Welltower Inc (WELL) — Q1 2019 Earnings Call Transcript

Thank you, Nicole. Good morning, everyone, and thank you for joining us today to discuss Welltower’s first quarter 2019 results. On the safe harbor, you'll hear prepared remarks from Tom DeRosa, CEO; Shankh Mitra, Chief Investment Officer; 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 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, the company's filings with the SEC. If you did not receive a copy of the press release this morning, you may access it via the company’s website at welltower.com. And with that, I will hand the call over to Tom for his remarks in the quarter.

Thanks, Tim. I'm pleased to report a strong quarter completely in line with the expectations we laid out for you at our Investor Day last December. These results are the product of consistent growth across all of our business segments, in particular seniors housing, where performance is being driven by an ongoing stabilization of occupancy which Welltower began to benefit from in 2018. We expect this to continue through the rest of the year. We also continue to benefit from excellent access to capital which allowed us to both fund our contractual investment pipeline and position the balance sheet for opportunistic investments going forward, locking in long-term value creation for our shareholders. Our differentiated strategy and approach to capital allocation has resulted in a total of $2 billion in new investments, closed or announced, since the start of 2019, bringing accretive new investment volume to over $6 billion since early 2018. This is enabling Welltower to deliver the earnings growth we report to you today. Simply put, we run Welltower to deliver sustainable and reliable growth to our shareholders. Our results demonstrate that our strategy works. Shankh Mitra will now give you a closer look at our operating performance in the quarter as well as our new investment activity. Shankh?

Thank you, Tom, and good morning, everyone. I will now review our quarterly operating results, provide additional details on performance, trends, and recent investment activity. At our Investor Day in December, we gave you a detailed look into our view of senior housing supply and how adjusted competition units and yet-to-open inventory shocks impact our best-in-class portfolio within our specific micro markets. While pundits proclaimed supply headwinds for years to come using their gut feel as it suits their story at any given moment, our data analytics team of statisticians and computer scientists, armed with machine learning, not gut feelings, informed our prediction of the turn in our operating trends that I have discussed with you over the last three quarters. However, I have to admit, our first quarter SHOP results exceeded our expectations in all three main drivers; rate, occupancy and labor cost. Same-store NOI for the SHOP portfolio is up 3% year-over-year, driven by 60 basis points of occupancy growth, 2.9% rate growth, partially offset by a 3.6% labor cost growth. These are the best fundamental results we have seen in a long time. Sequential results are even more encouraging. Sequential revenue growth of 0.4% in a usually seasonally weak first quarter is one of the best we have seen in years, and is driven by both strong rate and occupancy. More interestingly, this quarter, for the first time in five years, we saw sequential revenue per occupied room growth of 3.3% outpaced compensation per occupied room growth of 2.8%, resulting in a positive spread of 50 basis points. One of the most underappreciated aspects of our company is the strength and diversity of our senior housing operating platform, which has 23 operators in three countries. In any operating business, growth is not always a straight line as many of us wish it was. However, due to the significant diversity of our operating partners across geographies and spectrums, that volatility is softened in the aggregate. Over the last few years, we have routinely seen parts of our portfolio results that resemble the challenges of the industry at large. But, these operators have consistently been pulled up by other operating partners who serve a completely different customer need in another part of the country. Having said that, this quarter, we experienced broad strength across a majority of our operators. Exceptional UK results are driven by significant asset management efforts by our UK team headed by Justice Skiver, a deep negative comp in prior years and the lease up of a couple of low occupancy assets. We expect UK results to normalize as we move through the year. On the other hand, the Canadian platform facing a tough comparison year is expected to normalize upwards as the year progresses. We continue to be encouraged by our U.S. portfolio this quarter. NOI is up 2.2% year-over-year driven by 40 basis points of occupancy increase, 2.8% rate growth and particularly encouraging 3.8% compensation per occupied room growth. We have seen broad-based trends across larger and smaller markets. From a product-type perspective, our industry-leading assisted living and memory care portfolio drove results with 4% NOI growth. While a handful of quarters does not make a trend, we are cautiously optimistic that our portfolio is positioned for significant cash flow growth for years to come. While results were in line in our other lines of businesses, I want to highlight a few things to help you understand the trend. First, in our senior housing triple-net segment, the reduction of progress is driven primarily by the removal of StoryPoint portfolio, which we sold in the quarter, and somewhat by Brookdale underperformance. As you know, we consider StoryPoint to be one of our best and most strategic operating partners, yet we sold this asset at an offer we could not refuse. We sold this 20-year-plus-old asset at a 4.6% yield at an unlevered IRR of almost 19%. For our eight-plus years of ownership, we achieved an NOI CAGR of 7.2% in the face of significant supply headwind. We continue to grow with StoryPoint through a new RIDEA joint venture with two brand new assets that we just bought, several in development and are transitioning many more communities to Dan and Brian that we believe we will see cash flow growth similar to that experienced in the portfolio that we just sold. While we are not working on any lease restructuring in our senior housing triple-net portfolio at this moment, we have plans for every asset. And frankly, we'll be happy to get back many of these assets so that we can transfer them to operate like StoryPoint so that you, as our shareholders, can enjoy significant upside. Secondly, our post-acute portfolio is declining coverage is driven by a handful of L Tax we own, which is less than 1% of our asset base. Skilled nursing licensed assets which constitute a vast majority of our post-acute bucket either in the traditional sense or in the short-stay category are stabilizing as I have described in our last quarter earnings call, and you subsequently heard from Genesis. While mix shift is still a headwind, we're encouraged by occupancy growth, recent reimbursement announcements, and upcoming PDPM implementation in Q4. Third, we're very happy with the capital deployment plan, ProMedica HCR ManorCare assets. The ProMedica HCR ManorCare team is working diligently with our data analytics team to prioritize capital deployment. We have 45 assets slated to go through this CapEx program in the next two to four months. And last, as I have no noteworthy update for our outpatient medical operating results, we’re very encouraged by a 2.1% net rent increase in the quarter and the dramatic changes that Keith and Ryan are making in that platform to position us for growth next year and beyond. On the capital deployment side, we're busier than ever. We have closed $778 million of investment so far this year and have significantly more that are closing in the coming months. These investments have been made both in senior housing as well as the medical office segment. In the senior housing segment, we continue to grow with our existing partners such as Chelsea and Discovery. We are very excited about our new joint venture, RIDEA relationship with Frontier Management that we established this quarter. Portland, Oregon-based Frontier is one of the finest operators in the high acuity segment of the senior housing business. Greg Roderick, who is the CEO and majority owner of Frontier, is a third-generation operator and leads one of the most operationally focused teams that we have seen in this industry. We have significant plans for growth with this team in the future. As we continue to acquire attractive assets with great operating partners or health systems, we will fund this capital need through disposition and common equity. We expect the supporting yield on disposition will be very similar to the initial yield on acquisition, but our thesis is to drive higher total return, or IRR in that trade, through higher growth rates and lower CapEx. Whether through disposition or common equity, we only allocate capital when we believe this thesis holds. However, there can be a timing difference when capital is raised and an acquisition is closed. This timing difference, which has no impact on our run rate earnings, can impact quarterly earnings, but we're willing to make that trade-off in order to minimize balance sheet risk and lock in long-term value creation, as Tom described. We are not interested in rolling the dice in this volatile capital market by playing a short-term earnings game, but rather driving long-term cash flow and NAV growth. Beyond our significant organic acquisition machine, we are beginning to see the emergence of value-add opportunities. By definition, these transactions are not accretive to cash flow day one, but they come at a significant discount on all real estate valuation metrics, such as price per door or price per foot, and will drive significant IRR and NAV growth. We believe our acquisition of the South Bay portfolio with Discovery that we closed subsequent to the quarter end fits in this bucket. We’re exploring a few opportunities in the medical office space in this category as well. We are looking for the right opportunity, but we like the idea of what these assets can become in the hands of the right operators. In summary, we are very encouraged by the accelerating prospects of both internal and external growth opportunities. This will be a very busy year for us on all fronts. 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 first quarter 2019. As you just heard from my colleagues, Q1 has been another successful and very active quarter for Welltower as we’re highlighting our differentiated portfolio and corporate capabilities. During the quarter, we completed $367 million of gross investments including $259 million of high-quality acquisitions at a blended yield of 6.3% with twice that value already closed today in 2018 Q2. We also completed $612 million of dispositions in the quarter at a blended yield of 6.7%. In addition, we received $14 million in loan payoffs. Q1 was especially active for Welltower on the balance sheet and capital raising front. During the quarter, we successfully raised $538 million of gross proceeds from our common equity issuance via our DRIP and ATM programs at an average price of $74.69 per share. In addition, we elected to affect the mandatory conversion of all our outstanding 6.5% Series I cumulative convertible perpetual preferred stock into common stock. During the quarter, we successfully accessed the senior unsecured notes market issuing an aggregate of $1.05 billion across 5- and 10-year tenors using the proceeds to redeem an aggregate $1.05 billion of existing notes during 2019 and 2020. In doing so, we increased our average debt maturity profile by 6 months to 8.1 years at the quarter end. Finally, we initiated an up to $1 billion unsecured commercial paper program providing us with an alternative source of short-term financing. In summary, Welltower continues to enjoy excellent access to a plurality of capital sources to fund and pre-fund our acquisition pipeline and future growth opportunities. Our Q1 2019 closing balance sheet position was strong with $249 million of cash and equivalents and $2.6 billion of capacity under our primary unsecured credit facility. Our leverage metrics improved from last quarter with net debt to adjusted EBITDA falling to 5.47 times. Moving on to earnings, today, we're able to report a normalized first quarter 2019 FFO result of $1.02 per share representing growth of 3% over Q1 2018. As in the past, we do not include one-off income items such as these bifurcation or loan repayment fees in our normalized numbers. Our overall Q1 same-store NOI growth was an encouraging 3.1% for the quarter with all our segments recording solid growth. Senior housing operating same-store NOI grew by 3.0% in the quarter with the UK delivering a standout result. Senior housing triple-net grew by 4%, outpatient medical grew by 2.3%, and long-term post-acute grew by 3.2%. I’d now like to turn to our guidance. For the full year 2019, we are reaffirming our expected normalized FFO range of $4.10-$4.25 per share and our previously announced expected average blended same-store NOI growth of approximately 1.25% to 2.25%, with growth expected in all our business segments. We are also reaffirming our segmental guidance of senior housing operating, approximately 0.5% to 2%; senior housing triple-net, approximately 3% to 3.5%; outpatient medical, approximately 1.75% to 2.25%; health systems, approximately 1.375%; and long-term post-acute care of approximately 2% to 2.5%. As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2019. Finally, on May 28, 2019, Welltower will pay its 192nd consecutive cash dividend being $0.87 per share. This represents a current annualized dividend yield of approximately 4.8%. With that, I'll hand back to Tom for final comments. Tom?

Thanks, John. Now, Nicole, please open up the line for Q&A.

A good quarter. Wanted to expand on the comments about value-add opportunities that you first opened up your comments with. What sectors are you seeing that in and maybe what is causing those opportunities to pop up? Is there private equity pulling back? Is it simply developers have kind of hit the end of their line on their development funding and now need to go ahead and sell assets? Just wanted to kind of understand kind of the scope and extent of that.

Good question, Dan. I'd say it's all of the above. We're seeing opportunities across all of the sectors that we have focused in historically. And there are value-add opportunities we see outside of our portfolio, and we've talked about value-add opportunities we see inside the portfolio. Shankh, you want to expand on that?

Yeah. I think, Dan, you’re right. What happened is if you think about – we think about supply as it impacts operating portfolio, right, operating results. And also, you think about supply, you think about a lot of inventory that you can either acquire or inventory that people have built, people who are not from this business. Think about multifamily developers. People who have never been in an operating business have built, and now they can lease up, right. So that's sort of the point. They’re hitting a wall, so you can buy these things at 40%, 50%, or 60% occupancy at a very, very good price per door. I'm talking about the seniors housing segment. And you can do very well with them. On the medical office, they’re few and far between. As I said, we're looking at a couple of opportunities. A great price per foot. And the ownership of some of these buildings either has changed their strategic objective or they just could not maintain a capital structure that will require ongoing investment like we do in our portfolio, and great owners, other great owners are doing that portfolio. So, we're seeing that more in seniors housing but we have some significant opportunities in medical office as well.

Okay. But will those opportunities require a significant amount of CapEx or is it more of an operational improvement that needs to happen? Just trying to understand – I know it’s not accretive from day one, I’m just also trying to understand…

Sure.

How much do you need to put in and how long is that going to take?

Yeah. So, if you buy a 60% leased senior housing portfolio, it’s not going to be accretive day one, we know that.

Okay.

Some of these assets are newly built. So, you don't have to do anything. Some of these assets are older that you need to bring in operational improvement and refresh the physical plans. So, it can be both. So, if we do require – if some of these things require CapEx, that will be part of our underwriting. We're not going to think, okay, if you think about what we do with the four Sunrise assets we bought from SNH, it was a great value-add opportunity. We put the capital and we underwrote as a part of it. So, it can be both. We are seeing – now the one portfolio we did with Discovery, it's a newly built portfolio. So, you don't have to put any CapEx in it, and we're seeing opportunities that we do. We’re seeing both.

And if the value-add is bringing in one of our operators into a, let's just say, less than optimally-managed portfolio of senior housing assets, understand that doesn’t – that’s not like flipping on a switch. It takes some time. There is always going to be some level of disruption. So, that – and we’re seeing many opportunities like that where we’re seeing assets and the types that Shankh was referring to or actually, our operators are seeing assets in their markets that are struggling where they know their management template could significantly turn the performance around. So, it's coming from lots of different directions there.

Okay. One more quick question if I could. Just want to ask about how you saw the flu impact in the season? I know it's just a quarter and there's normal seasonality. But, the flu season did start late, it's ending late. How did that impact 1Q and how do you see that rolling through your same-store numbers as we get into the second quarter?

So, I will just start and then Mercedes will add color to that. So, first is that, we're very encouraged by, as I said, we're seeing in rate growth, occupancy growth as well as first time in the expense growth. So, I would not characterize our first quarter results driven by flu. Having said that, we have, as I said, we expect UK to normalize down and Canada to normalize up as we go through the year. We have high hopes for the rest of the year as we have seen. But, Mercedes, you want to comment on flu?

Yes. Something specific I would say that it’s been a slightly longer flu season that we traditionally see. Having said that, we haven't had any reports from any of our operators that indicate a noteworthy impact.

Okay. Appreciate. Thank you. I'll hop off.

Thanks for taking the question. So, Shankh, just wanted to expect – I just want to get more color on sort of value add not only product but just thinking about geography as well? Obviously, I know you focused more on micro markets and sub markets. But, as these opportunities come about, how do we think – or how should we think about sort of your focus on the traditional coastal markets that you have focused on versus maybe newer markets or newer opportunities in the new markets?

Vikram, it’s a very good question. So, we are seeing these opportunities across all markets. As you know that we don't focus on just what the headline major MSA looks like. We're focused on micro markets. We believe there are seniors that you need to pick up in every market. It just needs to be the right price point. And as you’re getting into that investment, it needs to be the right price per door. So, as you can see, that even in Michigan, Ohio portfolio on StoryPoint, we sold that asset at 19% unlevered IRR. I want to repeat, it’s unlevered IRR. So, you can make a significant amount of money if it’s the right assets with the right basis with the right operator. So, no change on template. Across the U.S., we are seeing this kind of opportunities. We're seeing sort of the emergence of certain opportunities in the UK. We're seeing certain emergence of opportunities in Canada. We're just – we're interested in all three of our countries across all products. What I would add to that, Vik, is that when you see us go outside of the core coastal markets or the major metro markets in Canada and the UK, it’s very operator-specific. We cannot underscore enough the operating excellence of companies like StoryPoint who faced tremendous competition from new supply and have outperformed consistently because of their focus on operations. These are not real estate developments that are trying to participate in what's considered a new sector of real estate. These are people that come from really the health and technology sectors who have a differentiated product, again, in not first-tier markets, and they perform consistently. That’s who we align ourselves with.

Okay.

Back to your earlier point about health systems, we can't talk about an endless chatter that goes on over that. The way we think about health system partnership is linking health systems with what we do, providing different ways to strengthen their decision about – around the local space. We have an advantage in focusing on the operating side about how health systems can change their delivery of care.

Okay. Just second question, we've obviously seen you be fairly active on the MOB side. But maybe, Tom and Shankh, can you sort of remind us or update us? You've talked in the past about opportunities with health systems and sort of opportunities both that could be specific to health system but also to senior housing. So could you remind – can you maybe update us on what sorts of opportunities you were seeing with health systems and tie that back to the ProMedica deal?

I will just talk about the medical office cost aspect of your question, and Tom will add on the health system side. If you look at – we have seen as we have described in the last call of 18 months, really we have seen sort of air pocket in that aspect, that part of the capital market where the cap rates have become more reasonable, and we have done a lot of transactions. As we told you, we need to hit give take 7% unlevered IRR to do any transactions. So we are still seeing opportunities to do that. And there's many ways to get there, but we're focused on unlevered, not levered returns. And if those pricing changes, then we will see that we will get out of the market again like we have two to three years prior to that.

What I'll say about health systems is that when I came here or I came into the CEO spot here five years ago, I came with a knowledge and relationships about the large not-for-profit health systems. I have been engaging in that space over the last five years initially by myself, and then I brought other people to the company like Shankh and Mark Shaver who have helped really develop the dialogue and relationship. One thing I will tell you, as major health systems start to consider their futures, they are thinking much more outside of the acute care hospital space about where they will meet their customers. And I said that word specifically, not necessarily patients, because patients means that you are sick; where they will meet their customers as their models evolve more towards health and wellness of the population rather treating sick people in acute care hospital beds, which is simply not sustainable. So that is leading to multi-level discussions with major health systems. And what I can tell you is it takes a lot of time to develop these relationships. This does not happen overnight, and we're making very good progress.

Great. Thank you.

Thanks. Good morning.

Good morning.

Wanted to just start on the same-store performance and particularly relative to the guidance, it seems like you guys came in very strong particularly relative to the guidance and particularly within the senior housing operating portfolio. Can you maybe just comment on sort of what the expectation is that's embedded in the rest of the year's performance for…

Yeah. So…

...the overall portfolio but SHOP, in particular?

Yeah. So, as you know, by policy, we do not update segment level guidance for the year. You are right, Jordan, that we are very excited about the same-store performance, really, in the SHOP, but also medical office also outperformed as well. So, we are excited about how sort of the year will shape up, but it’s too early to change overall same-store guidance, but just remember that we do not change segment level guidance through the year.

Well, have you just a guide…

Yeah. Go ahead.

I was just going to say, is there something we should be looking at that will soften up the trajectory like – so, in other words, you did 3% in the SHOP portfolio in the quarter versus your guide of 1.25%. But as I look out to the next three quarters, is there something either comp-wise on the revenue or expense line item that should cause a meaningful slowdown that I may not be focused on?

No, I'm not going to comment on that. That will be giving you guidance. I would say that we are just focused on different three countries. I expect UK will normalize down, Canada will normalize up, and I expect continued and I’m very, very encouraged by the U.S. performance. Just focus on what I said on a sequential basis, right? First time in five years, we saw RevPAR growth that outpaced ComPAR growth, right, if you just think about that? What that does for the P&L rest of the year, I will leave you to that math. But I will just say – answer to your question, I don’t see anything that dramatically slows down the performance of the SHOP portfolio except the UK and UK dynamic that I just described.

Okay. That’s helpful. And then could you maybe just talk about the character of the StoryPoint buyer so we can get an idea of who’s out there chasing assets like this?

I can’t because of NDA, but I can tell you that it’s everybody and anybody. We are in the public markets that’s focused that we know when – many participants are focused and when those business exactly times, which quarter, which year, private lives or not. We are seeing a multiyear trend that's coming, and people are excited to deploy capital. So, from private equity to all the institutional investors that we are seeing, everybody's interested in the asset class but this is obviously – there's an operating aspect of the business. So, people are trying to partner with the right types of operating partners or people like us.

Okay. My last one is just regarding the provision you took in the quarter. Is that something based on something that's already happened? I just was confused by the footnotes, $18.7 million charge related to a planned restructuring of seniors housing triple net.

Jordan, it's John. Is that exhibit you're looking at the Exhibit 2.

I guess your normalizing adjustment, yeah, correct.

Yes, that was a provision for a second loan loss and the restructuring of a few triple net properties involving special purpose entities.

That was – yeah, that occurred barely in the quarter, and there was no – the income impact in our restructuring was out there in the quarter.

Okay. So that was just another like a conversion when you say restructuring…

No. You think a provision. This is a provision in case something happens, right. So, this sort of provision you had a lot…

Oh, okay.

It's provision against the loans that we provided for a non-full recovery on. Then, we did not recognize interest income on that loan in the quarter.

Right. Since we touched on StoryPoint a couple of times, it looks like you sold the triple-net portfolio but you actually expanded your idea of a relationship there. So, could you tell us what was the coverage on a triple-net portfolio and then what is the rationale behind selling it to the operator of a purchase option if you want to reduce Michigan exposure or is it something else there?

Yes. So, we did not expand on the RIDEA portfolio; we created a new RIDEA joint venture…

All right. Thanks for clarification.

So that's sort of the first one. Second is the coverage was almost 1.7 times. The reason to sell the operator – those particular assets is what I told you in my prepared remarks. If you can hit 20-plus years building or buildings, you can hit a 4.6% yield to get to 19% unlevered IRR. You do that all day. Every asset is for sale at a price. So, we sold assets because we thought we got a fantastic value. There’s nothing to…

Sorry. Did you go to the operator? Did the operator come to you?

No, we got an unsolicited offer.

Okay. All right. And then just thinking about the shop portfolio, you've got Brookdale assets. Looks like you transition about 18 of those. What's the expectation of performance there? What's left to also transition there?

So I'm glad you asked that question. Our same-store pool for our SHOP portfolio has not changed. It was 473 assets. It is still 473 assets. The total number of SHOP assets changed to 599. Why? Because the restructuring of Brookdale that we talked about last summer got done, finally got done. Some of the assets in California and other places this quarter. So you saw those transition from Brookdale to Vegas has happened this quarter, actually on the one. So that changed the overall number of SHOP assets. But I want to reemphasize again that our same-store pool did not change. What is the expectation? We told you that we're pretty happy when we did the Brookdale transition. We transitioned the assets so that we have good coverage, right. Our EBITDARM coverage for the Brookdale assets is not the 1.3 times, right. Having said that, is it – I don't want to talk about specifically about Brookdale. Any assets we have in an operating portfolio. Just think about it. Just our idea portfolio has 23 operators. Our triple net portfolio has several operators. There are assets that can be maximized. The value can be maximized in different operators. So we have plans for every one of these assets, and I went through this in detail two quarters ago. How we think about it, how we look at it. We're more than happy to transition any of these assets if we need to is now about 2.5% of our total operating – our total income. So, it is very, very manageable that its cover, and we think that under the current leadership is turning the business around. If not, we have other operators who deal to transition their assets too as we have done in last year.

...we have 10 more buildings from the transition portfolio to transition from Brookfield to other operators, and we expect that to be done over the next few quarters.

All right. Thanks, Tim. And then just one more question on there, which is the 10 more buildings. Is that outside of you had a restructure agreement I think that's about $5 million or so of rent. Is that outside that? And then when would you expect that to be a factor?

Now, that is – so these are still part of the original restructuring plan. There's been no further asset after that since the original transaction. So it's just a matter of we gave that as kind of a pro forma when fully transitioned with the difference in income would be, and that 10 assets from that originally described transaction.

All right. And I just want to sneak one more question in here, which is labor costs looked like they were down quarter-over-quarter SHOP. Is that seems to be often the senior housing market you're seeing. So what was the contributor there? And then what's your expectation going forward through 2019?

Labor cost is not down, Chad. Labor cost is up significantly. The trajectory we observed for the first time is on demand. So, if you consider what I mentioned regarding the first quarter sequentially…

One second. OpEx from last quarter to this quarter and it looks like it was up like 24% which is flattish, right? And that probably shouldn't be the expectation there going forward, right?

I'm sorry. I don't understand the question. Occupied unit, the labor cost is up 2.8% sequentially quarter-over-quarter.

Okay.

And which rate is up 3.3%. You understand what I'm saying? Labor cost is still up significantly year-over-year. I'm talking about…

Yeah. Should we expect – you got rate going up much higher than OpEx and labor cost.

No. What's higher? Let’s not be dramatic.

No. I mean, that’s a pretty good portion of growth right there.

For 75 years, we got a positive spread. I will take it. But just let’s not be dramatic. It’s not – it’s 50 basis points. But look, as we talk about labor cost has been increasing in our portfolio of 5-plus percent on an occupied room basis for the last five-plus years. I mean now you see in the market – I'll give you an example. Let's just talk about New Jersey where labor cost is a problem. New Jersey is not slated to be a $15 market until 2021. If you look at our portfolio across the board, it's $15-plus today. So maybe the regulatory side in many aspects hasn't changed, but the actual labor market because of competition has already moved there. Recall that I talked about some of the regulatory driven change, which is a 15 move to the $15, let's talk about California. L.A. has hit $15 last summer. San Francisco has hit $15 last summer. L.A. is doing that this summer. To offset that, you’re going to get more of a market driven increase, rather than just a big move from 11 to 15 or on a percentage basis the big number. So, I'm not suggesting that the labor cost is not going to be a problem. All I'm saying is I'm happy that finally that has been undermanned for the first time. Too early to comment whether that continues or not.

All right. Good quarter on that side of the expenses but maybe changes going forward?

We'll see.

Thank you. The occupancy gap between senior housing, triple-net and SHOP has widened over the past year. I think a year ago was basically the same. And I'm wondering if this is a reflection of the quality difference between the two portfolios, sort of difference in CapEx spend and what do you think happened as the year progress?

So, look, I mean, we have our SHOP portfolio in better locations. Generally, that's true. And we also have some really good operators in the triple-net portfolio, right? We talked about different operators over a period of time. I think it's just different. If you think about the recovery, this is fundamentally a local business, and different parts of the country are participating in the recovery at different times. So, I wouldn't suggest that there's fundamentally something different about the senior housing business. We're encouraged by the first quarter results. But this is not yet the time to take a victory lap. But we do think, if you think about it longer period of time, we think that you will see improvement in both sides of the house.

Okay. And then on the supply in a 3-mile, 5-mile ring around your assets, I know that's not really how you look at it, but it has increased sequentially. And I'm just wondering how much of a headwind do you think this will be this year given you have maintained your guidance with your…

I think you, of course, you have the answer John. That's not how we look at it. We give you how we look at it which is adjusted competition unit and you need to open SHOP and we described that we expect roughly 15% to 20% reduction this year and walked you through the details of that on Investor Day. We still expect that. Now what happens is delays happen some 2018 flows into 2019, and then 2019 flows into 2020. So, obviously, all of these things can be stretched out. But, as you can see from our results, the thesis that we had directionally is playing out.

That level of supply increased the price use given it seems like it's impacting your markets more than the national average?

Again, we don't look at it that way. The way we look at it is actually down which is on…

Oh, we're not surprised.

Hi. Good morning.

Hi, Karin.

I appreciated your decision to over-equitize the balance sheet again this quarter and keep your powder dry. Just was wondering if the capital markets stay open will you continue the strategy and how do you expect leverage to trend over the balance of the year?

Yeah. Karin, on the – I’ll take the leverage side first. So, beginning in our Investor Day, we talked about keeping leverage flat throughout the year. You’ve obviously taken it down significantly. As a just a quick note on that, at the time of the Investor Day, we spoke about that from a debt-EBITDA perspective, and it was not part of our plan to convert our preferreds. In the first quarter given our stock was trading, we were given the opportunity to force a conversion on those, and we did, so we now expect our leverage on a preferred basis to come down significantly during the year, as it already has.

And then I'll just add to that. We think about the impact when you act to raise capital, whether through disposition or ATM on acquisition, there's a gap because – not because we did not know what we'll do with the capital but because it takes time, right? So, if we generally think about match funding when we signed the PSA, but you think about the diligence after that. And you know if you think about a medical office building, you have to think about a role for a process which a health system is on the side. They don't respond in seven days because we'd like to close the deal. On the senior housing side, you have to think about just look at that transaction. In California, it takes six to nine months for you to get the license transfer. So, these are the reasons that things change. We're not looking at our either stock or an asset to stay. That's a pretty good level. Let's just do that. We are doing a match fund basis. The difference of timing comes from all these things that are just part of life if you do real estate transactions.

Okay. Just to finish that, we expect leverage to come back up as we close on our under contract pipeline not more than expected and then on ATM, as Shankh said, we've got nothing planned as of now, but you should expect that to continue to match on as we see opportunities and we're very optimistic on that front right now. I will just say that while I am focused on doing what we do, it's a very good sign for us.

Hi. Good morning, everyone. I’m on for Michael Mueller. Just had one question regarding the development pipeline. I think last quarter you guys talked about the $3 billion development pipeline locked up across the seven different project. Could we get an update on which other projects have been underway?

So I will just say I think you probably misheard. It’s not seven different products. It’s seven different operating partners. And I'll just say many of that you will start to see later this summer. So let’s just – today’s call is not the appropriate time, but more to come.

Hi. This is Austin Caito on for Tayo. Thanks for taking the question. I guess just a follow-up to that. I saw that the New York development project was pushed out the conversion date another quarter, and at the Investor Day, the expectation was that construction was done by 1Q and, just curious, any new updates with that project?

Yeah. I mean, everything seems to be proceeding according to plan, both in terms of costs and time line, up to this point. So, there’s no real update to…

I don't know where – there's been no announcement of any change.

Okay, great. Thank you.

Yes. This is Tayo. Could I just actually ask one more follow-up question?

Go ahead, Tayo.

Yes. It’s actually more around, again, your data analytics platform. Again, I think you guys really put that on display during the Investor Day, and I'm just kind of curious, just kind of given the micro-level analysis that you do, if your data analytics platform is telling you anything different about operating trends today versus your Investor Day, whether across senior housing or any of your other business segments?

Oh, the – our data analytics platform did give us that insight, which is why we started talking about three quarters ago that the business is turning when the topic du jour was it's going to be really bad for the next five years, that's what I hear. So, it's hard to talk about stuff that already happened and take a victory lap. That’s just not a display of humility, I would say. But, as you can see, these people are very, very good, and they have called a turn, and you are seeing the results, you're seeing that turn in the results. From December to today, Tayo, we’re making 10, 15, 20 decisions. I mean like, from December to today, it’s – we don't change our views like that.

Remember, we're not making a call on the industry sector with our data analytics. This is very specific to the Welltower portfolio, our operators and the locations of our assets. As you learned at our Investor Day, we do look at the country on a micro-market basis. So, we have been managing our portfolio over the last five years and are making tough decisions that always didn't reflect well in quarterly performance, but they were the right decisions for the long term, and that is what you're starting to see flow through our results. So, yes, our data analytics gives us what we believed to be unique and proprietary insights into the way we run our business. But again, we are not – do not think our results and what we're seeing in our portfolio is a call on the senior housing industry changing.

Got you. I appreciate the explanation. Thank you.