of care focused on meeting the hospital’s growing need to care for the aging population. This builds on our existing Johns Hopkins relationship and demonstrates how we are using our platform to help health systems implement their real estate strategy to meet the public health and clinical needs of their patient populations. I look forward to talking to you more about these transactions at our Investor Day. Lastly, I would note that we believe the multiple recent partnerships that we’ve announced are the precursor to future growth in the segment. Our discussions with the best U.S. health systems continue to advance, and the pace of dialogue is increasing. Our partners look to us to help facilitate their broader real estate strategy and make connections with the best-in-class operators in adjacent sectors such as senior housing and post-acute.

Thank you, Keith, and good morning everyone. It’s my pleasure to provide you with the financial highlights of our third quarter 2018. As you have just heard from my colleagues, Q3 has been a successful and very active quarter for Welltower, whether it be investing, portfolio management, or improving our income quality and balance sheet. This quarter was particularly active in investments completed. In aggregate, we invested $2.2 billion in acquisitions and joint ventures in Q3 at a blended rate of 7.9%. We also placed three development projects into service totaling $96 million at the blended stabilized yield of 8.5%. Alongside these, we completed $256 million of dispositions and received $60 million in loan payouts. I would like to expand on Tom’s comments regarding the continued increase in the quality of our income line. Over the last five years, we have divested $8 million of assets as we refined our portfolio towards future earnings stability and growth. In that same time period, we have recycled this capital and invested in and developed over $16 million of high-quality assets with financially strong, best-in-class partners, often in premium locations such as New York, LA, London, and Toronto. Additionally, we have significantly reduced our earnings from our loan portfolio. Welltower, as an organization, continues to improve our operational excellence, and I would like to thank our colleagues that work judiciously on this every day. These efforts enabled us to report G&A cost for the quarter at $28.8 million, a continued reduction over prior year levels. Our overall Q3 same-store NOI growth was 1.6% for the quarter, slightly above the midpoint of our full-year guidance. All our business segments grew in Q3. Senior housing operations, same-store NOI grew by 0.3%, and as you heard from Shankh, we are encouraged by the recent occupancy improvements. Senior housing triple net growth was strong at 4.2%, with both outpatient medical and long-term post-acute growth at 2.1%. Today, we are able to report normalized third quarter 2018 FFO results of $1.4 per share. As in the past, we do not include one-off items such as lease modifications or loan repayment fees in our normalized numbers. Last quarter was also very active for Welltower on the balance sheet and capital fronts. Our Q3 2018 closing balance sheet position was strong with $191 million of cash and equivalents, with $1.7 billion of capacity available under our primary unsecured credit facility. Our leverage metrics were slightly above trends. However, expected dispositions will reduce this number significantly in the coming quarter or two, and I would reiterate that over time, our average plan sees our leverage returning to levels generally seen prior to the acquisition of QCP. In July, we closed on a new $3.7 billion unsecured credit facility with improved pricing across both aligned and credit and off-term line facility. In August 2018, Welltower successfully placed an aggregate $1.3 billion of senior unsecured notes across five, ten, and thirty year tenors with an average maturity of 15.4 years and a blended yield of 4.4%, again demonstrating our strategy of managing our balance sheet in a long-term durable way. In addition, during Q3, we raised $232 million through our ATM and DRIP programs at an average price of $66.07 per share. I would now like to turn to our guidance increase for the full year 2018. We are increasing our normalized FFO range to $4.02 and $4.07 per share from $3.99 to $4.06 per share prior. This is based upon updated, current operational performance expectations, with the full year 2018 overall expected adjusted same-store NOI guidance range remaining at approximately 1% to 2% and the reduction in anticipated disposition proceeds on $2.4 billion to $2.2 billion at a blended yield of 6.0% overall from 2018. As usual, our guidance includes only announced acquisitions and includes all dispositions anticipated in 2018. On November 21, 2018, Welltower paid its 190th consecutive cash dividend of $0.87. This represents the current yield of approximately 5.3%. With that, I will hand it back to Tom for final comments.

Thanks, John. So, as you’ve heard from Shankh, Keith, and John, the broad strategic overhaul that we initiated at the start of 2017 has prepared us well to manage the current operating dynamics of the senior housing business. We are bumping along the bottom of a cycle now. Our positive Q3 financial results, along with improvement in operating metrics, should give you some level of comfort. The fact that we’ve been able to identify approximately $3 billion in new strategic and accretive investments year-to-date demonstrates that we are further well-positioned for earnings growth as the cycle turns. Now, Regina, please open up the line for questions.

Thanks, good morning everybody. I guess, I wanted to maybe just touch on the senior housing operating platform and kind of A, your expectations on sort of when that business turns. It sounds like it’s picking up, but as you sort of look out how do you sort of look at the supply picture? And then, I don’t know, Shankh or Tim, I know the pull changed a little bit this quarter from last quarter, and I am just trying to see if you could give us a little bit more detail on how some of the changing pull dynamics impacted same-store growth this quarter.

Sure. So, Steve, obviously, let’s talk about the three questions one at a time. First, the pull change. If you look at, we don’t talk about specific operators. We have a very strong same-store policy that you have to wait if there is an operator change; you have to wait for five quarters for assets to come in. Without getting into the specific details, I think there are some implications you guys think that we restructured another relationship and thus, driving same-store. I would point out that if you go to the last quarter’s call, Tim walked you through how the decline on those pulls that we have changed actually hurt our earnings. The second point I would point out is that if you look at Page 3 of the supplemental and look at the total occupancy growth of the cash SHO business, you will see there was a 100 basis point occupancy increase while same-store is only 80. So that tells you it’s a broad-based strength we have seen. Obviously, it’s a billion dollar for us. So, five x is going in and out really doesn’t change the fact; but I am trying to point you to Page 3 of the supplemental where you see that overall our shop business has seen more increase relative to the same-store. And going back to the 2019 supply question, this is a very broad topic, and probably not suited for this call. We have an Investor Day coming up. We will have a very detailed discussion about this particular topic. I want to tell you how we see supply. It is just not market diverse supply; we have a data science team that is very granular. We have built a metric called ACU, which is adjusted composition units. This is based on not only the number of supplies but also the covariance of different products, drive time, and other machine learning algorithms into it. We have a very specific view of how many of the new supply impacts us. Property we have shock factors. We will walk you through all those details at our Investor Day. Needless to say that you are hearing that we are encouraged about the outlook. We are not necessarily calling for a bottom in any industry, but we are definitely encouraged by the outlook, and we will have a broader discussion about this topic on our Investor Day.

Hi, just maybe a broader question for Tom. You highlighted that you see yourself different from altogether REITs out there. Do you consider yourself a soft REIT? And if not, what’s the key difference?

I consider the company a healthcare delivery platform that’s very real-estate heavy. REIT is not an industry; it’s a tax selection. And because we are a very property-heavy company, it makes sense for us to elect REIT tax status. So, I don’t think I have that much in common with other REITs in other sectors because they invest in different property types. We invest in healthcare assets. But, our business model is much more than managing real estate assets in a fund-like operating structure. We are intimately involved in the operations of this business, whether it be our senior housing business or our medical office business. But, I would remind you that REIT is not an industry; it’s a tax selection.

I'll touch on the FFO aspect of it and Shankh can comment on the actual transaction. There is no impact from the acquisitions on a modeling standpoint; we should consider them occurring at the end of the year and having no material impact on FFO numbers. You’ve heard me mention that we do not believe it makes any sense to buy real estate yielding less than a 7% unlevered IRR, and we believe that we’ll hit 7% unlevered IRR in this particular portfolio.

Thanks for taking the question. Shankh, just to clarify on the Sally lease. Can you clarify if there was any cut to rent? Any restructuring to the bump? And when you said the CapEx from it, does that sort of imply a 7% market return?

Brookdale is right now in a quiet period, so it’s very hard for us to just talk about specifics. They are very— we don’t want to— the opposite partner wouldn’t want to get into that. I have mentioned on the call that once Brookdale is through their quiet period, I am happy to walk you through all those specifics. I think your market return comments that you’ve seen in other restructuring with Brookdale are pretty much spot-on. You are in the zip code, but you might be too low. The second question is—I already mentioned the rent is the same as it is. The escalator has changed and it’s slightly higher, but I just don’t want to discuss that on the call. Once Brookdale goes through its quiet period, we will be happy to answer any questions. The whole discussion is what I want you to focus on: even at that level, we mentioned that Brookdale actually makes money. In any triple-net relationship or even in our RIDEA, the focus of Welltower is not to grab all the economics we can but to have a healthy driving operator where they can make money and we can make money. Here, Brookdale makes money as we are sitting under typically low occupancy, and as they lease out these buildings, we think they will make significantly more money, which is always good for us.

Okay, great. And then just to clarify on the senior housing side. I know it’s tough to call 2019 if it’s a turn or not, certainly the results are encouraging. But I want to maybe focus on the expense side. The comps were very high last year; you had a 0.8% increase year-over-year in expenses. Can you just walk us through how you think about the structure today going into 2019? Are there other levers you can pull to control other parts of the expenses assuming labor continues to be a headwind?

Labor continues to be a headwind. I am glad that you actually know this; we had a very, very tough comp. Q3 of 2017, we had a 4.1% NOI increase on the back of a very low expense comp. Obviously, the expense growth this year is not just a factor of expenses but also a factor of what happened in Q3 of last year, and so that is absolutely the right observation. So that Mercedes will add some comments on how we think about expenses, but we think the headwind continues.

We both have talked about the initiatives that we have undertaken at Welltower to try to bring expense savings to our operators. Some are being done; some of those efforts that pop up in our mind right now is labor. It’s something that is impacting a lot of industries, naturally, and certainly is in senior housing, which is such a labor-intensive business. So, we are very focused on trying to bring efficiencies to our operators and trying to help them with our scale.

Just to add one point, I just want you to understand that the big part of the minimum wage increases have been flowing through our numbers. San Francisco went to $15 this year, that’s flowing through the numbers. From here on, you will see more of inflation and increase. LA will hit $15 next summer. So you do have this, but I will say, looking at a more medium to long-term perspective, a lot of the minimum wage $15 driven growth has been flowing through our numbers for the next four to five years. We feel encouraged about the long-term. But we are obviously, as you said, managing in the near term.

Thanks, good morning everyone. Congrats on the results.

Hey, Steve.

There was an announcement in the industry and during the quarter about this additional $3 billion of senior housing development in various urban centers in the U.S. It wasn’t a huge number in the grand scheme of things, but the headlines seemed to draw some attention. From your perspective, I'm curious whether that sort of activity was already contemplated in your development plans when thinking about your focus on every markets in particular over the next several years. Just want to get your thoughts around the competitor developments and how that’s sort of being made?

Thanks, Steve. I think that announcement clearly validates a thesis that we’ve been articulating for a few years and have been working towards for a few years. I think there is demand for a next generation of senior living product in major metro areas. You take a city like New York, which is made up of many villages that are densely populated that have an aging population. There is room for lots of senior housing property to be brought to this market. But I would say it’s a next-gen product. I don’t see any of the product in a market like New York today being sufficient to meet the needs of the upper end of this population. I am going to tell you I’ve dealt with it myself personally; and there really are no options on the Island of Manhattan today. The first viable option will be what we are opening by the end of 2019 or early 2020. On our Investor Day, you are actually going to have a chance to go into that building. It’s coming out of the ground. So, in summary, Steve, I would say that we have a number of plans to bring that type of asset into the major metro centers. So, stay tuned.

Hey, good morning. Thanks for the time. I will skip the shop questions as it sounds like you’ll address those in December. But this past summer, I recall you are saying, getting excited about maybe buying more senior housing assets. Shankh, I know you don’t focus on cap rates, but could you maybe talk about where potential deals or marketed deals, senior housing deals out there being priced? What sellers are asking as compared to your replacement cost analysis or your 7% required IRR threshold?

From our perspective, look, we are product agnostic, as I mentioned. Obviously, with different products requiring different levels of risk-adjusted returns. So, I don’t want you to think that the 7% is a hard and fast number. We talk about 7% as we have some minimum return required for investing capital. And you said that the senior housing market is a very, very robust market. We are seeing a lot of participants coming in. Lot of core capital being priced. So obviously, if you think about the options, they are very densely populated and the risk of the prices are very high. If you look at our investment sources and we give you these numbers on our supplemental, quarter after quarter after quarter, we are not in those options. We have a relationship-based investment strategy. We have almost 80% to 100% of what the acquisition done from our existing relationships. We are not in those equity funds but they are very densely populated, and we see cap rates at levels we can’t make sense of. But we are very disciplined in capital allocation, so when it will make sense, we will be there.

Yes, Shankh, this is Mercedes Kerr, and I would add one more comment, and that is I think for the first time really we are starting to see a real distinction between Class A and Class B assets in senior housing in terms of cap rates. The capital that Shankh talked about is really very interested in that Class A quality which is I think generally what makes up the Welltower portfolio, but so, happy to be sitting on the assets that we have, and perhaps the distinction in cap rates wasn’t as pronounced as it is today.

Thanks. Good morning. So, I am aware there are certain things you want us to focus on, but if you will forgive me, I’d like to ask a couple of questions that I am focused on. On the cap rate question on medical office, you gave a cap rate for the Johns Hopkins one, but not one for the larger $400 million transaction. Is that something that the seller is requesting? Is the actual number below or above the 4.9% that you are willing to provide in the Johns Hopkins? Can you just sort of frame it a little bit for us?

We have a fee with the seller that we can’t disclose it before the deal closes. But it’s above, to answer your question specifically, it is not that hard to comprehend what drives an IRR. We are already telling you that it’s a very well-leased portfolio. You know what the bump generally looks like. If I am telling you that we can solve for unlevered 7, that gives you a general number. We will give you the number next quarter when the deal is closed.

Hey, Shankh, it’s Michael Bilerman speaking. Just as you think about the initial yields versus what you talked about underwriting everything at a minimum of a 7% IRR, how does like the Johns Hopkins outpatient medical building where you go in at a 4.9%? What’s the—what’s the underwriting to get to a 7% unleveraged IRR? How should we be thinking about what you are putting in there for an asset as 100% leased? I assume under a long-term lease.

Yes, so you are correct about the lease. We will not get the 7% unlevered IRR to buy an asset at 4.93% cap rate, which it is. But this is why I said you look at the development agreement we signed. This building fits right next to our charter building that has five acres of land. This particular building has ten acres of land and we told you we just signed a development agreement with them. So do we take—we will get to 7% or higher IRR from the whole relationship we do. That’s what we are focused on.

We said investment-grade—we told you in fact, when we had the group here in our offices, that we expected that they could be downgraded to triple B plus. And they were downgraded to triple B plus by Fitch and Moody’s; S&P put them to triple B.

Hi, thanks. Just shifting to dispositions. The guidance implies $800 million in Q4. But the cap rate would be in the mid-4% range unless that’s being dragged down by some other non-yielding properties. So one of you just go through maybe the Q4 stuff?

Yes, Todd, you are correct. So it’s about $750 million in assets to be sold during the fourth quarter. But $225 million are non-yielding and the remaining have a 6.4% yield on them. So, it’s about $520 million of non-recourse dispositions at a 6.4% yield and then $225 million at the zero yield.

Yes, thanks. Shankh, I want to touch on your prepared remarks regarding QCP. I believe you said that you saw occupancy pickup sooner than you expect without the CapEx being invested within that portfolio. Can you kind of quantify the occupancy pickup and the reasons why you think that trended higher?

I specifically talked about Arden Court, which is the memory care business. Remember that we got 150 skilled nursing assets or post-acute assets and 55 Arden Court assets. My comment was very specific to Arden Court, which as you know, we talked about that will go through—obviously both sides of the business will have significant CapEx. My comment specifically is we have seen occupancy increase in the Arden Court business. It’s too early to comment how much, why that happened, but it is not very hard to imagine why that happened, right? We are seeing across the board in the senior housing spectrum. Look at our entire RIDEA portfolio; it’s a $1 billion business. It’s almost 550, 600 assets. That sorts of gives you a sense of the industry, obviously the high-quality end of the industry. But there is occupancy growth. So, we have seen a lot of the seasonal patterns of the business have been really eaten up by new deliveries as deliveries are starting to come down, the impact obviously is getting on the margin better.

Just a quick question about the development pipeline. It is about 70% senior housing and 30% office. Do you see that mix changing through the next three to five years?

It’s opportunity-driven, Sarah. I mean, we are not trying to target a mix. It’s purely driven by opportunity. So I would not look for any trends quarter-to-quarter. It's purely deal-driven and opportunity-driven. We are very focused on development on both sides of our business.

Hi, good morning. Wanted to see if you could talk a little bit more about the earlier comment of the alignment of interest in a triple net lease and maybe go into that a little bit more? And in the context of coming out of neck, we didn’t really hear too much in the way of enthusiasm from operators for triple net lease. So, maybe you could comment on what you are seeing out there in terms of the inclination of operators to want to lease versus RIDEA?

Dan, you didn’t attend my panel. I talked about that for an hour.

No, I did miss your panel. I heard about it, but...

Okay, so look, there is—at the end of the day, I think there is too much focus on whether it’s RIDEA, it’s triple net, that’s a moot point, right? The idea is very simple. We need our operators to be making money. We want the thriving operators. At the end of the day, I want you to understand this is a people business. We want our operators to invest in people, in that system, and that enhances the value of our real estate. So, whether we can do that in a well-covered lease, whether we can do that with other alignment features, I think I mentioned additional four in the call already. I am not going to repeat myself, or we do a pure equity transaction called RIDEA. That’s a moot point, right? We want—at the end of the day, what we want you to know is that we are very, very focused. We think it’s an operating business. And the senior housing—obviously senior housing operating side, and we want our operators to do very well. And we think that enhances the value for our real estate, and we think there are several ways to get that. There is just not only one path.

Good morning. I had a question on managed care. You got Anthem out there talking about their Medicare Advantage and some of the rules coming in 2019 and how they are increasing their interest in senior housing. Is that something you guys are looking to expand on any payer relationships? Or is that something with the ProMedica relationship that could be an opportunity for you?

Yes, this is Mark, Eric. So yes, absolutely. So, nationally, we see a rapid acceleration of Medicare Advantage. Some of the payer methodology is being more value-based in the post-acute it’s EDPM, which we’ve mentioned a fair amount when we did the ProMedica partnership that our partners both at ManorCare and ProMedica are pretty bullish that the new methodologies should lead to better-enhanced care and from a reimbursement perspective, Shankh used the term green shoots, which is increased reimbursement on that side. I think you will see us in the future talk a bit more about opportunities with payers. Our senior housing platform is providing a great amount of care to the senior population, and increasingly they are becoming greater sites of care and greater linkage both to the delivery system partners and also to payers. So there is more to come in that aspect for sure.

Just to follow up on that, were there any specifics you could provide about the types of opportunities you’re looking into with some of these payers? Are they fairly comprehensive across different types of care services?

Yes, I think fundamentally with our partnerships, not only are we seeing an increased interest in skilled nursing and assisted living from payers, but also there is a lot of movement towards home health and how we can provide a lot of those alternative services to our senior population.

Yes, just to add to that, with the relationships we have, we are really looking for opportunities to provide care across the continuum. Our health system partners are looking to really define how they deliver care at all levels, and any expertise we can provide will result in better outcomes for the patients as well as financial outcomes for the systems and for us.

Sure, thanks. And then, last question I had for you is on Brookdale just the ongoing restructurings and transitions. Can you talk about how you are thinking about that business and what changes you would potentially anticipate there?

So obviously, we’ve talked about the fact that we’ve transitioned a lot of Brookdale’s assets over the last few quarters. We feel very good about the quality of those transition partners and how they are positioned to drive growth and how that benefits the asset quality over time. Just as we said, Brookdale analytics continue to develop and grow so we’re optimistic about what’s coming out of that portion of the portfolio.