Welltower Inc.

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2018 World 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 McKee, 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 WealthHour's fourth quarter 2018 results. Following the safe harbor, you will hear prepared remarks from Tom DeRosa, CEO, Chak Mitra, CIO, and John Goody, 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 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 assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in this morning's press release and from time to time in the company's filings with the SEC. If you did not receive a copy of this morning's press release, you may access it via the company's website at welltower.com. Before I hand the call over to Tom DeRosa, I want to highlight a few significant points regarding our fourth quarter results. Welltower achieved 1.6% total same-store growth in the quarter. We are particularly encouraged by the 40 basis points year-over-year occupancy increase in our senior housing operating portfolio and the sequential coverage increases in both our triple-match 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.

And with that, I will hand the call to Tom for his remarks this quarter and this year. Tom? Thanks, Tim.

At our investor day on December 4th, we took the notable step of announcing 2019 FFO guidance. Based on our Q4 results and our confidence in our outlook for 2019, I'm pleased to reaffirm that guidance this morning. Our guidance of $4.10 to $4.25 in normalized FFO per share represents a 4% increase at the midpoint in our guidance range over our 2018 results. As Tim highlighted, Our continued strong operating results in Q4 reflected the positive momentum in our seniors housing business that we've talked about throughout the year. Most notable in the quarter was the fact that we completed $559 million in acquisitions at a blended yield of 5.6%, nearly 90% of which are medical office buildings associated with investment-grade health systems. These investments help drive total investment activity to over $4 billion for the year. Our ability to source accretive investments 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 C&L and the majority of our announced investments will close by mid year, we expect FFO to accelerate in the second half of the year, setting us up well for 2020 and beyond. In the fourth quarter, we raised 552 million of equity driving down sequential 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 Qatari Investment Authority, one of the highest quality and most resilient capital partners in the world. This is part of a broader investment partnership That was a long time in the making. We are honored to have entered into this partnership with the QIA, which illustrates their belief in Welltower's unique business model and strategy for driving the future of healthcare real estate. Now, I'm delighted to pass the mic to 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're cautiously optimistic about the recent performance of our senior housing portfolio. On last quarter's earnings call, I discussed the narrowing of occupancy gap in year-over-year results. It appears that occupancy has reached and inflation points this quarter. Specifically, it shows occupancy increase 40 basis points year 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 your senior housing triple net portfolio, driving coverage up one basis point. Our reported growth rate of 2.2% in show is somewhat masked by lower growth in international markets, whereas four US markets experienced 2.7% 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 40-day decrease in 20-month employee turnover. While we're 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. pricing of skilled nursing assets have 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 8.95% yield. At market coverage and rent, that represents $40-plus million of value creation. As you would recall, we bought ACR 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 EBITDA coverage, this Genesee 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 Genesis Assets, selling Genesis Assets is short-term earnings dilutive to the tune-up to 1.5 pennies per share, we believe our shareholders achieved significant value and an improved growth profile for the enterprise going forward. Roughly 4% of our NOI currently is attributed to Genesys, 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 offices 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 WorldTower 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 and implied IRR. The cap rate at which MOB portfolios have traded during the frenzy of 2017 did not make any economic sense for World Tower shareholders. We passed on every one of these opportunities and would do so again at those economics. As cap rates have expanded, we return to offense and have since executed $2-plus billion of Class A medical office at a blended cap rate of 5.7%, resulting at 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 marketed 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 joint venturing with WorldTower 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 pounce 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 amount 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 PAPUS properties. These two buildings are 100% leased to Atrium Health for 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're 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're 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 facts 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 Goody, our CFO. John?

Thank you, Sean, 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 WorldTower, 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 to our investor day with growth expected in all our business segments. Two, our strong, proactive and 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 1.6% for the quarter and 1.6% for 2018 overall. this being above the midpoint of our full year guidance. Senior housing operating same-store NOI grew by 0.6% in the quarter and by 0.4% in 2018 overall. As Shams noted earlier, we're encouraged by another quarter of improved occupancy. Seniors housing triple net grew by 4.3% in the quarter and by 3.7% for the year, again with improved occupancy. Outpatient medical grew by 1.8% in the quarter and by 2.2% for the year. Finally, long-term post-acute grew by 1.4% in the quarter and by 2.1% for the year. We continue to focus on Welltower's operational efficiency. Even with significant investments in technology enablement and data science and the hiring of additional high-quality colleagues to our team, our G&A expenses relative to the size of our portfolio beat the sector. Overall G&A spend was $31 million for the quarter and $126 million for the year. Today, we are reporting a normalized fourth quarter 2018 FFO result of $1.01 per share and $4.03 per share overall for the year. 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 quarter and 2018 overall, we were very active for World Tower 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 date 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 4.34% with an average maturity of 13.8 years. We also closed on a new $3.7 billion unsecured credit facility with improved pricing across both our line of credit and term loan facility. 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 has been at 5.8 times at year end. In summary, World Tower 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 segments. 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 normalised FFO range at $4.10 to $4.25 per share. Starting with same-store NOI, we expect average blended same-store NOI growth of approximately 1.25 to 2.25% in 2019, which is comprised of the following components. Senior housing operating, approximately 0.5 to 2.0%. Senior housing triple net, approximately 3.0 to 3.5%. Outpatient medical, approximately 1.75 to 2.25%. 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, World Tower will pay its 191st consecutive cash dividend, being 87 cents. 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 REITs in this most prestigious index. Furthering our commitment to climate change, Well Tower continues to be recognized for the number of new green building certifications added this quarter and throughout 2018. With respect to social impact, The Wellpower 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, an 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 Spizo, President of UCLA Health and CEO of UCLA Hospital System, who both joined our board in December of 2018. We are delighted to bring these three recognized healthcare leaders to the board of Welltower. At the same time, we are sad to see Judy Pelham and Jeff Myers retire from our board in May. 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 six zero, 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 healthcare real estate to deliver sustained cash flow growth, all with an eye toward maximizing long-term shareholder value. We were the top performing large cap REIT in 2018, delivering 15.3% total shareholder return. This reflects not only the high quality of our differentiated business model, but the fact that we have articulated a path for growth. As you will see in 2019, we positioned the company to continue to deliver for our shareholders. Now, Nicole, please open up the line for questions.

Ladies and gentlemen, if you would like to ask a question, please press star, then 1 on your telephone keypad. To withdraw a question, press the pound key. Please limit your questions to one question and a related follow-up so that all callers may ask their questions. You may reenter the queue by pressing star 1 again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Joseph for Citi.

Thanks. Can you break down the components of your 2019 same-store 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're very encouraged by the occupancy growth. We think that we'll continue to have moderate rent growth and expenses are challenging. So we'll see how the year plays out. As you understand that we're trying to maximize our revenue, not one component of the revenue, we'll see how the year plays out. Too early to comment on specific breakdown.

Thanks, Ben. Keep providing 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 Prometica and AC America on our invest today, and you heard from them directly that now the leadership team expects better synergies in the short to medium term. We are encouraged overall by what's going on in the post-secret sector. I'm not going to make too many comments, given that Genesys 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 HCR managed share transaction is attributed to senior housing. We're seeing occupancy in that senior housing, both triple net, as we mentioned, both triple net 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 ACM Manicure contract. 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 SAMHSA NLI guidance is over 200 basis points higher than your peers on both the SHOP and the TripleNet portfolio. Why do you think you're seeing superior performance, and can you confirm that there's no incremental rent relief or portfolio transitions expected in your triple net portfolio?

So I think that should not be a surprise to you. If you 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 a very granular view of what our portfolio, our assets should be. You have seen our data analytics presentation, how we're thinking about asset management, very active asset management. You have seen that we have taken a lot of proactive steps to sell assets and not afraid of dilution on a short-term basis. So we're very encouraged by the business. Now, 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 in. 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 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, AL minus segment, 3X of population growth. So there is no evidence that we have seen that's 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, you know, difficult to sit here and predict what might happen, but there is no doubt that in the recent past, at least, we have seen that demand has been running 3x of population growth.

You know, senior housing provides an environment for the aging population to live 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. 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. 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 Vicar Mahal Trek 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 are 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 sort of make you more a seller today versus a buyer? And how would you sort of describe just 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 at 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 are not prepared to pay a price that does not make sense from a total return perspective. That's what I was trying to drive at.

Okay.

If I may just make one... is we are as you have seen within 12 months we have turned 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 skilled nursing no different from any other buildings we own in any other segment okay if i may just sneak one more in um

I was a bit surprised, or maybe it's also early in the year, but the $2.25 billion of acquisitions you've done, obviously you've closed Hamas, and especially CNL, it seems like it's modestly accretive. You talked about the trajectory improving for FFO, but it also suggests that maybe your midpoint, you know, could move up, just given the amount of acquisitions you've done for this year.

Yeah, back from him 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. 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 of dispositions that have already closed as well. 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 acquisition 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 kind of 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 the most sense with the publicly announced information.

Great. Thank you.

Sure. Next question comes from the line of Teyu Okusanya with Jefferies.

All right, 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. What I'm trying to understand, this $725 million of deals 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?

Yeah, to tie out Tim again, the answer is yes and yes. So on the acquisition side, we have the billion-dollar acquisition to be announced on our investor day, which – 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 C&L on January 2nd, and that's $1.25 billion. So between the investor day announcements and the C&L 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. Just one more point. If you think about it, we have raised equity already. But as you think, as you know, real estate 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 with big balance sheet to maintain. But that's sort of driving the delusion. 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. Makes sense. 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 ruleful first look, last look type situation, but of that $3 billion, how much realistically do you actually think you guys could execute on it? What 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 ROFO just as you mentioned, but we are deploying capital in various ways, equity, debt, different parts of the capital structure. And when not equity, and we fund a portion of the capital stocks through mezzanine, second mortgage, participating mortgage, you can think about any structural, you know, provisions that is available that we use. Then we get a ROFO and a ROFR. and a participation that's defined on the front end. So 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 the cost of capital. If not, we wouldn't. So that sort of gives a sense of how we think about this.

But there's high visibility tie-out to that number. Oh, yeah. This is a number that – We know where those opportunities are.

So, yeah, that's a very good point. I should have mentioned that. So, Tyler, 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.

Okay. Excellent. One more if you would indulge me. I was taking 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 what's your viewpoint in regards to supply? Is that kind of shifting back to primary markets? Is it still really more of an issue of, you know, secondary markets at this point in the cycle?

So, Tayo, 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 those stats on our Invest Today, which, you know, we see supply is an FDU or adjusted competition unit. 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. 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 U.S. business, we have seen 120 base response occupants increase. That is one of the best uptick we have seen in years. Hopefully that's helpful. Thank you. Great.

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 video structure, at least not in such a meaningful way today. So how do you expect – Shops who 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, you know, that business should perform in a recessionary environment.

Yeah, so you are asking for something that we have absolutely no upside, 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 the assisted living business, which is a need-driven business, right? So if you look at the assisted living data, over those time frames, you will see the business stayed large, a couple 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, I think, you know, as you know, it's very much that particular portfolio in the right year phase is very much of 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 preferreds sitting on the balance sheet at a 6.5% coupon that I believe are redeemable. Any plans to call them and maybe refi with debt or pay down with common equity embedded in 2019 guidance?

Thanks, Jonathan. So the preferreds you're referring to, you're right, they're convertible and are actually convertible at our rights above 7354. 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 7354, 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 a unique position if those are mandatory convertible to not only further democratize the balance sheet, but do it in a cash flow or creative way. So I don't want to speak to where the stock price may or may not be in the 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. Excellent.

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 nine cap. So I'm just kind of if you could help us get to the the other residual amount and maybe what that's the field.

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

Just try the residual amount there would be helpful whatever's in that basket.

Yeah, so so far today, you're correct today. The Tremises 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 nine cash cap. So the remaining $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, 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 and 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.

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

Correct. Your math is correct on 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 necessarily our long-term strategy.

Jordan, we're not definitely disputing your math. We can only tell you that the demand for health care 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 frenzy from institutional investors you know everybody's people are seeing where the demand growth curve is going and there's a huge demand for these assets so we've obviously like to recycle our portfolio and our balance sheet over a period of time. So that's what we're doing.

I would just add to that, Jordan, this is kind of going back to Vikram's question from earlier, but the math on kind of our dispositions throughout the year adds to part of that the acceleration of earnings into the year. So your math is correct in these being accretive sales in the back half and That's what puts, I think, Bikram 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 occurring at the beginning of the year.

Okay. And then just a couple quick clarifications. So looking at your senior housing triple net rent expiry, Last quarter, there was $43 million-ish expiring in the rest of 2018, and there was zero in 2019. And now it looks like – I'm curious what happened to that. I don't know if that was Brandywine or something else. 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 could you confirm that's Brandywine? Okay.

No, Jordan, it's the Brookdale transition that is still happening. 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 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 operators. Brookdale assets are not because it is a change of operators.

Okay. Thank you.

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

Yeah, thanks. Shaq, I want 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 tapas property. I also said these are not just development. They're under construction projects as well. So obviously they are coming up, and, you know, obviously at the right point in the lifecycle, 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 relationship 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. And I guess last question, and this 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 it was highlighted 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 towels. We're not going to give you any more granularity about that other than we've 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 portfolios put up two quarters of high single digit and a wide growth.

Can you provide some color and the drivers are it's it's driven by significant occupancy ramp in UK.

Okay. And then I think in your comments, shock, 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 a very attractive returns of 6.6% 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, understand 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 Bellicati with Barclays.

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 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 in 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 touched on this a little bit, but as we think about your pipeline of opportunities with health systems, I'm curious if you're getting that same sense that the pipeline could actually be accelerating a little bit on ProMedica, Medicare-type deals as we think about well-towered opportunities with health systems, or is the pipeline maybe accelerating in other asset types with health systems, just given what seems to be strengthening balance sheets? Thanks.

Yeah, 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 models 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. 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 fit in all of these health systems that are well past their useful life. When they look at capital going forward, many of them are now seeing that a partnership with Well Tower helps them accelerate the transition that they need to undertake.

Mark, you want to make any comments on that? Steve, thanks for the question. It's 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. 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, you know, create these pro-medica types transactions where they're looking to grow additional margin businesses. And, again, I think we're very well positioned to support that.

Steve, I'll just 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 or ambulatory care or medical office segment.

Okay. Got it. Okay. All right. Thanks, everybody. Thanks, Steve.

Your next question comes from the line of Chad Fedecore with Stiefel.

Hey, good morning. This is Seth Caddo on for Chad. 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 Jacques 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 it 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. Should we still think about any triple net to IDEA 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 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 or 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 gonna 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 right here as of today.

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

Yeah, absolutely. This is also something we talked about in details in our invest today. 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 gets caught in that calendar site. We're very, very excited. about that business as Keith was taking over the business and is making lots of change. So starting, you know, 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 two lease rules that we described when I invested it.

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 J.P. Morgan.

Yeah, 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 Forward 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 could we see that disposition number scale up more?

First is I'm not going to venture a guess 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 to reward. As you know that we, for example, in the medical office segment, we only put trouble on the ground when it close to 100% lease. 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 is. It's probably going to be higher, but it is a function of a lot of other factors. The second answer is, as we think about the ramp-up of the acquisition portfolio, you should also think, that the equitization of those assets will come from both common equity as well as the assets we own. Tom talked about how we think about asset disposition. 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 gonna see the diluted capital rates that you have seen before. And so whether it's from common equity is from the assets we own, we do think that we will very prudently manage the balance sheet.

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, 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 85th and Broadway, this is a product that's never been delivered. I think what healthcare real estate offers investors is the opportunity to invest in 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 WealthTower. And, you know, Sean's comment 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 in with us than trying to compete against us because there are, you know, just you've heard us talk a lot about our data analytic capability. 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 MA 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 MA plans?

Yeah, Eric, 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 MA 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, 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, Tom says often, early days with regards to MA 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 they're actually the development of products by the payers that will address the needs of the population that will likely enter the assisted living sector. Again, generally a wealthier population. Historically, we don't think of MA as a product that was geared 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.

Thanks a lot.

Thank you.

And with no further questions, we thank you for dialing in to the World Tower Earnings Conference call. We appreciate your participation and ask that you please disconnect.