Welltower Inc (WELL) — Q4 2018 Earnings Call Transcript

Thank you, Nicole. Good morning, everyone, and thank you for joining us today to discuss Welltower's fourth quarter 2018 results. Following the Safe Harbor, we will hear prepared remarks from Tom DeRosa, CEO; Shankh Mitra, CIO; 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 this morning's 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 fourth quarter results. Welltower achieved 1.6% total same-store growth in the quarter. We are particularly encouraged by the 40 basis points year-over-year occupancy increase in our Senior Housing operating portfolio, and the sequential coverage increases in both our triple-net Senior Housing and long-term post acute portfolios. Fundamental performance in the quarter was consistent with our expectations, partially offset by delayed timing in investment activity and equity issued to prefund announced acquisitions, resulting in $1.01 per share of normalized funds from operations. In the fourth quarter, we issued $552 million of equity at a weighted average share price of $68.41. And with that, I will hand the call over to Tom for his remarks on the quarter and the year.

Thanks, Tim. At our investor day on December 4th, we took the notable step of announcing 2019 FFO guidance. Based on our Q4 results and our confidence in our outlook for 2019, I'm pleased to reaffirm that guidance this morning. Our guidance of $4.10 to $4.25 in normalized FFO per share represents a 4% increase at the midpoint in our guidance range over our 2018 results. As Tim highlighted, our continued strong operating results in Q4 reflected the positive momentum in our senior housing business that we talked about throughout the year. Most notable in the quarter was the fact that we completed $559 million in acquisitions at a blended yield of 5.6%, nearly 90% of which are medical office buildings associated with investment grade health systems. These investments help drive total investment activity to over $4 billion for the year. Our ability to source accretive investments continued in 2019 with the announced acquisition of 55 outpatient medical buildings from CNL Healthcare property for $1.25 billion. This further enhances our ability to deliver growing high quality and sustainable cash flow growth. Given that T&L and the majority of our announced investments will close by mid-year, we expect FFO to accelerate in the second half of the year, setting us up well for 2020 and beyond. In the fourth quarter, we raised $552 million of equity driving down sequential average and prefunding late quarter and early 2019 investment activity as we continue to manage our business with a focus well beyond the current quarter. This included a $300 million direct investment by the Qatari Investment Authority, one of the highest quality and most resilient Capital partners in the world. This is part of a broader investment partnership that was a long time in the making. We are honored to have entered into this partnership with the QIA, which illustrates their belief in Welltower's unique business model and strategy for driving the future of healthcare real estate. Now, I'm delighted to pass the mic to Shankh Mitra, who will give you a closer look at our operating performance and investment activity.

Thank you, Tom and good morning everyone. I will now review our quarterly operating results and provide additional details on two topics: one, operating results and trends; two, recent investment activities. We are cautiously optimistic about the recent performance of our Senior Housing portfolio. On last quarter's earnings call, I discussed the narrowing of occupancy gap in year-over-year results. It appears that occupancy has reached an inflection point this quarter, specifically with a 40 basis points year-over-year occupancy increase. Sequentially, fourth quarter over third quarter occupancy and revenue growth has been the best we have seen since Q4 2015. While one quarter does not make a trend, we are particularly encouraged by the 120 basis points of occupancy increase in our Assisted Living segment, as the impact of new supply is starting to wane and demand is beginning to pick up. We also saw a sequential occupancy increase of 90 basis points in our Senior Housing triple-net portfolio, driving coverage of one basis point. Our reported growth rate of 2.2% is somewhat masked by lower growth in the international market, whereas core U.S. market experienced 2.7% growth. Expense growth remains elevated, driven by labor. We continue to look for greater use of technological and analytical solutions to drive greater efficiency in the labor model. We are beginning to see the results. For example, since implementing our new systems, we have seen a significant decrease in employee turnover. While we are working actively to mitigate labor challenges, the demand side of the equation is starting to look brighter. While it is true that the explosive growth of the population aged 86 and over is still a handful of years away, the median age by definition suggests an equal number of our customers are below that age mark, and the population will begin to grow significantly starting later this year and into next year. We are also becoming confident in the post-acute business, which, while unlikely to be a V-shaped recovery, appears to have fundamental support. Meanwhile, pricing of skilled nursing assets has materially increased due to the amount of capital deployed in that space. For example, during the first quarter of this year, we sold 22 Genesis assets that were below market coverage for $252 million at an 8.95% yield, which at market coverage and rent represents significant value creation. While we keep reading about how skilled nursing facilities should be around two times EBITDA on coverage, this Genesis transaction highlights the significant gap between theoretical worth and how practitioners behave. This is no different from the Senior Housing triple-net coverage rate I described during the last quarterly earnings call. While selling Genesis assets is short-term earnings dilution to the tune of $0.025 per share, we believe our shareholders achieve significant value and an improved growth profile for the enterprise going forward. Roughly 4% of our current portfolio is attributed to Genesis, down 70% from the peak, and a significant portion of what remains is in PowerBack format. We continue to invest in the model through corporate skill development. The PowerBack facility we opened 13 months ago is currently 64% occupied, demonstrating the power of that product. As we have consistently told you, our investment philosophy is driven by price and total return, not a desire to solve for specific operator or segment exposure. This brings me to my last point. Since the last quarter's earnings call, we have announced $2.25 billion in acquisitions comprised of $1.5 billion in medical office and $725 million in Senior Housing, bringing our total announced or completed medical office transactions to $2 billion over the last six months. This has prompted speculation in the research community that Welltower is actively trying to tilt its asset mix towards medical office. As we have consistently said, we like the medical office business, but at a price. We have buyers and sellers of almost any asset at a price and implied IRR. The Cap rates at which MOB portfolios have traded during the frenzy of 2017 did not make sense for Welltower's shareholders. We passed on every one of these opportunities and would do so again at those economics. As Cap rates have expanded, we are determined to often take acquisitions at over $2 billion of Class A medical office at a blended Cap rate of 5.7%, resulting in a 7% plus IRR. This diligent approach adds excellent value for our shareholders. While we feel very bullish about our acquisition pipeline, we will not buy any asset unless the total return makes sense regardless of current advantages of the capital. We remain disciplined and look for off-market or broken-market transactions, with sellers increasingly focused on quality and reputation more than just price in this volatile capital markets backdrop. Increasingly, highly reputable developers and operators are joint venturing with Welltower by recapping their current portfolios and forming mutually beneficial growth plans leveraging our data analytics platform. While we remain very selective on opportunities to pursue, we are delighted to announce that we have locked up over $3 billion in development and construction pipeline across seven separate relationships in both Senior Housing and medical office over the last six months. This pipeline is not an obligation, but our option to deploy capital at attractive returns and benefit from first look and last look, therefore creating significant value for our shareholders. The first project of this pipeline is the development of two Class A trophy medical office buildings in midtown Charlotte with Pappas Properties. These two buildings are 100% leased to Atrium Health for the next 15 years and will be an anchor as we build out further projects with our partner. On the Senior Housing side, we are delighted to share that since our last call, we have committed to approximately $725 million for acquisitions at a blended Cap rate of 6.6%. These acquisitions have an average age of 4.5 years and will be managed by three different operating partners. Our pipeline remains strong in Senior Housing across both existing and new relationships. Our data analytics capabilities, Senior Housing and health system relationships, and our team’s creativity, reputation, and integrity are the main reasons why more and more highly reputable partners are reaching out to us today, compared to historical trends where we primarily reached out to them. We are proud to be competing based on our capabilities rather than on cost of capital. In summary, while the fundamentals of many asset classes and industries are starting to mature, both the internal and external growth prospects of Welltower are accelerating. We remain disciplined, vigilant, and cognizant of the fact that we exist to create value for you, our shareholders, and we feel the prospects have never been better. With that, I will pass it on to John Goodey, our CFO.

Thank you, Shank, and good morning everyone. It's my pleasure to provide you with the financial highlights of our fourth quarter and for the full-year 2018. As you have just heard from my colleagues, Q4 has been a very successful and active quarter for Welltower, as has 2018 overall. Before I proceed with the usual commentary, I wanted to highlight three points. One, we are confident in our continued growth in 2019 and reaffirm our 2019 guidance given at our Investor Day, with growth expected in all our business segments. Two, our strong, proactive, and efficient writing of invested capital in 2018 and in 2019 to date has enabled us to reduce financial leverage and improve returns for all announced acquisitions. Three, we are fruitfully investing $4.1 billion in 2018, making it one of the most active years in the Company's history. Our overall Q4 same-store NOI growth for Q4 2018 was 1.6% for the quarter and 1.6% for 2018 overall. This is above the midpoint of our full-year guidance. Senior Housing operating same-store NOI grew by 0.6% in the quarter and by 0.4% in 2018 overall. As Shank noted earlier, we are encouraged by another quarter of improved occupancy. Seniors housing triple-net grew by 4.3% in the quarter and by 3.7% for the year, again with improved occupancy, outpatient medical grew by 1.8% in the quarter and by 2.2% for the year. Finally, long-term post-acute grew by 1.4% in the quarter and by 2.1% for the year. We continue to focus on Welltower's operational efficiency, even with significant investments in technology enablement and data science and the hiring of additional high-quality colleagues to our team. Our G&A expenses relative to the size of our portfolio are a protector. Overall G&A spend was $31 million for the quarter and $126 million for the year. Today, we are reporting a normalized fourth quarter 2018 FFO result of $1 per share and $4.03 per share overall for the year. These numbers reflect the increased Q4 2018 results and as in the past, we do not include one-off income items or fees in our normalized numbers. Last quarter and 2018 overall were very active for Welltower on the balance sheet and capital raising front. We continue to be efficient and proactive raisers of equity capital to fund the growth of our business. During Q4, including the $300 million strategic investment made by the Qatar Investment Authority, we raised $552 million of gross proceeds from common equity at an average price of $68.41 per share. This included $129 million raised after our Investor Day in Q4, originally modeled to be in 2019. Overall, for 2018, we raised $795 million of gross proceeds at an average price of $67.51 per share. In addition, since January 2019, we have raised $195 million of gross proceeds at an average price of $73.97. During the year, we issued a total of $1.85 billion of senior unsecured notes at a blended yields of 4.34%, with an average maturity of 13.8 years. We also closed on a new $3.7 billion unsecured credit facility with improved pricing across both our line of credit and term loan facilities. Our Q4 2018 closing balance sheet position improved with $215 million of cash and equivalents and $1.9 billion of capacity under our primary unsecured credit facility. Our net debt to adjusted annualized EBITDA improved from last quarter and stood at 5.85 times at year-end. In summary, Welltower continues to enjoy excellent access to a variety of capital sources. During the fourth quarter, we completed $559 million worth of acquisitions at a blended yield of 5.6%, the majority being in the outpatient medical sector. This brought us to a yearly total of $3.4 billion in aggregate across all segments with a blended yield of 7.3%. Including developments, funding, and other activities, total gross investments for the year were $4.1 billion, making it one of the most active years in the Company's history. During the quarter, we completed $349 million in dispositions and received $46 million in loan pay-offs in 2018. Overall for 2018, we completed dispositions totaling $1.6 billion with $209 million of loans being repaid. I would now like to turn to our guidance for the full-year 2019. We are reaffirming our normalized FFO range at $4.10 to $4.25 per share. Starting with same-store NOI, we expect average blended same-store NOI growth of approximately 1.25% to 2.25% in 2019, which is comprised of the following components: Senior Housing operating approximately 0.5% to 2.0%, Senior Housing triple-net approximately 3.0% to 3.5%, outpatient medical approximately 1.75% to 2.25%, our systems approximately 1.375%, and finally, long-term post-acute care, approximately 2% to 2.5%. As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2019. On February 28, 2019, Welltower will pay its 191st consecutive cash dividend of $0.87. This represents a current dividend yield of approximately 4.5%. And with that, I will hand back to Tom for final comments.

Before we open the line for questions, it's important that I mention that in 2018 Welltower achieved significant milestones in our environmental, social, and governance initiatives. Highlights for the year include being named to the Dow Jones World Sustainability Index, one of only two North American REITs in this most prestigious index. Furthering our commitments to climate change, Welltower continues to be recognized for the number of new green building certifications added this quarter and throughout 2018. With respect to social impact, the Welltower Foundation and our employees donated over $1.5 million in 2018 to organizations engaged in health, wellness, arts, and education. We were also recognized by the National Diversity Council as one of the Top 15 companies for diversity in Ohio. Regarding governance, I’m pleased to announce the appointment of Catherine Sullivan to our Board of Directors. Catherine has had a 35-year career in the health insurance industry and was most recently the CEO of UnitedHealthcare’s Employer and Individual Local Market Division. Catherine joins Dr. Karen DeSalvo, former acting Assistant Secretary for Health at the U.S. Department of Health and Human Services, and Johnese Spisso, President of the UCLA Health and CEO of the UCLA Hospital System, who both joined our Board in December of 2018. We are delighted to bring these three recognized healthcare leaders to the board of Welltower. At the same time, we are sad to see Judy Pelham and Jeff Myers retire from our Board in May. On behalf of our shareholders, we thank them for their guidance and stewardship. Welltower seeks to model accessible American corporations. In order to be counted among the truly excellent companies, we need to be a leader in ESG. I’m pleased by the fact that with our recently announced board appointments, 60% of our independent directors are women and minorities. The diversity of our employee base, our leadership team, and our board continues to be a priority at Welltower. This is not only a key component of good governance, but it has been proven to drive higher returns to shareholders. This is something we should all be proud of. At Welltower, we deploy capital in the most relevant sectors of healthcare real estate to deliver sustained cash flow growth, all with an eye towards maximizing long-term shareholder value. We were the top performing large-cap REIT in 2018, delivering 15.3% total shareholder return. This reflects not only the high quality of our differentiated business model but the fact that we have articulated a path for growth. As you will see in 2019, we have positioned the Company to continue delivering for our shareholders. Now, Nicole, please open up the line for questions.

Thanks. Can you break down the components of your 2019 same-store NOI guidance for the shop portfolio between occupancy rate growth and expense growth expectations?

Nick, at this point in the year we would like to give flexibility on how we think those would play out, but obviously we are very encouraged by the occupancy growth. We think that we will continue to have moderate rent growth and expenses are challenging. So we will see how the year plays out. As you understand that we are trying to maximize our revenue not one component of the revenue, we will see how the year plays out. Too early to comment on specific breakdown.

Thanks. And can you provide an update on ProMedica's integration of the skilled nursing assets? At the Investor Day, you mentioned that trends so far were better than expected?

You have heard from the leaders of ProMedica and HCR ManorCare on our Investor Day, and you have heard from them directly that the leadership team expects better synergies in the short-to-medium term. We are encouraged overall by what is going on in the post-acute sector. I'm not going to make too many comments given that Genesis is a public company, but looking for the release and see how obviously that sector is playing out, but we are definitely encouraged by the fact that roughly 45% of that managed care transaction is attributed to Senior Housing, with occupancy in both our triple-net and the shop segments starting to come back. So those are some of the data points I would point to as you think about the overall ProMedica and HCR ManorCare construct.

Thank you.

Hi, good morning. I wanted to ask about your Senior Housing portfolio. Your same-store NOI guidance is over 200 basis points higher than your peers on both the shop and the triple-net portfolio. Why do you think you are seeing superior performance, and can you confirm that there is no incremental rent relief or portfolio transitions expected in your triple-net portfolio?

That should not be a surprise. If you look at the history, you will see how our portfolio has generated data growth, and that has widened as the cycle got tougher and tougher. The second thing I would mention is that we have a very granular view of where our portfolio or asset should be. You have seen our data analytics presentation and how we are thinking about asset management. We have taken a lot of proactive steps to sell assets and are not afraid of the dilution on a short-term basis. So we are encouraged by the business. Now it's very hard to comment on things on a quarter-to-quarter basis, but we are encouraged that the population growth is coming and the supply is starting to roll over.

Karin, let me just add that it's no secret that we have sold a lot of Senior Housing assets over the years. I think what you are seeing is a plan dedicated to a critical view of what we own from an asset management standpoint, and when we see assets in Senior Housing that we do not believe have long-term viability, we will exit those assets. We will take the short-term dilution that you get from that, all with an eye towards owning the best-in-class assets for the long-term and as Shankh said in the right market. We take a very granular view of how we define the markets that we want to own Senior Housing assets in, and I think you are seeing the benefit of an active asset management program.

That is good color, thanks. My follow-up is more of a bigger picture question on Senior Housing. You talked about the demand, the demographics and the timing. Do you think technology is allowing for greater autonomy for seniors later in life, such as grocery delivery and wearable monitors improving focus on wellness? Do you think that might delay the demand for Senior Housing?

If you look at the demand growth for the last three years for example, I mean, Nick has a lot of this data, you can look at it. You will see that demand has been running particularly in the Assisted Living segment, three times of population growth. So there is no evidence that we have seen that is the case. Do we think that technology will change this business for the better? Absolutely, but recall that a lot of senior housing is our communities as well. Those technologies will help us drive margins as well. So we will see how this plays out. It's very difficult to sit here and predict what might happen. But there is no doubt that in the recent past, we have seen demand running three times of population growth.

You know Senior Housing provides an environment for the aging population to live safely. Much of the historic housing in this country works against seniors' health and wellness. You could put some new technology in an obsolete residential environment and I'm not sure at the end of the day you are achieving the goals of improving health outcomes at lower costs. As John said, we are very much on the forefront of bringing new technology into our settings and also thinking very hard about what the settings of the future look like. And that is why we are so focused on the markets that we are in. Senior Housing is a very expensive product. As I always say, it's a luxury good that no one aspires to own, but it's a necessity. It's often out of reach for the majority of the population. We have been very careful about where to own that real estate, because the cost of delivering the care has been growing significantly. Therefore, we need to be in places where people can pay. Over time, I'm hopeful we will figure out how to deliver a much-needed environment, a much-needed real estate setting at a cost that is not out of reach for the majority of the population. So stay tuned on that, Karin.

Thank you.

Thanks for taking the question. Shankh, I know you don't want to give components of the guidance, but is it safe to assume that within the guidance, expenses of about 4% are baked in and that you are likely to see the trajectory improve, given the expense comps get easier through the year?

As you know, as you look at our numbers, you'll see the expense growth has been challenging for the last five years, so this is nothing new. I would expect that in 2019 we will continue to see that. Maybe we will see some moderation in 2020 as many of the California markets will have $15 of wage growth by then. Expense growth is a challenge, and obviously, hopefully we will be able to mitigate that like we have using pricing and some occupancy. You are correct about the trajectory, considering growth is a function of what happened last year.

Okay. And then just my follow-up. Your comment on not really looking at portfolio composition, but looking at what is available and what the price is. Your reference to skilled nursing sort of pricing moving up, does that make you more a seller today versus a buyer? How would you describe just pricing across your different subgroups?

I'm not suggesting by any means that we don’t have a view of what our ideal portfolio should be constructed. But I will also say that view is evolving, so it's not a static view. What I was trying to convey is that most importantly we deploy capital to make money. We are not prepared to pay a price that does not make sense from a total return perspective. As you have seen, within 12 months we have turned from an opportunistic buyer to an opportunistic seller. Every asset this Company owns is for sale at a price and total return. This is no different from skilled nursing or any other segments we own.

Okay. If I may just sneak one more in, I was a bit surprised or maybe it’s also early in the year, but the $2.25 billion of acquisitions you have done, obviously you have closed Hammes and specifically CNL, it seems like it's modestly accretive. You have talked about the trajectory improving for FFO, but does that also suggest that your midpoint could move up, just given the amount of acquisitions you have done for this year?

Yes, back on that. I think the pre-funding that we pointed to makes sense for us to think about that with conservatism on the closing side of these acquisitions. So as John mentioned in his prepared remarks, not only did we have the issuance from the fourth quarter, but we continue to issue $195 million of equity into the first quarter and had $270 million from dispositions that have already closed. So when you think about where we are at from a funding perspective, our balance sheet is actually in a very good spot to start closing on a lot of the acquisitions we have spoken to. The timing of our closing, plus the seasonality of our Senior Housing, which steps down in the first quarter but then picks up throughout the year is what drives that acceleration of earnings from the first quarter through the end of the year. So your comments on where we are is on the midpoint, but at this time we are maintaining a range because that makes sensitive what properly announced information.

Hi, yes good morning everyone. Congrats on the quarter and the outlook, it’s definitely looking up. A couple of things, the guidance, I'm just trying to understand kind of what is in and what is out given the large amount of transactions being contemplated at this point. It sounds like the CNL transaction is in the numbers and all the acquisitions announced pre-CNL. What I'm trying to understand is if the $725 million of deals Shankh talked about are those in the numbers? It also seems like this full guidance went up from $800 million to about $1.4 billion, is that increased also in the guidance?

Yes, Tayo, Tim again. The answer is yes and yes. On the acquisition side, we have $1 billion acquisition we announced on our Investor Day, which 180th closed in the fourth quarter and the remaining will close during 2019. Also, as you said, we announced CNL on January 2nd at $1.25 billion. So between the Investor Day announcements and the CNL announcement, your publicly announced acquisitions are in the guidance, and our disposition of $1.4 billion that we revised this morning is also included in our 2019 number.

I would just add one more. If you think about it, we have raised the equity already. But as you know, real estate transactions take time to close. You have a six-month gap between raising capital and deploying it, which is the prudent thing to do. We are not going to take that kind of market risk. Our balance sheet is strong, but that is driving the dilution this year. You can refer from Tom's comments that we don't think that impacts the run rate earnings growth, so you will see a good chunk of the run rate earnings growth showing up in the second half and flowing through 2020 and beyond.

Yes, I understand. Okay, that is helpful. And number two, again, the $3 billion of development pipeline that you announced. I found that pretty interesting. Can we just talk a little bit about again the timing around when all that could be deployed? I know you just kind of like rolled for first look, last look, but of that $3 billion, how much do you realistically think you guys could execute on that over what timing?

Yes, we do believe the number I mentioned is one that we can execute on. We want to do it, and we have several different structures. We don’t want to get into just traditional development as we have our share of that. But we are deploying capital in various ways, whether through equity or other parts of the capital structure. And when it's not equity, we fund a portion of our capital stack to mezzanine, back-in mortgage, and participating mortgage. There are various provisions that we use. We are very careful about our basis. We are very careful about the IRRs that we achieve. But more importantly, that is options and not an obligation. So we hope we deploy the capital at a sustainable cost of capital, and if not we wouldn’t.

But there is high visibility, Tayo, to that number. This is a number that we know where those opportunities are, and while anything can happen in the development world, we can’t underscore more that we know the timing of them is not something that we are going to predict for you. But let's just say, this is not 10 years out in the future; these are things that we are actively engaged in right now.

Yes, thanks. Shankh, I wonder if you can provide some additional color off of the $3 billion predevelopment pipeline. Are these with new and/or existing relationships, and could you provide a breakout between MOB and Senior Housing assets?

I mentioned seven relationships; three are in MOB, four are in Senior Housing, and all but one is a new relationship—one is an existing relationship.

Okay. I'm sorry if I missed this, but from Tayo's question, should we assume that you guys can break ground on these projects over the next one to two years, or should we think about this more as a longer-term type pipeline?

No. We have broken ground already on the largest project I mentioned, which is a significant property. I also said these are not just development; they are under construction projects as well. At the right point in the lifecycle, we will execute on those opportunities. This has always been the case where we have had this kind of arrangements; we have executed in relationship investment strategy with our operators. However, we are very encouraged that six of the seven new relationships have reached out to us instead of us reaching out to them. That gives you a sense of how we compete in the marketplace today is shifting.

I think what Shankh said is that we are engaged with some of the most successful developers in the U.S. today. They are presenting us with many attractive opportunities that are very strategic for us. These are opportunities with some of the nation's leading health systems; that should give you a flavor for that.

Thanks, good morning. So for Shankh, the UK portfolio has put up two quarters of high-single-digit NOI growth. Can you provide some color on the drivers there?

It's driven by significant occupancy ramp in the UK.

Okay. And then I think in your comments, Shankh, you mentioned that you are working on something like $600 million in Senior Housing acquisitions. Can you provide more color on the quality market mix versus the current portfolio?

I think, Lukas, you might have a start—I said that we have announced $725 million worth of Senior Housing portfolio across three operating partners. These assets are new assets, young assets with an average age of 4.5 years. We think that we did these transactions at a very attractive return of 6.6% Cap rate.

The question of quality is hard to answer. Quality to us is what is strategically relevant to our long-term plan. We are selling and you have seen us sell assets that many people think are high quality. When we think about capital recycling going forward, it is lower Cap rate non-core assets that do not fit into our long-term strategy. The demand for healthcare assets, both in Senior Housing and medical office, is extremely robust.

Great, thanks. The main question I wanted to ask was touched on a couple minutes ago. In the last recession, we didn’t have the sharper structure that we have today. So how do you expect the shop to perform in a recessionary environment since you are not protected by the lease payments but are instead exposed to supply and demand fundamentals? I'm just trying to understand your views on how that business should perform.

You are asking for something that we have absolutely no upside, other than predicting what might happen. I will just mention to you that our Senior Housing business is driven by demand. Over those timeframes, you will see the business stage lost a couple of hundred basis points of occupancy, but the rates growth remains resilient, and expense growth is obviously helpful in that kind of environment. It depends on when you go into such an environment, what is the supply, and importantly, what does the demand side look like.

Hey, good morning. Kind of a higher level question for Tom or Shankh, but in the last recession, we didn’t have the sharper structure at least not that meaningful ways of today. How do you expect the shop to perform in a recessionary environment since you are not protected by the lease payments but are instead exposed to premarket supply and demand fundamentals? I'm not saying the broader macro picture is going, but just trying to understand your views there and how that business should perform.

Yes. So you are asking for something that we have absolutely no upside, either than predicting what might happen. I will also mention to you that as you know our Senior Housing business, which is an e-driven business. If you look at the Assisted Living data over those timeframe you will see a business stage, lost a couple of hundred basis points of occupancy, but the rates growth remains resilient and expense growth is obviously helpful in that kind of environment. I'm not going to venture a guess to exactly how things will play out. I will also mention to you that it depends on when you go into such an environment, what is the supply and more importantly what does the demand side looks like. It's a complicated answer than you would like.

Yes, okay, that is helpful. And then I will just try to have one more, but looking at the capital stack you have $720 million of preferred sitting on the balance sheet at a 6.5% coupon that I believe are redeemable. Any plans to call those and maybe refinance with debt or pay down with common equity embedded in 2019 guidance?

Thanks, Jonathan. So the preferred you are referring to, you are right, they are convertible and are actually convertible at all just above $73.54. So it has been trading above that for some time, and there is a trigger on that if the stock stays where it is or above that it will hit in the near future. What you should think about is that we manage our balance sheet to continue to position it into a better long-term position, and we will be in a unique position if those remain convertible to not only further exercise the balance sheet but to do it in a cash flow accretive way.

Good morning. Just wanted to ask a question on how are you guys looking at potential Medicare advantage opportunities? I know Sunrise talked about their plan at the Investor Day, and you have got the ProMedica relationship. When do you think you can start getting any contribution and what do you think the total market opportunity is for the NA plans?

Yes, Eric. This is Mark Shaver. I think Medicare advantage continues to grow as a trend in the country; it's about 35% adoption nationally in MA plans. The larger plans are straightforward Medicare, really looking at the earlier, younger population that the middle 60s to early 70s of population. A lot of the residents living in our community are older and more frail. Some of the more specialized programs, the institution programs, really, which is what Sunrise and some of the others are playing. It's actually a much smaller percentage adoption of that nationally. We are very active in those conversations with some of the major payers and there is, as Tom says often, early days regarding MA and its adoption. But we are very active and we think there is going to be an important role in partnering with payers in this front.

You know, I think there will be development of products by the payers that will address the needs of the population that will likely enter the Assisted Living sector. Again, generally a wealthier population. Historically, we don't think of MA as a product that was geared for someone paying $8,500 a month for Senior Housing. But I think that is going to change in the future. And as Mark said, we have had a lot of discussion with the major payers, and you just heard that a very senior executive from UnitedHealth came on our board. We just announced it today, as well as Dr. Karen DeSalvo, who was with CMS.

Okay. Thanks a lot.