Welltower Inc.

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2018 Well Tower earnings conference call. My name is Nicole and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the call over to Tim McKeave, Vice President of Finance and Investments. Please go ahead, sir.

Thank you, Nicole. Good morning, everyone, and thank you for joining us today to discuss Well Tower's fourth quarter 2018 results. Following the safe harbor, you will hear prepared remarks from Tom DeRosa, CEO, Shak Mitra, and John Goodie, 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 Security of Illegation Reform Act of 1995. Although Well Tower believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurance that projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the morning's press release and from time to time the company's filing 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. Well Tower achieved .6% total same-store growth in the quarter. We are particularly encouraged by the 40 basis points -over-year occupancy increase in our senior housing operating portfolio and the sequential coverage increases in both our triple-met senior housing and long-term post-acute portfolios. Fundamental performance in the quarter was consistent with our expectations, partially offset by delayed timing of investment activity and equity issued to pre-fund 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.

With that, I will hand the call over to Tom for his remarks in this quarter and his speech. Tom? Thanks, Tim.

At our Investor Day on December 4th, we took the notable step of announcing 2019 FFL Guides. Based on our Q4 results and our confidence in our outlook for 2019, I am pleased to reaffirm that guidance this morning. Our guidance of $4.10 to $4.25 in normalized FFL 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 seniors housing business that we have 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 helped drive total investment activity to over $4 billion for the year. Our ability to source a creative investment has continued into 2019 with the announced acquisition of 55 outpatient medical buildings from the CNL Healthcare Properties for $1.25 billion, further enhancing our ability to deliver growing, high-quality, and sustainable cash flow growth. Given that CNL 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 leverage and pre-funding 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 Huttery 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 beliefs in Wells Hauer's unique business model and strategy for driving the future of healthcare real estate. Now I'm delighted to pass the mic to Shank Mitra, who will give you a closer look at our operating performance and investment activity.

Shank? 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 -over-year results. It appears that occupancy has reached an inflection point this quarter, specifically in Shell, occupancy increased 40 basis points -over-year. 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 the 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 up one basis point. Our reported growth rate of .2% in Shell is somewhat masked by lower growth in international markets, whereas core U.S. markets experience .7% growth. Expense growth remains elevated, driven by labor. We continue to look for greater use of technological and analytical solutions, such as OnShift, Arena, SmartWinner, amongst others, to drive greater efficiency in the labor model. We are beginning to see results. For example, since implementing Arena, Sunrise has seen a 27% decrease in 90-day employee turnover and a 40-day decrease in 20-month 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 86-plus population is still a handful of years away, 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 gaining confidence in post-acute business. While it is unlikely to be a V-shaped recovery, it appears that the industry fundamentals are on the mend. Meanwhile, pricing of skilled nursing assets has materially increased due to the flood 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 .95% yield. At market coverage and rent, that represents $40-plus million of value creation. As you would recall, we bought 8-year Medicare assets only a few months ago at a significantly cheaper price and in a materially better credit structure. While we keep reading about how skilled nursing facilities should be around two times in BDARM coverage, this genesis transaction highlights the significant gap between theoretical assertions versus how practitioners behave. This is no different from the senior housing triple net coverage rhetoric I described during the last quarterly earnings call. While selling genesis assets is short-term earnings dilutive to the tune-up to $0.5 per share, we believe our shareholders achieved significant value and improved growth profiles for the enterprise going forward. Roughly 4% of our ROI currently is attributed to genesis, down 70% from peak, and a significant portion, what remains, is in powerback format. We continue to invest in the model through purpose-built development. Powerback Piscataway, which just 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 exposures. This brings me to my last point. Since last quarter's earnings call, we have announced $2.25 billion of acquisitions, comprised of $1.5 billion in medical office and $725 billion 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 World Power 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 are buyers and sellers of almost any asset at a price, an implied ROI. The cap rates at which MOB portfolios have traded during the frenzy of 2017 did not make any economic sense for World Power shareholders. We passed on every one of these opportunities and will do so again at those economics. As cap rates have expanded, we return to often and have since executed $2-plus billion of cost in medical office at a blended cap rate of 5.7%, resulting in a 7-plus percent IRR. This diligent approach adds excellent value for our shareholders. While we feel very bullish about our acquisition pipeline, we will not buy any assets unless the total return makes sense, regardless of our current advantageous cost of capital. We remain disciplined and look for off-market or broken-market transactions as sellers increasingly focus on certainty and reputation more than just price in this volatile capital market backdrop. Increasingly, highly reputable developers and operators are joined venturing with World Power by recapping their current portfolios and forming mutually beneficial growth plans by leveraging our data analytics platform. While we remain very selective on opportunities to bounce on, we are delighted to announce that we have locked up a $3-plus billion development and under-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 an attractive return and basis with first look and last look and will create enormous amounts of value for our shareholders. The first project of this pipeline is in 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 this terrific mixed-use project with our partners. On the senior housing side, we are delighted to inform you that since our last call, we have committed to roughly $725 million of acquisitions at a blended cap rate of 6.6%. These acquisitions have an average age of four and a half 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, while historically it was primarily us who reached out to them. We are very proud that we compete on these capabilities and not 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 World Tower 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'll pass it on to John Goodie, our CEO for

John. Thank you, John, 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've just heard from my colleagues, Q4 has been a very successful and active quarter for World Tower, as has 2018 overall. Before I proceed with usual commentary, I wanted to highlight three points. One, we are confident in our continued growth in 2019 and reaffirm our 2019 guidance, given as our investor day, with growth expected in all our business segments. Two, our strong, proactive, and efficient capital, efficient raising of equity capital in 2018 and in 2019 to date has enabled us to reduce financial leverage and pre-fund all announced acquisitions. Three, we are accretively 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 .6% for the quarter and .6% for 2018 overall, this being above the midpoint of our full year guidance. Senior housing operating same store NOI growth by .6% in the quarter and by .4% in 2018 overall. As Shanks noted earlier, we're encouraged by another quarter of improved occupancy. Senior housing triple net grew by .3% in the quarter and by .7% for the year, again with improved occupancy. Outpatient medical grew by .8% in the quarter and by .2% for the year. Finally, long-term post-acute grew by .4% in the quarter and by .1% for the year. We continue to focus on well-powered operational efficiency, even with significant investments in technology enablement and data science and the hiring of additional high-quality colleagues to our team are generally expensive relative to the size of our portfolio lead sector. Overall, G&A spends was $31 million for the quarter and $126 million for the year. Today, we are reporting a normalized fourth quarter 2018 FFO result of $1.01 per share and $4.03 per share overall for the US. These numbers reflect the increased Q4 2018 equity raise total and as in the past, we do not include one-off income items or fees in our normalized numbers. Last year, sorry, I told you, last quarter and 2018 overall, we were very active for wealth hour 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 issuance 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 1 January 2019, we've raised $195 million of gross proceeds at an average price of $73.97 per share. During the year, we issued a total of $1.85 billion of senior unsecured notes at a blended yield of .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 in 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 5.8 times at year end. In summary, Wellpower continues to enjoy excellent access to a polarity of capital sources. During the fourth quarter, we completed $559 million of acquisitions at a blended yield of 5.6%, the majority being in the outpatient medical segment. This brought us to a yearly total of $3.4 billion in aggregate across all segments at a blended yield of 7.3%. Including development 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 of dispositions and received $46 million in loan payoffs. 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 .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%. Health 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 dividends being $0.87. This represents a current dividend yield of approximately 4.5%. And with that, I'll hand back to Tom for final comments. Tom? 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 of the year include being named to the Dow Jones World Sustainability Index, one of only two North American reefs in this most prestigious index. Furthering our commitment 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, the arts, and education. We were also recognized by the National Diversity Council as one of the top 15 companies for diversity in Ohio. With respect to governance, I am pleased to announce the appointment of Katherine Sullivan to our Board of Directors. Katherine has had a 35-year career in the health insurance industry and was most recently the CEO of UnitedHealthcare's employer and individual local markets and operating division of UnitedHealth Group. Katherine joins Dr. Karen DeSalvo, former acting Assistant Secretary for Health at the U.S. Department for Health and Human Services, and Janice Spiezo, President of UCLA Health and CEO of UCLA Hospital Systems, who both joined our board in December of 2018. We are delighted to bring these three recognized health care 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, and on behalf of our shareholders, we thank them for their guidance and stewardship. WellTower seeks to model the most successful American corporations. In order to be counted among the truly excellent companies, you need to be a leader in ESG. I am pleased by the fact that with our recently announced board appointments, 60% – that's 6-0 – 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 is a proven driver of higher returns to shareholders. This is something we should all be proud of. At WellTower, we deploy capital in the most relevant sectors of health care real estate to deliver sustained past-flow growth, all with an eye toward maximizing long-term shareholder value. We were the top-performing large-cap reach in 2018, delivering .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 position the company to continue to deliver for our shareholders. Now, Nicole, please open up the line for questions.

We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Joseph, with Citi.

Thanks. Can you break down the components of your 2019 SAMHSA or NLI 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 will 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 a specific breakdown.

Thanks, Ben. 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 HR Medicare on our investor day, and you heard from them directly that now the leadership team expects better synergies in the medium, short to medium term. We are encouraged overall by what's going on in the post-acute sector. I'm not going to make too many comments, given that Genesis is a public company, but look for their release and see how obviously that sector is playing out, but we're definitely encouraged by the sector. Just remember that about half, 45% to be exact, of that HR Medicare transaction is attributed to senior housing. We're seeing occupancy in that senior housing, both triple net, as we mentioned, and in the shop segment is starting to come back. So those are some of the data points I will point out to you as you think about overall ProMedica HR Medicare construct. Thank

you. Your next question is from the line of Karen Ford with NUFG Securities.

Hi, good morning. I wanted to ask about your senior housing portfolio. Your same Serenity Guidance is over 200 basis points higher than your peers on both the shop and the triple net portfolio. Why do you think you're seeing superior performance? Can you confirm that there's no incremental rent relief or portfolio transitions expected in your triple net portfolio?

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

let me just add that it's no secret that we've sold a lot of senior housing assets over the years. I think what you're seeing is a planned, dedicated, 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'll take the short-term dilution that you get from that and all with an eye towards owning the best in class assets for the long term. And as Sean said, in the right markets, and I think, you know, particularly Karen, we take a very granular view of how we define the markets that we want to own. Senior housing assets. I think what you're just seeing is the benefit of an active asset management program with a view to the future of the business versus trying to manage FFO per share on a quarter by quarter basis.

That's good color. Thanks. And 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, things like grocery delivery, 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, IL plus, AL minus segment, three X of population growth. So there is no evidence that we have seen that the case. Do we think that technology will change this business for better? And that will be very helpful for seniors in their home environment? Absolutely. But just recall that a lot of seniors home is our communities as well. Right. Those technologies, and I mentioned a bunch of them in my prepared remarks, will help us drive the margin as well. So we'll 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, at least we have seen the demand has been running three X of population growth.

You know, senior housing provides an environment for the aging population to live safely. A lot of historic housing in this country works against a senior's health and wellness. So you could put some new technology in an obsolete residential environment. And I'm not sure at the end of the day you're achieving the goals of improving health outcomes at lower cost. As Sean said, we are very much on the forefront of bringing new technology into our settings and also thinking really hard about what the settings of the future look like. And that's why we are so focused on the markets that we're in, because 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. But it's actually out of reach for the majority of the population. So we've been very careful about where to own that real estate because the cost of delivering the care, as you all know, has been growing significantly. So you need to be in places where people can pay. And over time, I am hopeful we will figure out how to deliver a much needed environment, a much needed real estate setting at a cost that is not without reach for the majority of the population. So stay tuned on that,

Karen. Good stuff.

Thank you. Your next question comes from the line of the Vickroom Mahou Truck with Morgan Stanley.

Thanks for taking the question. Shank, 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're likely to see the trajectory improve given the expense comps get easier through the year?

You know, as you know, as you can look at our numbers, you will see that the expense growth has been challenging for the last five years. So this is nothing new. I would expect that 2019 will continue to see that. Maybe we'll see some moderation in 2020 because a lot of the California markets by then will actually have $15 of wage growth, which has driven a lot of those increases. But 2019 will continue to be a challenging year. And obviously, hopefully, we'll be able to mitigate that like we have using some pricing and some occupancy.

Okay. And then you are correct

about the trajectory given obviously year over year growth is not just a function of what happened this year, but it's also a function of what happened last year. So you're correct about the trajectory.

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

I'm not suggesting by any means that we don't have, you know, we don't have a view of what our ideal portfolio should be constructed. I'll also say that view is evolving. So it's not a static view. But what I was trying to drive that that most importantly, we deploy capital to make money. Even if we assume that we had a long term view of some percent of assets from some segment or some operators, we are not prepared to get to that view to execute that view to realize that you were not prepared to pay a price. That does not make sense from a total return perspective. That's what I was trying to drive that.

If I may just second, skill

nursing is we are, as you have seen within 12 months, we have time from an opportunistic buyer to an opportunistic seller. Right. Every asset this company owns is for sale at a price and total return. So that's no different from skill nursing, no different from any other buildings we own in any other segment.

OK, if I may just make one more in. I was a bit surprised or maybe it's also early in the year, but the two point two five billion dollars of acquisitions you've done, obviously you've closed Hamas and this new CNL, it seems like it's modestly accretive. You talked about the trajectory improving for FFO, but it also suggests that maybe your midpoint could move up, given the amount of acquisitions you've done for this year.

Yeah, Vikram came here. I think the pre-funding that we pointed to at this point, it makes sense for us to think about that from 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 continued to issue 195 million of equity into the first quarter and had 270 million dollars of dispositions that have already closed as well. So when you think about kind of where we're at from a funding perspective, our balance sheet is actually in a very good spot to start closing on a lot of the acquisitions that we've spoken to. And the combination of the timing of our closing on the acquisitions, plus the seasonality of our senior housing, which steps down in the first quarter, but then picks up throughout the year, is what is driving that acceleration of earnings from the first quarter through the end of the year. So, I understand your comments around where we are at midpoint, but at this point we're maintaining the range because I think that makes no sense with the public, the announced information. Great.

Thank you.

Sure. Next question comes from Wynette Teyu Okasanya with Jefferies.

Hi, yes. Good morning, everyone. Congrats on the quarter and the outlook. Things definitely looking up. A couple of things. The guidance. I'm just trying to understand kind of what's in and what's out, given the large amount of transactions that are being contemplated at this point. It sounds like the CNL transaction is in the numbers and all the acquisitions announced pre-CNL, but I'm trying to understand the $725 million of gear in the first line that Sean talked about are those in the numbers, and it also seems like the DISPO guidance went up from $800 to about $1.4 billion. Is that increase also in the guidance?

Yes. Hi, Tim again. The answer is yes and yes. So, on the acquisition side, we have the billion dollars acquisitions we announced on our investor day, 180 of which had closed in the fourth quarter and the remaining of which will close during 2019. And then, as you said, we announced CNL on January 2nd and that's $1.25 billion. So, between the investor day announcements and the CNL announcement, you're getting to your acquisition, your publicly announced acquisitions, and our dispositions of $1.4 billion that we revised this morning is all included into our 2019 number. Gotcha. I would just

add one more point. If you think about it, we have raised the equity already, but as you know, realistic transaction takes time to close, right? So, you have a six-month gap between when you're raising capital versus when you're deploying capital, which is a prudent thing to do. We're not going to take that kind of market risk. We have a big balance sheet to maintain, but that's sort of driving the dilution this year. But as you can figure, you know, I sort of, you can refer from Tom's comments that we don't think that impacts the run rate earnings growth. So, you're going to see a good chunk of that run rate earnings growth shows up in the second half and then flows through 2020 and beyond.

Yep, yep, yep, yep. Okay, that's helpful. Then number two, again, the $3 billion of development pipeline that you announced, Sean, because I found that pretty interesting. Can we just talk a little bit about, again, the timing around when all that could be deployed, whether, again, I know it's kind of like a row full, first look, last look type situation, but if that's $3 billion, how much realistically do you actually think you guys should execute on and so forth timing?

Yeah, so we do think that the number I mentioned is the one that we can execute on. And as I said, that we want to do it. We have several different structures and we don't want to do a row for just as you mentioned, but we are deploying capital in various ways, equity, debt, different parts of the capital structure. And when not equity, we, and we fund a portion of the capital stocks from as an impact in mortgage, participating mortgage, you can think about any structural, you know, provisions that is available that we use. Then we get a row for and a row for and a participation that's defined on the front end. We're very careful about our basis. We're very careful about our IRR that we achieve. But more importantly, as I said, that it's our option, not an obligation. So obviously, we would hope when we deploy the capital, we have to cross the capital. If not, we wouldn't. So that sort of gives a sense of how

we think about that. But there's high visibility, Tayo, to that number. This is a number that we know where those opportunities are.

Oh, yeah, that's a very good point. I should have mentioned that. So Tayo, I can sit down with you and walk you through building by building what those opportunities are. They are not unidentified opportunities. That's a very good point,

Tom. Excellent. One more thing you would indulge me. I would take a look at the sub and then in regards to properties under construction on the shop side for your top three markets, LA, New York and Boston, it feels like there are a couple more properties under construction now on a quarter over quarter basis. Just to get what's your viewpoint in regards to supply? Is that kind of shifting back to primary markets? Is this still really more of an issue of secondary markets at this point in the cycle? So,

so we do give you those stats because, you know, that's what you guys have asked for. And we continue to give those stats with our view of supply as it relates to our own portfolio is very granular, much granular. We've shown you some of the stats on our invest today, which, you know, we see supply is an FDU or Adjusted Competition Union. And our view is competition or our portfolio will be lower in 2019 than in 2018. But that, you know, we'll see obviously things fall off from 18 to 19, but also things go from 19 to 20. Right. We're encouraged by what we are seeing, particularly as you recall, I mentioned in our assisted living segment, which is a very large portion of our US business. We have seen 120 basis funds occupancy increase. That is one of the best uptick we have seen in years. Hopefully that's helpful. Thank you.

Your next question comes from Jonathan Hughes with Raymond James.

Hey, good morning. Thanks for the time and earlier remarks. Kind of a higher level question maybe for Tom or Sean, but in the last recession, obviously we didn't have the shop or RIDIA structure, at least not in such a meaningful way as today. So how do you expect shops to perform in a recessionary environment since you're not protected by the lease payments, but are instead exposed to free market supply demand fundamentals? I'm not saying that's

the

broader macro picture is going, but just trying to understand your views there and how that business should perform in a recessionary environment.

Yeah, so you are asking for something that we have absolutely no upside in even predicting what might happen. I will just mention it to you that as you know, our senior housing portfolio, particularly shop portfolio is very much geared towards assisted living business, which is a need driven business. Right. So you should look at the assisted living data over those time frames. You will see the business stayed large, a couple of hundred basis points of occupancy, but the rate growth remains resilient and expense growth is obviously helpful in that kind of environment. I'm not going to venture a guess of exactly how things are going to play out. I will also mention to you that it depends on when you go into such an environment, what is the supply, more importantly, what the demand side looks like. So it's a complicated answer than you would like, but I would like to point out when you think about our portfolio, senior housing is a very broad term. When you think about our portfolio, think, you know, as you know, it's a very much that particular portfolio in the right year phase is very much a need driven product.

Yep. Okay. That's helpful. And then I'll just chime in with one more, but looking at the capital stack, you have 720 million of preferred sitting on the balance sheet at a six and a half percent coupon that I believe are redeemable. Any plans to call those and maybe refi with debt or pay down with common equity embedded in 2019 guidance?

Thanks, Jonathan. So the prefers you're referring to, you're right, they're convertible and are actually convertible at our rights above 73, 54. So we've been trading above that for some time and there's a trigger on that. That if the stock stays where it's at or above that it'll hit in the near future. I think the way you should think about that is that the way we manage our balance sheet is always to continue to position it in a better long term position. And we'll be in the unique position if those are mandatory convertible to not only further advertise the balance sheet, but do it in cash flow recreative way. So I don't want to speak to where the stock price may or may not be in coming weeks. But you should think of us making the right long term decision from a balance sheet perspective on this.

Yep. Okay. That's it for me. I'll jump off. Thanks for the time.

Thanks,

Jonathan.

Your next question comes from the line of Jordan Sadler with KeyBank Capital Markets.

Thank you. Good morning. Can you guys offer a bit of granularity on the 1.4 billion of sales that are in guidance at a 6-2? I think the Genesis sales are 252 million at a 9 cap. So I'm just kind of, if you could help us get to the other residual amount and maybe what that's going to be helpful.

Sorry, Jordan. Your last part of your question got cut off.

Sorry. The residual amount there would be helpful, whatever's in that basket.

Yeah. So, so far to date, you're correct. So the Genesis transaction closed another 252 million and we had another 16 million of transactions closed year to date. So we've closed on 268 million dispositions at a little less than a 9 cash cap. So the remaining, called 1.1 billion, should be spread out through the remainder of the year. I would think about it kind of being a mid-year from here as far as timing.

Can you tell us what it is?

Yeah. The remaining assets are a mix of medical office buildings and senior housing. And I would think of that being, so if you think about the blended cap rate overall, you can see the remaining 1.1 billion is being done at a much lower cap rate than what's been sold. And it's more in the category of what we've talked about in the recent past, which is outside of opportunistic continued kind of culling of the portfolio in some of the higher yielding sectors. There's not much of that left. So when we think about capital recycling going forward, it's really lower cap rate, non-core assets in our business that are higher quality, that there's institutional demand for, but aren't necessarily part of the company's long-term strategy. And that's going to be reflected in the cap rate. But I think it kind of goes back to... Mathematically,

it seems almost sub-five based on what you sold Genesis.

Yeah. Correct. Your math is correct in the blended cap rate of what's remaining. So I think you'll be, from a quality perspective, from a sales cap rate perspective, it will fit again in that bucket of higher quality assets just don't fit into our long-term strategy.

Jordan, we're not definitely disputing your math. We can only tell you that the demand for healthcare assets, both in senior housing and medical office, is extremely robust. Particularly in senior housing, we have seen medical office cap rates have come up from the troughs of 2017. But in senior housing, there's an absolute bidding friendly from institutional investors. Everybody's people are seeing where the demand curve is going and there's a huge demand for these assets. So we obviously like to recycle our portfolio and our balance sheet over a period of time. So that's what we're doing.

I was just adding that, Jordan, this is kind of going back to Vikram's question from earlier, but the math on our dispositions throughout the year adds the part of that, the acceleration of earnings into the year. So your math is correct. And these being our creative sales in the back gap. And that's what puts, I think, Vikram is hitting at the run rate likely at the end of the year would be towards the higher end of what our guidance is out there. But throughout the year, we'll have a lower number at the start and partially due to some of these sales current in the beginning of the year.

Okay. And then just a couple quick clarifications. So looking at your senior housing triple net rent expiring, last quarter there was $43 million-ish expiring in the rest of 2018. And there was $0.19. And now it looks like, I'm curious what happened to that. I don't know if that was Brandywine or something else. And now it looks like there's about $28 million that's set to mature in 2019 and it's expected to be converted in addition to senior housing operating. So just you can confirm that's Brandywine?

No, Jordan, it's the Brookdale transition that is still happening. A lot of Brookdale assets are in California. A lot of Brookdale assets are in California. And those, obviously, the licensing transfer takes time. So those are happening right now. There has not been any additional senior triple net to right-year conversion other than Brandywine and Brookdale that we have talked about through the years

last year. And the other clarification is for the show guidance for 2019. All transition assets are in the guidance, Brandywine and Brookdale. Brandywine

is because it is not a change of operator. Brookdale assets are not because it is a change of operator.

Okay. Thank you.

Your next question is from the line of Michael Carroll with RBC Capital Markets.

Yes, thanks. Shock, I'm going to see if you can provide some additional color off of the $3 billion pre-development pipeline. Are these with new and or existing relationships? And can you provide a breakout between MOB and senior housing assets?

Yes.

I mentioned seven relationships. Three are in MOBs. Four are in senior housing. All but one is a new relationship. One is existing relationships.

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

No, we have broken ground already on the largest project we mentioned, which is a campus property. I also said these are not just developments. They're under construction projects as well. So obviously they are coming up. And, you know, obviously at the right point in the life cycle, we'll execute on those opportunities. But they are, as I said, as you can look at, it is very typical for this company to have this kind of arrangement. That's why we have always executed a relationship investment strategy with our operators. So there is nothing new that I'm telling you. But we're very encouraged that six of the seven are new relationships with highly reputable developers and operating partners. And a very interesting part of that trend, which is a change, as I mentioned on my script, out of those seven, four has reached out to us instead of us reaching out to them. And so that sort of gives you a sense of how we compete in the marketplace today is shifting. You know, I had

mentioned in an answer to Taya's question that there is tremendous visibility here. Now, anything can happen in the development world. Lots of reasons why things will be delayed. But I can't underscore more that we know where these opportunities are. And the timing of them is not something that we're 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.

Great. I guess last question, and it seems like a pretty attractive pipeline. Should we assume that the company's focus on developments will increase from this point forward? Are you seeing more opportunities out there? I guess I'll highlight it by the $3 billion of deals you kind of just highlighted. You

know, I think what Sean said is that we are engaged with some of the most successful developers in the U.S. today. And they're presenting us with many attractive opportunities that are very strategic for us because these are opportunities with some of the nation's leading health systems. And I think you've gotten a little flavor for that if you look at what we've done in what we've announced in 2018 and some of the projects, for example, with Providence St. Joseph's health system, the projects that we talked about today with Atrium, a very highly rated system in North Carolina. These should give you an indication of where a significant amount of growth will happen for well tower. We're not going to give you any more granularity about that other than we showed you with real examples of what we're doing. And we've articulated a $3 billion pipeline. You should assume a big percentage of it is more of that.

Great. Thank you.

Your next question comes from the line of Lucas Hartwick with Green Street Advisors.

Thanks. Good morning. So for SHOP, the UK portfolio has put up two quarters of high single digit and wide growth. Can you provide some color in the drivers there?

It's

driven by significant occupants around the UK.

OK. And then I think in your comments, Sean, you mentioned that you're working on something like $600 million of senior housing acquisitions. Can you provide more color on the quality market mix versus the current portfolio? I

think, Lucas, you might have heard. I think we I said that we have announced $725 million worth of senior housing portfolio across three operating partners. And these assets are new assets, young assets, four and a half years of age. And there's nothing else I have to add to that except that we think that we did this transaction in a very attractive return of 6.6 percent cap rate.

You know, the question of quality is hard to answer. Quality to us is what is strategically relevant to our long term plan. We are selling, you've seen us sell assets that many people think are high quality. We talked about where cap rates are in this space. These are high quality assets to some people, but they may not be strategic to us. So it's hard to answer that question. When you see us deploying capital in seniors housing going forward, you have to understand it's it's in markets and in the types of assets that are relevant to the broader well tower strategy, which is connecting senior housing more broadly in the health and what is increasingly becoming a wellness continuum. That's what we're driving here. So that's what we think of as quality because we sell something. It doesn't mean it's low quality and we're getting good prices for it because to some buyers, they're great assets. They're just they don't fit necessarily our long strategic plan. I hope that's helpful.

That is, yeah. Thank you.

Your next question comes from the line of Stephen Balacatty with Far Place.

Great. Thanks. Good morning, everyone. Thanks for taking the question here. So the main question I wanted to ask was just touched on a couple of minutes ago. But just to kind of ask on the same subject anyway, really as a follow up on the overall pipeline in the U.S. market right now, we're actually seeing real time that many hospitals and health systems are actually posting stronger than expected earnings results exiting 2018 and 2019. And intuitively, that should give health systems more confidence to pull the trigger on acquisitions, whether it's in post-acute or other types of assets. So, again, you kind of fashion this a little bit as we think about your pipeline of opportunities with health systems. I'm curious if you're getting that same sense, the pipeline could actually be accelerating a little bit. Prometica, Medicare type deals as we think about well-towered opportunities with health systems or pipeline of accelerating in other asset types with health systems, just given their what seems to be strengthening balance sheets. Thanks.

Good question, Steve. Let me take some of that and maybe Mark Shaver will have some comments on this because he spends a lot of time with the health systems, as do I. One of the comments I'll make is that as health systems start to see a future for their business model that's different from the very focused acute care model that drove so much of their real estate investment in the past, I think that opens up opportunities for partners like WellTower. So, you know, I would say what you see, particularly from the nonprofit health systems, is a little bit of a mixed bag in terms of performance because, you know, some of them are very well positioned to face a great new world where data, new technologies, and an ambulatory focus will have a big impact on profitability. Those that are attached to an acute care inpatient bedded hospital model will struggle. So, not to say that there aren't markets where there's an undersupply of acute care, but on balance, there's a lot of outmoded acute care beds that sit in all of these health systems that are well past their useful life. So, when they look at capital going forward, many of them are now seeing that a partnership with WellTower helps them accelerate the transition that they need to undertake. Mark, do you want to make

any

comments on that? Yeah,

I kind of, Steve, thanks for the question, Mark Shaver. I would maybe add two points. I think with health systems, we're going to continue to see, you know, two very important trends that we're positioned well to help with. One is they're going to continue to need to right-size their clinical delivery system. This is a lot of what Tom said, continue to move away from the acute care, maybe some specialty care environments in the inpatient setting, and build out their ambulatory, outpatient, and other sites of care footprint. So, we continue to be very active in those dialogues, and I think while their balance sheets may be strengthening a bit, the ability for them to fund that clinical growth on their own is going to continue to be challenged. That's a great opportunity for us. And then the second piece, which is really where I think the question was starting, there is going to continue to be vertical integration with health system partners, just like you see across the health spectrum. And so, that's going to create these per-medicine transactions where they're looking to grow additional margin businesses. And again, I think we're very well positioned to support that.

Steve,

I was just going to say one last comment. The majority of the pipeline today, if you look at with health system though, it is on what you understand as traditional outpatient, ambulatory care, and medical office segments.

Okay, got it. Okay, all right. Thanks, everybody. Thanks,

Steve. Your next question comes from a line of chat. Ben Acora with Stiefel.

Hey, good morning. This is Seth Caddo on for chat. My first question on the increased disposition guidance going from $800 million to $1.4 billion, you know, what changed since December that led you guys to increase this so significantly?

Yes, Seth. It's Tim here. You know, we're always in talks, as Shog mentioned, as part of his prepared remarks and as we're consistently saying, with interested parties and their assets. And you shouldn't think of discussions between now and December having been something changed, but things firm up. And it got to the point where we're more comfortable putting it into guidance now than we would have been back in December.

All right, thanks. And then just looking at the triple net senior housing portfolio, it does look like, you know, you have about 2% of your portfolio under one times coverage. Do we still think about any triple net to RIDEA conversions going forward?

So, I think if you look at last quarter's earnings call, you'll see that I've gone through significant details about how to think about that segment. So I'm not going to repeat that. I mentioned, I think I answered that question before that you are not going to see something of material size. But we just have to say it is this we don't think about is a triple net better than RIDEA, RIDEA better than triple net. That's not how we do this business. We think about alignment of interest with our operators. If it is the right alignment, we will take RIDEA assets into triple net. If it is the right alignment to do the other way, we're going to do that. But just to answer your question very specifically, please go back and read the transcript from last call. You'll see there's a major discussion about that topic. I don't want to waste everybody's time to get into that. But we do not expect anything besides change from triple net to RIDEA as of today.

All right. Thanks. And just on the segment guidance for 2019, the outpatient medical guidance looked like it declined 25 basis points at the midpoint versus 2018. Can you just give more color what drove that decrease here? Yes,

absolutely. This is also something we talked about in detail tonight and yesterday. We have a couple of leases rolling this year that will have downtime. We always underwrite downtime. And that's what you're seeing sort of get caught in that calendar side. We're very, very excited about that business as Keith was taking over the business and is making lots of change. So starting towards the end of this year into next year, you will see the fruits of those efforts that Keith is putting in and bringing and hiring a lot of really good talent there. And also empowering a lot of our existing talent. So we're very excited about the business. What you're seeing, the 25 basis points, just a function of the resource that we described and invested in.

All right. Great. Thanks for taking my questions. Thank you.

As a reminder, in order to ask an audio question, please press star 1 on your telephone keypad. The next question comes from Michael Mueller with JPMorgan.

Hi. Two questions. First, what do you see as being your average annual development spend over the next five years given how the pipeline is ramping up? And then second, for the billion four disposition target, should we think of that as that's what you want to sell this year? So if you're active on, more active on the acquisition side, you know, we should be thinking of equity for incremental funding or can we see that disposition number scale up more? First is I'm

not going to venture against on what the average development spend will be. It is safe to assume it will be higher than what it is. It's a question of risk reward. As you know, that we, for example, in the medical office segment, we only put trouble on the ground when it's close to 100 percent leads. We don't we don't go and build a building if we have, say, half of that as a commitment.

So that

sort of gives you a question to answer to what the question you asked. It's probably going to be higher, but it is a function of a lot of other factors. The second second answer is as we think about the ramp up of the acquisition portfolio, you should also think that the acquisition of those assets will come from both common equity as well as assets we own. Tom talked about how we think about asset distribution. We have lots of very high quality assets that has a significant bid in the marketplace today, and we will continue to recycle capital. The most important point that you are not going to see the deluded capital rate that you have seen before. And, you know, so whether it's from common equity, it's from the assets we own. We do think that we will very currently

manage the balance sheet.

You know, Mike, I want to make one comment. I think you should expect that development will accelerate in this next cycle because of the fact that there we're bringing forth a new asset class that didn't exist. I mean, you know, a lot of the urban senior housing models like that we've announced on 56th Street, which, by the way, was capped off just last week. Right, Mercedes? And what we announced on 86th and Broadway, these are this is a product that's never been delivered. I think what health care real estate offers investors is the opportunity to invest in a next generation class of real estate that they've not seen before. It's going to take a lot of capital. That's what we're positioned to do. I don't know how you do that if you're not investing with WellCowell. And, you know, Sean's comments about all these incoming calls now, a lot of it has to do that. We met with an institution who realized they would be much better off investing with us than trying to compete against us because there are, you know, just you've heard us talk a lot about our data analytics. No

one can compete with

that. So there you go.

Okay, that's helpful. Thank you.

And your final question comes from the line of Eric Fleming with SunTrust.

Good morning. I just want to ask a question on how you guys are looking at potential Medicare advantage opportunities. I know Sunrise talked about their M.A. plan on your investor day. You've got the pro-Medica relationship. When do you think you can start getting any contribution and what do you think their total market opportunity is for the M.A.

plans? Yeah, this is Mark Shaver. You know, I think Medicare advantage continues to grow as a trend in the country. It's about 35% adoption nationally in M.A. plans. You know, the larger plans for straightforward Medicare are really looking at the earlier younger population, the middle 60s to early 70s in population. A lot of the residents living in our communities are older and more frail. And some of the more specialized programs, the institutional programs really, which is what Sunrise and some of the others are playing, there's actually a much smaller percentage adoption of that nationally. We're talking about, you know, less than 100,000 individuals across the country in those plans. So we're very active in those conversations with some of the major payers. And there's, you know, as Tom says, often early days with regards to M.A. and the adoption, but we're very active. And we think there's going to be an important role

in

partnering with payers in

this front.

We

think there will actually 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 M.A. as a product that was geared towards someone who's paying $8,500 a month for seniors housing. But I think that's going to change in the future. And as Mark said, we have a lot of discussions with the major payers. You just heard that a very senior executive from UnitedHealth Care came on our board. We just announced it today, as well as Dr. Karen DeSalvo, who was with the largest payer in the world, CMS, I mean, the largest payer in the U.S., CMS. So we've got a lot of good knowledge and experience both inside the company and sitting on our board.

Thank you.

Thank

you. And with no further questions, we thank you for dialing in to the WellTower earnings conference call. We appreciate your participation and ask that you please disconnect.