Welltower Inc (WELL) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2016 Welltower earnings conference call. My name is Kayla and I will be your operator today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn the call over to Jeff Miller, Executive Vice President and Chief Operating Officer. Please go ahead, sir.

Thank you, Kayla. Good morning, everyone, and thank you for joining us today for Welltower's second-quarter 2016 conference call. If you did not receive a copy of the news release distributed this morning, you may access it via the Company's website at welltower.com. We are holding a live webcast of today's call which may be accessed through the Company's website.

Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results projected in any forward-looking statements are based on reasonable assumptions, the Company can give no 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 the news release and, from time to time, in the Company's filings with the SEC.

I will now turn the call over to Tom DeRosa, our CEO. Tom?

Thanks, Jeff. Our strong results this quarter were driven by excellent operating results across all of our business segments. From an earnings perspective, funds from operations per share was up 6% and funds available for distribution was up 9%. The Scotts will take you through a deeper dive of what is driving our performance. But, first, let me give you the high points.

Overall same-store NOI for all of Welltower was up 3.3% versus last year. This is largely being driven by the performance of our seniors housing business. The senior housing operating portfolio registered 4% same-store NOI growth versus a year earlier.

Despite the industry concerns about new supply and wage expense growth, the Welltower family of operators were able to pass along on average 4% rate increases while increasing occupancy by 100 basis points. These results can only be realized from owning A quality real estate in A quality markets. That is the Welltower story.

A key differentiator for Welltower is that 90% of our revenue is from private pay sources. You should expect to see our private pay percentage increase through this year.

However, we also have a strong history of managing the credit exposure to government reimbursement for our shareholders. So, regarding our Genesis assets, we believe Genesis is continuing to strengthen its business platform and financial position. I can only speak to our Genesis portfolio and I can tell you that the operating performance of our portfolio improved during the quarter.

We are pleased to see a strong final Medicare rate increase, the DOJ settlement that was announced by Genesis yesterday, and both Welltower and Genesis shareholders should be pleased to have some clarity around their capital structure. This goes a long way toward adding some balance to the Genesis story and we believe positions the Genesis management team to focus their time and energy on the future of their business.

Speaking of the future, we are pleased to announce the $1.15 billion Vintage acquisition this morning. This is an ideal strategic acquisition for us. It allows us to go deeper into two important core markets, significantly solidifying our number one market share in Los Angeles, gaining the number one position in San Francisco, and which, by the way, adds to our already number one market positions in New York, Boston, and Seattle, five of the Sexy Six core markets in the United States. The Vintage portfolio will be managed by Sunrise, Silverado, and SRG, three of our operators with a strong position in these markets.

The Vintage team has built a great business with some irreplaceable assets. We expect rebranding and connecting these assets to the broader Welltower senior care network will enhance their value and capture significant upside for our shareholders. I do hope you will review the Vintage portfolio slide presentation available on our website.

Our strategy of building scale in A quality real estate in the leading core markets in the US, UK, and Canada is driving the excellent results we are reporting today. Our ability to bolt on a large acquisition like Vintage underscores the dominance of the Welltower franchise and enhances our ability to continue to drive best 8in-class operating results and growth for our shareholders.

Now Scott Brinker will give you a closer look at our operating performance.

Thank you, Tom. Welltower is known for discipline around high-quality real estate and operating partners. That discipline delivered another solid quarter with 3.3% same-store NOI growth, just above the high end of annual guidance. The operating portfolio led the way.

Same-store NOI grew 4%, rental rates were up 3.8%, and occupancy increased 100 basis points. All were above expectations. To date, we're proving resilient to new supply and higher labor costs.

Our diversification by operator, service type, and geography is a key attribute. An example is that same-store NOI in Canada last quarter increased 7.1%. Outstanding work by our partners at Chartwell and Revera. Their performance offset more modest growth in the UK. Two years ago the roles were reversed, showing the benefit of diversification.

By design, more than half of our Canadian NOI comes from Toronto, Montreal, Vancouver, and Ottawa, the four largest markets in Canada. Over the past few years, our properties in these four core markets have produced 5%-plus annual NOI growth, far above any comparative benchmark. We have number one market share in several of these markets and intend to go deeper over time.

Same-store NOI in the US grew 3.5% last quarter. We continue to see wide variance by market, with clear outperformance from our core markets, those being southern and Northern California, Seattle, Boston, New York, New Jersey, and DC, Northern Virginia. Including the Vintage acquisition, our six core markets will account for nearly 60% of the NOI in our US operating portfolio.

We've always liked the supply and demand fundamentals in these markets and they've rewarded us with consistently higher rate growth, better margins, and same-store NOI growth in the mid to high single digits. We very deliberately formed partnerships with the leading operators in these markets, including Sunrise, Silverado, Belmont Village, SRG, Benchmark, Epic, Merrill Gardens and Brandywine. Their operating expertise helps our real estate avoid commodity status. They make our market position even more defensible.

Including the Vintage acquisition, we'll have number one market share in five of these six core markets and number two share in the six. And yet our market share is only in the mid teens leaving plenty of room for growth.

The UK operating portfolio produced 2.7% same-store NOI growth last quarter. As expected, labor costs are a head wind. To date, thanks to our premium locations, we've had enough pricing power to offset most of those costs.

Half of our NOI in the UK comes from the RIDEA structure and the other half is triple net with 2% to 3% annual rent escalators. This 50/50 mix in the UK gives us a nice balance of upside and stability.

Outpatient medical results continue to be boring but in a good way, with another quarter of same-store growth in the mid 2% range. There's excellent visibility into this income stream driven by low lease rollover and a high retention rate. Also, the vast majority of the leases are triple net which gives us reliable earnings growth because expenses are passed through to the tenants.

Moving to triple net senior housing, same-store NOI grew 2.8%, in line with history and our expectations. Payment coverage moved higher and we see potential for a slow upward trend over time.

Skilled nursing and post acute -- same-store NOI increased 3.6%. Payment coverage declined a few basis points primarily due to certain assets being moved to held for sale and therefore out of the calculation. More important, our Genesis properties continued to perform well given the environment. Our master lease saw a nice improvement in Q2 versus the previous two quarters as Genesis adapts to the new environment.

Yesterday Genesis made several positive announcements including covenant release and a term loan refinancing through Welltower and Omega on a 60/40 basis. For Welltower shareholders, this should be viewed as an important first step in a much larger process.

As of yesterday, we are better positioned to reduce our Genesis concentration. We own their core assets in their core markets. So, getting buyers comfortable with our real estate has never been our concern.

Three things changed yesterday. One, the hostile lender is gone. Two, buyers can underwrite the corporate credit with more clarity. And, three, Genesis can now focus on running their business rather than inherited DOJ investigations, covenants, and debt maturities. We had already been seeing inbound interest in acquiring Genesis real estate from us and we expect the interest level to increase over the past 24 hours.

We raised $227 million of capital last quarter through dispositions and loan pay-offs including $61 million of Genesis mortgage loan repayments. The largest asset sale was in Canada where senior housing cap rates are now right on top of the US. When we entered Canada nearly five years ago, the spread to the US was at least 100 basis points. Since then institutional capital has poured into the sector, driving down cap rates.

We took advantage last quarter by selling a non-core triple net portfolio in Alberta for $125 million, which is a mid 5% cap rate. The price was particularly attractive to us in light of the weak economy in that province.

We closed $356 million of new investments last quarter at a 7.2% initial cash yield, a healthy spread to our cost of capital. Our operating partners continue to be a unique source of high-quality investments at reasonable prices.

That takes us to our pending acquisition of the Vintage portfolio in California for $1.15 billion. This portfolio is middle of the fairway for us. First, 100% of the NOIs in our core markets. We're going deeper into markets where we have an incredible footprint and a track record of success.

Second, Welltower is uniquely positioned to unlock value here. We chose SRG, Sunrise, and Silverado to take over management of the properties. Seniors housing is not a one size fits all business. And we have the unique luxury of hand picking among our operating partners for the task at hand.

SRG is an expert at large communities. Sunrise excels at midsize properties. And Silverado is the memory care specialist. And that's exactly how we allocated the 19 properties.

The cap rate is expected to improve from about 5% in year one to the mid to high 6%s at stabilization. That improvement is driven by occupancy, rate, and expense assumptions that are based on our partners' deep experience in these markets.

Vintage is a very unique opportunity due to its scale in high barrier markets. It includes irreplaceable properties in San Francisco, including one a few blocks from Nob Hill and one a few blocks from Golden Gate Park. Also, the timing for a big core acquisition is perfect for us given our pending dispositions.

That's a good segue to Scott Estes.

Thanks, Scott, and good morning, everyone. We were pleased to generate another solid quarter of earnings results and operating performance out of our portfolio. I'd like to focus my comments this morning on how we're thinking about our business from a financial perspective as we enter the second half of the year.

As Tom and Scott mentioned, we will not be shy about looking for incremental disposition opportunities throughout the remainder of 2016. As a result, you should expect us to remain focused around our capital allocation theme this year, which emphasizes the following three components.

First, we'll look to maximize our financial flexibility through enhanced liquidity, as evidenced by the recent increase in our line of credit from $2.5 billion to $3 billion. Second, we intend to further strengthen our balance sheet by using incremental disposition proceeds to fund announced investments and continue to reduce leverage and strengthen our credit metrics. And, third, we intend to further enhance the quality of our portfolio through targeted asset sales, which we'll remain focused on reducing our skilled nursing exposure and increasing our private pay mix.

So I'll, again, begin my detailed remarks with some perspective on our second-quarter financial performance and several of the more significant changes made to our supplemental package this quarter. In terms of second-quarter earnings, we generated normalized FFO of $1.15 per share, up a solid 6% versus last year and normalized that of $1.04 per share, which increased 9% versus last year. Results were driven primarily by our same-store cash NOI growth and the $1.9 billion of net investments completed over the last four quarters.

Overall I think this is a fairly straightforward quarterly report as our net investment volume of $129 million was relatively light, a G&A of $39.9 million was in line with expectations, and tax expense is only slightly less than expected. The only somewhat unusual item was on our other income line which included an additional $11.8 million related to the receipt of insurance proceeds and the release of an escrow, the benefit of both of which were backed out of our normalized earnings results.

Moving on to dividends, we will pay our 181st consecutive quarterly cash dividend on August 22 of $0.86 per share, a rate of $3.44 annually. This represents a 4.2% increase over the dividends paid last year and represents a current dividend yield of 4.3%.

I'd also like to point out three fairly significant enhancements we made to our supplemental package this quarter. First, you can see at the bottom of page 5 that we enhanced our CapEx disclosure to include both recurring CapEx that impacts our normalized bed but also the other CapEx amounts that are generally value-enhancing larger renovation projects throughout our portfolio.

Second, on page 8 we added detailed triple net payment coverage data that highlights both the EBITDA coverage and duration of the individual leases in our portfolio.

And, third, on page 29, we added disclosure related to our same-store NOI calculation methodology which details the specific adjustments made to arrive at our same-property count at the top of the page and the adjustments to arrive at the same-store NOI by property type at the bottom of the page. I think our intent here is to be as transparent as possible in showing you how we calculate our same-store results.

Turning next to our liquidity picture and balance sheet, the second quarter was fairly quiet from a capital markets activity perspective. I think the highlight of the quarter occurred in May when we further enhanced our financial flexibility by increasing our line of credit from $2.5 billion to $3 billion, while extending the initial term through May of 2020.

Our new line is priced at LIBOR plus 90 basis points, represents savings of 2.5 basis points from our previous line, and carries a one-year extension option and an accordion feature for an additional $1 billion. This brings our total unsecured credit facility to $3.7 billion when including our US dollar and Canadian dollar term loans, which were also extended for another five years.

In terms of equity, we raised $64 million by issuing 914,000 shares through our DRIP program this quarter. We also generated $227 million of proceeds through dispositions and loan pay-offs, which, importantly, included $61 million in Genesis mortgage loans repaid during the quarter. And, last, we repaid approximately $151 million of secured debt at a blended rate of 5.2% while issuing $87 million of secured debt at a blended rate of 3%. As a result, we continue to have significant liquidity with over $2.7 billion available at quarter end with only $745 million of line borrowings and $467 million in cash on balance sheet.

Our balance sheet and financial metrics at the end of the second quarter remain strong. As of June 30, our net debt to undepreciated book cap of 39.2% improved 40 basis points from last quarter, while our net debt to enterprise value improved 230 basis points to 30%. Our net debt to adjusted EBITDA improved to 5.5 times, while our adjusted interest and fixed charge coverage for the quarter remains solid at 4.2 times and 3.3 times, respectively.

Our secured debt remains at only 11.9% of total assets at quarter end. In addition, we were pleased to receive an upgrade in our senior debt ratings from Moody's to BAA-1 in June.

In light of the recent Brexit vote, I'd like to take just a moment to remind you that we have fairly little financial exposure to the recent weakness in the pound sterling as a result of our hedging program. More specifically, as of June 30, our UK exposure from a balance sheet perspective is over 80% hedged through a combination of sterling-denominated unsecured debt and other currency hedges in place, while our earnings out of the UK are approximately 90% hedged through interest expense on debt, G&A, CapEx, and cash flow hedges. Since the UK does represent only 8% of our total NOI, each 10% move in the pound against the dollar currently has an annualized earnings impact of less than $0.01 per year.

I will conclude my comments today with an update on the key assumptions driving our 2016 guidance. Regarding investments, our acquisition guidance includes those completed during the first half of the year, the $1.15 billion Vintage portfolio, and an additional $48 million of investments expected through our Mainstreet partnerships.

Moving to dispositions, we've increased our disposition forecast for the full your to $1.3 billion in proceeds from the previous $1 billion. Our new forecast is comprised of the $343 million in proceeds received during the first half of the year, $769 million of proceeds from properties currently held for sale, with the remainder representing loan payoffs and other potential property sales over the rest of the year. Most of the $300 million of incremental disposition proceeds that were added to our guidance this quarter are skilled nursing assets and do include $68 million from our Genesis portfolio.

As Tom and Scott mentioned, we continue to evaluate opportunities to sell additional Genesis assets above and beyond those included in our current guidance. Just to be clear, our exposure to Genesis has declined by $57 million for the three Genesis-related items that have been disclosed over the past two days, which include the $61 million in mortgage loans repaid during the quarter, the $68 million in pending dispositions, partially offset by the $72 million new term loan.

In terms of our same-store NOI growth forecast, there's no change to our blended full-year estimate of 2.75% to 3.25%, but I would say we're tracking toward the higher end of the range at this point driven largely by the strength of our seniors housing operating portfolio. Our CapEx forecast is currently $82 million for 2016, comprised of approximately $55 million associated with the seniors housing operating portfolio, with the remaining $27 million coming from our outpatient medical portfolio. We do expect CapEx spending to ramp up a bit during the latter half of the year due to the timing of projected expenditures.

Our G&A forecast continues to track toward the low end of our initial guidance at approximately $160 million for the full year at this point. Our tax line item is projected to return to an expense of about $3 million to $4 million per quarter during each of the last two quarters of this year based on slightly higher taxable income forecasts. As a result of all these assumptions we're maintaining our normalized FFO guidance of $4.50 to $4.60 per diluted share and FAD guidance of $3.95 to $4.05 per diluted share, both of which represent 3% to 5% growth over normalized 2015 results.

I think our decision to maintain guidance was largely based on the fact that the incremental dispositions added to our guidance this quarter should be roughly offset by the Vintage portfolio acquisition and continued solid operating portfolio performance through the second quarter.

In conclusion, we remain focused on our capital allocation efforts this year that we'll continue to prioritize, maximizing financial flexibility through increased liquidity, strengthening our balance sheet by lowering leverage, and enhancing the quality of our portfolio and private pay mix.

That concludes my remarks. I think at this point, Tom, I'll turn it to you for some closing comments.

Thanks, Scott. Before we take your questions I wanted to highlight a few promotions that were approved by our Board and announced last week. Many of you know Mercedes Kerr, as she is an important leader in the senior housing industry. I'm delighted to tell you that Mercedes was named an Executive Vice President and a member of the Welltower management committee. Mercedes oversees business development and relationship management activities and has relocated to the mothership here in Toledo.

Additionally, Matt McQueen, Senior Vice President of Legal, was named General Counsel and Corporate Secretary. I'm grateful to their contributions to our success, and they add further strength to an already deep senior management bench here.

Now, Kayla, open up the lines for questions, please.

(Operator Instructions)

Our first question comes from the line of Michael Carroll from RBC Capital Markets.

Thanks, good morning. Scott, can you give us an update on the sales process for the Genesis add? I know you touched on this in your prepared remarks. Maybe you can touch on the depth of the buyer pool that you're currently tracking.

Yes, Michael, I'd be happy to. The held for sale bucket includes $68 million of Genesis properties that are already under contract. And that should close in the next 60 days or so. Those are unique in that Genesis is actually exiting the operations, as well. So, we're selling the real estate, they're exiting operations.

And I say that's unusual or unique because, for the most part, we own core Genesis assets that they want to stay in as the operator so we would be selling our real estate and Genesis would remain as the operating partner. I think it's a less complex transaction than trying to sell the real estate and the operations together.

In terms of interest level, it's strong, and it's from a number of different sources -- private equity for sure, overseas capital for sure. And we're actually starting to see the private and public REITs show interest again, which would not have been the case in the past three to six months as the stock prices have come back and the capital rate has improved. So, there's actually a pretty deep buyer pool. And the lenders continue to be interested in the space, as well, provided the payment coverage is reasonable.

But I would highlight something that Scott said earlier, Mike, is that based on the Genesis announcement yesterday, I think there is even greater interest in owning these assets because there were a number of issues that were providing a little bit of a smoke screen in terms of really understanding the true value of the real estate and the future of the Genesis operating platform. I think a lot of that has been taken care of by the measures that we've already talked about.

Okay. Then can you touch on how much of the portfolio you'd like to sell? And will this be done in multiple transactions, a JV, or just one single transaction?

Mike, we've always been both buyers and sellers of real estate. We are opportunistic and strategic in both those regards. We, again, are evaluating opportunities to sell across our portfolio as they come in. I think we're comfortable with what we own today and feeling better about it today than we might have felt a few days ago. So, again, we ask you to stand by and assume that we're seeing a lot of interest and we'll make the best decision with respect to our shareholders.

Okay, great. And last question, can you give us some color on that California portfolio you agreed to buy? I think the release said a stabilized yield in the mid to high 6% range. Why is this a stabilized deal? Does that assume some type of redevelopment opportunities? Or does that assume any operational improvement from transitioning your existing operators into those assets?

Michael, it's more the latter. There are a couple of properties that would benefit from some CapEx and redevelopment but that's not the reason for the gap between the first-year yield and the stabilized yield. It's more that we're going to pretty dramatically change the service profile at the communities. I think the service level, the price point is going to change pretty dramatically. And we've chosen three operating partners to do that with, who have extremely deep experience in these markets.

So, we've under written occupancy rate and expense assumptions. They're very much based on their historical experience in these markets. Any time you do an operator transition you have to assume there's going to be a decline in year one, especially if you're increasing the service mix. The way it works is the expenses go up first, and it takes time to be able to increase occupancy and rate to match the service level that you implement day one. And no doubt you have staffing changes, as well as turnover within the resident population. So the year one is always a bit depressed.

What's the in-place or initial yield on these assets?

It's around 5%, Michael, in year one.

Great. Thank you.

Our next question comes from the line of Kevin Tyler from Green Street Advisors.

Good morning. Thanks. Just following up on that point on the Vintage deal, can you give some color on how it ultimately came together? I know the portfolio had been rumored to be on and off the market. What brought them to the table ultimately?

Kevin, there's only so much we can say about something like that. I would say that patience is a virtue sometimes. And the timing here worked particularly well for us given cost of our capital today maybe versus in the past and our disposition proceeds that are pending.

So, we felt like this has always been a portfolio that we had our eye on. We always had operating partners that we thought could do a great job creating value, and the timing came together perfectly.

Kevin, we don't know of another opportunity to be able to create the level of scale in the Los Angeles and San Francisco markets that this acquisition will give to us. So we think it's a highly strategic move for us to be able to acquire Vintage. We're very excited about it.

The Vintage group, Vintage Senior Living, really assembled an excellent portfolio of assets in some extremely high barrier to entry locations. That's what we're all about. So this, as Scott said, down the middle of the fairway, this is exactly the type of growth opportunity that we seek out.

Okay. Thanks. I agree, definitely some high barrier locations there right in our backyard in Southern Cal. In the slides that you put out, the occupancy in the Southern Cal piece of the portfolio, I think it was around 83%. I was just curious, given the nature of these assets and where they are why that might be a little bit lower than the industry average. Any color there?

We think there's opportunity to bring it up to the industry average, our occupancy in these markets is in the low 90%s. SRG, Sunrise, Silverado consistently run at that level. It will take a little time to get there but we're confident these over time these properties will be at the 90%-ish level. And that's one of the reasons why we see the yield in this investment improving over time.

Okay. Thanks. And just switching gears on to the Genesis and SNF side for a second, as we think about the overall exposure to these new bundling initiatives and try and quantify what that means for any particular operator, we try and pencil down what percent of NOI might be exposed to joints broadly, and then maybe go from there into the 67 geographies that are laid out under the CJR program. I'm just curious, from you, and we don't have to talk in exact numbers, but directionally Genesis' exposure to CJR and in those 67 markets, how do you think about that? And what, if we're talking ballpark terms, would you think that represents in terms of their NOI?

Kevin, the world of healthcare reimbursement is moving towards bundling. And it's hard to answer your question incrementally because there's so many unknowns. Genesis is very much preparing for a world that looks different than today in terms of reimbursement. And all I would say is the lowest cost setting that can deliver the best outcome will be the winner.

Okay. Thanks for the thoughts, guys.

Our next question comes from Juan Sanabria from Bank of America Merrill Lynch.

Hi. Thanks for the time. I was just hoping you could comment on the changes that Genesis announced yesterday with regards to its covenant to get a 20% to 25% buffer. If you could just comment on what we should expect that implies. Does that imply more pressure likely ahead? And if you could comment on what the covenants were and where they are now relative to the covenants and what the change was.

Yes, Juan, I'll answer what I can. Genesis will have their call on Friday. I don't think they're disclosing particular covenants. But the point is when these covenants were set three and four years ago it was a different business environment. And they were set at a level that gave a cushion to the projected performance. And that's the same thing we've done here.

The idea behind covenants is to give yourself a seat at the table when things are trending in the wrong direction so that you can sit down and have a rational discussion about how to proceed. That's what happened here among Genesis and its various capital partners. So, we've agreed to reset the covenants to levels that certainly have all of us being paid. And, as they disclosed, the cushion is in the 20% to 25% range against the EBITDA projection that they've recently provided that's based on today's operating environment.

So, is the covenant with regards to fixed charge? What's the new covenant level? And if you can comment, what did you guys get in return for the change to that covenant?

I don't think it's appropriate to talk about specific numbers, Juan, but there is a fixed charge coverage. There's an interest coverage. There's a leverage covenant, liquidity, net worth. There are a number of covenants that hit all the key factors around corporate credit. And for us there's a master release payment coverage, as well.

Okay. Then on Genesis you talked about the lenders being supportive of potential buyers of any assets you're looking to sell. What are you seeing in terms of lenders? What kind of coverage levels do they want? And then maybe you can comment on how that is relative to your expectations for how your Genesis portfolio will look as the year progresses, given I think you said that the second quarter was strong. I don't know if that's a one-quarter trailing or as of today.

Juan, on the payment coverage it's worth talking about because we always report on a trailing 12-month basis, but also on a one-quarter lag. So, the number you see in our reports can be a bit misleading. So, when I talked about the second quarter being strong, I'm talking literally about the three months from April 1 through June 30. The performance in those 90 days was a nice improvement over the prior two quarters, which is encouraging to us.

In terms of the payment coverage that lenders are looking for, and the same is true of the buyer pool, and it tends to be in the 1.3 times coverage range. So, our coverage today is closer to 1.25 so we're slightly below but not in any material way, which gives us additional comfort that these are very salable assets, particularly now that the Genesis corporate profile is a lot less uncertain than it was a week ago.

Just one last quick one for me, you guys obviously have substantial exposure to Genesis. And even if you were to do, call it, $1 billion of acquisitions over the next 12 months, or whatever the timeframe may be, are you still ruling out a potential spin of whatever may remain after an initial larger transaction?

Yes, we are.

Okay. Thank you.

Our next question comes from Nick Yulico from UBS.

Thanks. Just another Genesis question. You said that one of the motivations here to do the term loan, to become the term lender, is to remove other lender parties from the discussion table to make it easier when trying to sell a chunk of the Genesis real estate in deals where Genesis would stay the tenant. So, I get some of that motivation. But a skeptic would say it looks like no other lenders were willing to step in on a new term loan besides you and Omega. And then looking at the LIBOR plus 13% rate, doesn't that signal a very weak credit profile and that you were forced into becoming a lender of last resort here?

Nick, it's Scott. It's interesting, the way we thought about the term loan is that it's not our core business. So, 98% plus or minus of what we do is high-quality real estate. So, you're not going to see us do things like this very often. On occasion to accomplish a longer-term bigger goal we'll extend a loan. And we have a good history of having those loans repaid.

In this situation, I can't speak for Omega but for Welltower we told George and his team to go out and talk to the marketplace, see what a third party was willing to lend at, and we would be willing to match it. And that's what we did because this is an important security in the Genesis capital structure and we'd prefer to control it rather than have a hostile third party be in that position holding the cards even though they have 1% or less of the capital at risk.

So, the situation that existed a week ago to us was untenable and was not allowing us to accomplish important goals. It was distracting Genesis. But we did not do a below market loan. We didn't do an above market loan. This is a market rate. Clearly, they're not a AAA credit, so we're being paid for the risk that we're taking.

Then what's the incentive for Genesis at this point to go out and try to refinance the term loan? It sounds like you guys want to be a term lender in the near term because it helps with asset sales, helps shore up Genesis. But, if the rate is market, what is the incentive for Genesis to go out and refinance this with new term lenders?

Regardless of who the lender is, as one looks at one's capital stack you want to pay off the highest cost that you can. I would say that, given that Scott said this is market terms for this kind of paper, it's always going to be the type of paper that management wants to get rid of as soon as possible.

The maturity at December of 2017, too, is another consideration.

Okay, thanks. Then just going back to the Vintage deal, can you just talk a little bit more about the time you think it's going to take to get from the going-in yield to the 30% NOI upside to get to a mid 6% yield? And I forget if you said what the occupancy today of the portfolio is.

The occupancy today is in the 84%, 85% range. It's a bit lower in Southern California than it is in Northern California. And it's going to take a couple years. This isn't unlike a redevelopment opportunity.

We think given the locations and the scale, the 6.5% to 7% stabilized yield is more than adequate return for this type of opportunity. And then longer term we think this fits right into the profile of inflation plus outperformance. So, this is not a two-year investment for us. This is continuing to build on a really important footprint in great markets.

I think that's what's exciting about this acquisition, is that we think, while Vintage has been doing a good job, the scale that we already have in those markets and the operational efficiencies, that being part of the Welltower umbrella, bring to any asset. Our portfolio was the very reason why you see our performance leading the industry. It's not magic. It's hard work. And we believe we bring tremendous synergies with our other pieces of our portfolio to the Vintage portfolio and we think that will benefit our shareholders over time.

Thanks, everyone.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Thank you. You guys had pretty solid same-store NOI growth in the operating portfolio again this quarter, ahead of some of your peers. So you [candeed] to show us the results there. I'm just wondering on the expense side, was anything one time in the comp expense? I think it was up 6%. What should we assume a good run rate over the next few quarters on expenses?

Vik, there's always something unusual. It's one reason that we try not to focus too much on 90-day increments of time, whether it's a plus or a minus. With this many properties, there's always something unusual going on. But we don't really move those in or out.

The pool is the pool. If there are already adjustments that are particularly unusual, we tell you exactly what we did in the supplemental. So, the numbers are always going to be a little bit more volatile than, say, a triple net lease.

The compensation for sure has escalated this year, particularly in the UK and the US. We've talked about that at length. It's in our projections for the year, and those expectations are being met. I don't know if it's good or bad. But we accurately predicted that costs would be up quite a bit with respect to labor.

The fact is, we're in core markets that are at the leading edge of the change in the minimum wage, like San Francisco and New York and Los Angeles. The benefit is we have the pricing power to offset that. So, we can't view these things in isolation. And our performance to date has shown that the revenue growth has been enough to offset the cost growth and still deliver really good performance.

I think just look at the occupancy. The fact that our occupancy increased across the portfolio 100 basis points as we're pushing rate growth, that is not what you see across the industry. It's what we are able to do because of what we own, how our operators manage, and the benefits that the Welltower platform gives to the portfolio. That's why we get those results.

That's a fair point. Just more broadly on the shop portfolio, you're now at 37%, 38%. Can you maybe just give us some color on the opportunity set just going forward for similar types of large transactions that you just announced? And where do you want to see this segment of the business going in terms of business mix?

Vik, there aren't many opportunities of this scale, good or bad. Most of what you'll see from Welltower in terms of investments in the RIDEA portfolio will be select acquisitions that are in core markets in new development. And virtually every one of our RIDEA 10 partners is actively doing new development, between two and five properties a year.

Sometimes they do it alongside of us, sometimes we have an option to buy it when it opens or when it stabilizes. So, you're much more likely to see us do one at a time, two at a time acquisition in development to grow that portfolio going forward. But there are always a handful of portfolios that are interesting to us or that may be aggregated over time. But there's nothing else out there like this Vintage portfolio in terms of its scale in core markets.

Okay. Then last one, thanks for the triple net coverage math. That was really useful. I'm just wondering what our operators think today when they look to enter into deals or they look at their own coverages, which for some cases may be below 1.1 or below 1.1 on an EBITDAR basis. What are they saying about the level of coverage, doing new deals? Are you seeing some operators say -- hey, we need to rethink about structuring the deal?

I think so. Vik, when I start ed doing this 14 years ago, the typical coverage for seniors housing was in the 1.25 or higher range. And to us that was a structure that made sense for the landlord and the tenant. As the businesses become more competitive, the coverage ratios have declined and declined. 1.1 today is the market. And for years operators were willing to enter in to leases at those coverages.

Frankly, we were not doing many if any acquisitions at those coverages. We've been saying for years now that to us the distinction of risk in focusing on triple net versus RIDEA was really not the way we think about risk, and we'd always prefer to own a class A risk in a class A market and deal with the quarter-to-quarter variation in results. And that's exactly why you've seen us concentrate our investments where you have for the past six years.

We've done very few triple net investments. When we do, it tends to be a new development where there's enough opportunity and enough profit in the development for there to be strong payment coverage, or a turnaround opportunity. We don't like the thought of doing big acquisitions at near 1.0 coverage. It looks great on a press release because you've got great structural protection, or so-called structural protection, but we've seen already that those don't always work out as planned.

If a deal doesn't work for both parties, it eventually doesn't work for either party. I think you've seen that. To us, the market coverage ratios today are not appropriate. There's not enough of a balance between risk and reward for the tenants.

You see oftentimes the operators getting frustrated when most of the profitability is going into the rent. And we find that it's much more constructive to have the RIDEA structure where you're both incentivized to drive NOI, you share in the CapEx, and you want to drive the performance as opposed to trying to find some means of scratching out profitability when it's right around 1 to 1.1.

That's a great point. I think the other thing, Vik, is just understand that we've built an infrastructure over the last five years that really allows us to maximize the performance along with the operator of the RIDEA assets. So, I think that's a key point that you have to consider. It really is, going forward, there will be a rare occasion that you will see us acquire seniors housing assets in a triple net lease structure.

You might expect to see some of the triple net lease assets we own move to a RIDEA structure if that's a possibility in the future. We think it's better for us. We think it's better for the operator. We think it's better for our shareholders.

Thank you, guys, and congrats on the strong quarter.

Our next question comes from Tayo Okusanya from Jefferies.

Good morning. I just wanted to follow up on Juan's question about some of the changes to the covenants and if HCN actually received anything in consideration for that.

Tayo, it's Scott speaking. There are a long list of projects we're working on with Genesis. Some have been disclosed, some haven't. It's fair to say the term loan as well as the covenant release were part of a much broader discussion. So we're not prepared to talk about the specific pluses and minuses. I would just ask that you have patience, give us time. We're clearly focused on the situation and there's a much bigger picture that we're focused on than covenant release and a term loan.

Okay, fair enough. And then did you do anything similar to what Sabra did in regards to changing the lease maturities, as well, to help Genesis have a more staggered maturity schedule?

I can't speak for the details of what Genesis and Sabra agreed to. I can tell you that all 180, plus or minus, of our properties are in one mass release that matures in 2032. So, new term maturity date is not something we're worried about.

Okay. Helpful. And then last one for me, I know you guys have always been in and out of life sciences for a while. We saw [Vince] ask you this, the Wexford transaction. I was a little bit surprised to see them do it and probably not you guys, just given you'd had experience with life sciences and you've always expressed an interest in it, but had expressed frustration you couldn't grow it in the past. So, just some thoughts around that transaction. Did you look at it? And why didn't you do it if you did, indeed, look at it?

We'll only invest in real estate that's in core markets. That's part of our strategy. And I don't think you've heard us say that we want to invest in life science related buildings. We told you when we did the deal with Forest City in Cambridge, that was an opportunistic investment and it was an opportunistic sale. I don't think you've heard us say we've had any interest in getting into the life sciences real estate business.

Okay. Thank you.

Our next question comes from the line of Chad Vanacore from Stifel.

Good morning. Just a couple quick questions. On that Vintage acquisition, what's the mix of stabilized versus lease up opportunities? And then what kind of occupancy increases are you assuming to go from that 5% in place cap rate to the mid 6% expectation?

Chad, it's Scott. The occupancy today is in the low to mid 80s.

Did that get you up above 90s to get your in place stabilized assumptions?

Yes, that's right, Chad, in the low 90s, which is where we are today in these markets with our operating partners.

All right. What rate assumptions are we making there?

In terms of the percentage stabilized versus unstabilized, I'd probably think about it a little bit differently. There are properties that we think have the opportunity to grow census pretty materially. And almost across the board we feel like there are opportunities to change the service mix, the service level, and change the value proposition pretty dramatically for the residents.

In addition to the occupancy upside, it's really on the rate and service level that we see the portfolio changing the most over the years but that will take some time. And it is a drag in the early years because you've got to put the new service platform in place before you can charge for it. People need to see it before they'll pay for it. And it takes time to turn over the population. So this is a long-term investment for us.

The 5% cap rate is -- we'd prefer it was accretive day one but the fact is where cost of capital is today, it probably is accretive at 5%. This is very much a long-term play for us.

Said differently, the way I think about it, Chad, you really do have the opportunity for four to five years for mid to high single-digit NOI growth the year after you spend the additional dollars.

All right. Thanks. And then just one more. Scott, you made a comment that increasing private pay and reducing exposure was a priority, I think, a quarter or two ago. You guys may have made a comment that SNF actually looked like the best value at the time. Can you reconcile where we are today?

I don't recall anybody saying that SNFs were an area that we wanted to invest in. We've said that we are comfortable managing our SNF portfolio that's operated by Genesis. But I don't think you've heard us say --.

Just general pricing environment --.

I would just say, Chad, that the skilled nursing environment is still one that is attracting investment dollars. It's just, as we think about the direction of our Company, it's probably best not in Welltower's portfolio.

The fact is the population that uses those properties is going to double in size over 20 years and the supply of properties is declining. When you think about the longer term rather than the next three quarters or three months, I think the supply/demand dynamics are still quite favorable for that business despite the headwinds that exist.

And in a world with yields that are pushing 0% in most developed economies, you can still buy skilled nursing in the high single digits unlevered and get attractive financing. And it generates an awfully attractive return on equity immediately. The payment coverage is, unlike seniors housing where they're awfully low, with 1.3 times coverage it's a pretty stable yield, particularly if you own the real estate with a good operator. It actually still is a good investment, it's just not for us.

I would even remind everybody, I think it's important, while everyone so focused on Genesis, we actually and even today just announced an incremental progress on disposing of skilled nursing assets. Within our $1.3 billion of projected disposition proceeds, about 60% or so of that is skilled nursing. And pro forma from what we've announced through today, we're already 90% private pay.

Genesis is just a little bit a part of those numbers currently but we're actually seeing those reasonable prices. We have $760 million-some of potential proceeds from assets held for sale in that low 9s cap rate. And I think that's a good example of how we're continuing to improve the quality of the portfolio.

All right, guys, thanks a lot.

Our next question comes from the line of Smedes Rose from Citi.

Thanks. I just wanted to ask you about how you're thinking, if any changes about your investment in the UK, if you want to maybe bring that down given their pending exit from the EU. Or does it change the way you think about investing there going forward?

I think that you just answered part of the question. Yes, I think it is too soon to tell. I think we've seen a very different view of the impact of Brexit over the last couple of weeks.

The thing you have to understand is 99% of the population in our buildings are UK residents. So, they are not leaving the UK because of Brexit. The UK is not going to be building new assisted living assets for its population. More and more the UK residents will have to turn to a private pay alternative to local authority funded elder care.

The bulk of our assets are in the London metropolitan area which I don't think you bet against London long term. I think London has had a 30-year head start on building an irreplaceable infrastructure and economic machine that will prevail regardless of what happens here. So, I don't think we're losing sleep over it.

I think there are some challenges you've heard us talk about on the wage side in the UK, but we continue to manage through that -- again, for the same reasons why we're managing through that in the US. I said we have the best located real estate with the best operators and people want to live in this portfolio. So at the same time we are watching what's happening in the UK and Europe very closely. But at the end, I would tell you that we've assembled a really great portfolio of assets there.

All right. That makes sense. I think you got to the rest of them, so thank you. I appreciate it.

Our next question comes from the line of Paul Morgan from Canaccord.

Hi. Good morning. Just a couple quick things. You mentioned that you're trending toward the high end of your full-year same-store NOI guidance. I think that still implies maybe around 50 basis points of deceleration, if I have that right. Would you say that's accurate? If so, are there any sectors or markets that might be driving that in your outlook?

First quarter I think was 3.8% blended. So, 3.3% averages to about 3.5%. I think, in short, we like to keep a little bit of conservatism in there and are tracking toward the higher end of the range.

Really, the only variable is, again, around the operating portfolio, but we feel like it's doing pretty well. We're hopeful we would, again, be able to come in toward the high end of that range at this point or maybe even a little better.

Okay, great. And then on Genesis I think you mentioned that one of the reasons for the coverage decline was based on held for sale assets. I might have thought that the sale assets would have had lower coverage. Is that just specific to the deals? Or is there any color there you can offer?

It's more because, among the assets that are being sold, are some inpatient rehab hospitals that have particularly high values and extremely high payment coverages. So, that's what's driving it. It's not a huge portfolio at the end of the day. So, if you sell a $60 million, $70 million property that has 3 times payment coverage, it unfortunately impacts the portfolio by 2 or 3 basis points, and that's what happened.

Okay. That's helpful. Then just lastly, going back to Vintage -- sorry if you mentioned this and I missed it -- is there anything in terms of a contribution to the ramp in yield to the stabilized level that's coming from the cost side as you roll those assets into your platforms in those markets, or is it all really occupancy and rate?

It's more driven by revenue in this case. One property, 13 taxes, have an impact immediately. The minimum wage is an issue in a lot of these markets, so we've budgeted for that. And our operating partners expect to increase the service level, not decrease it. So, it's not like we're assuming big expense cuts, it's really just the opposite here.

Okay. Great, thanks.

Our next question comes from the line of Michael Mueller with JPMorgan.

You spent a little bit of time, Tom, at the beginning of the call talking about performance core markets and hitting that, and talking about how after Vintage I think core markets are going to be 60% of the NOI for senior housing or for the operating portfolio. And, just given the disconnect in terms of performance that you're seeing between the core markets, the six core markets and everything else, should we expect you to ramp up asset sales in those non-core markets over time?

Mike, we like what we own across the portfolio, but that's always changing. What today is a good market may not be a great market in the future. So, expect that we are always looking for opportunities to recycle capital and constantly improve the quality of the portfolio.

I would say that we are laser focused on building scale in the top markets in the country. Scott mentioned that the sixth of the Sexy Six is DC where we're number two. But expect that we are very focused on building scale in DC. A number of our operators have development properties being constructed in the greater DC market. That's an important market for us.

But, you've heard us say this before, we are looking to go deep in the top core markets in the three countries in which we operate and get as close to the center of the core as possible, which is not typically where you found senior housing assets. So that speaks to what we're doing in New York City, which we talked about on our last call, and it speaks to some of the things we're doing in markets like Toronto, very much in the center of the urban market there. You will see assets we either own today or are developing in Los Angeles.

So, it's very much our strategy. Expect you're going to continue to see us to follow that strategy. And the other piece of this, which you'll be hearing more about in the future, is how we are connecting what we do to the major health systems in those core markets.

One thing I'd add, Mike -- it's Scott Estes -- I think it's important that, because of what Tom just said, we've always adhered to this investing methodology. And I think we see less variability between the portfolios. We start talking about these six core markets that's used generally in the industry.

I remember -- and Scott Brinker could add some color here -- in the first quarter, our same-store RIDEA NOI growth was 5%, 5.5%. The best markets were 7%, 8%, the low were 2% or 3%, all positive, and around 4% this quarter. We don't see wide variability and no big negatives or anything. We don't dislike any markets. I think it's important that we feel pretty good about most of the markets we're in.

Yes, when we talk about our performance, we talk about the entire portfolio. We're not bifurcating our portfolio. We generally like the markets we're in. We're skewed to the core markets. It's not 100% of what we own.

We have edited the portfolio over many years, and that's why our performance is better, because we don't have a lot of weak links in our portfolio. That's one of the key differentiators of the Welltower business model. Again, it's not magic that our same-store numbers are what they are. It's because we have better assets, and much fewer lower-quality assets.

Got it. And just one quick followup on Vintage, the $1.5 billion investment, does that capture everything as you go through this, start at a 5% going-in yield, ramp up to 6.5%, or is there an incremental spend above and beyond that to get there?

Mike, it starts at $1.15 billion. And there is some capital that needs to be put into a couple buildings in particular, but that's accounted for when we talk about a stabilized yield in the 6.5% to 7% range.

That number is fully loaded.

Yes, correct.

Okay. Thank you.

Our next question comes from the line of Andrew Rosivach of Goldman Sachs.

Thanks. It's late so I'll talk really fast. On Genesis I wanted to ask about the facility level EBITDARM coverage because, it's interesting, if you look, that 1.57, it's actually been constant for over a year. Does that imply that basically the operator property level EBITDARM on a same-store basis has been flat over the last year, which would appear to be a lot better than the overall commentary for the skilled nursing industry and also Genesis' portfolio overall?

Andrew, this is Scott speaking. We've commented in the past, and we'll do it again here, that our properties have performed quite well over the past four years. There's a 3.5% lease escalator in our master lease that's a high bar for Genesis to climb over every year. Next year that goes to 3%, so a bit of relief, from their standpoint. But our coverages, other than in 2011 when Medicare cut reimbursement very substantially, have been very consistent over the past four years.

A followup is how are they able to do that? And one thing I thought about -- because you're not in the ex Sun assets, right? You're not in the ex skilled assets. Is that legacy Genesis doing better?

Yes.

Just curious, is there a reason why?

They have huge geographic scale in these markets. We're concentrated in New England and the Mid-Atlantic. They've been there for decades. They have the referral networks, the brand, the staffing, and it's good real estate.

I don't know as much as about the Sun portfolio or the skilled health portfolio. We don't own those assets. We do own their core legacy assets and they've held in quite well, which is why we keep saying we're confident that there will be interest for our real estate, and the issue was clearing up the corporate credit situation. Because they've done three or four big acquisitions in the past three years that, in hindsight, maybe not all the assets were perfect, and they did use a lot of debt to finance them, so the corporate credit isn't as strong as it could be despite strong performance in our real estate.

But Andrew, thanks for noticing. (laughter)

Any time. Thanks for taking the question, guys.

Our next question comes from the line of Todd Stender from Wells Fargo.

Did you talk about what types of leases you'll enter into for the Vintage deal, just across the three operators, and maybe there's a mix for RIDEA or triple net.

It's Scott. These are all RIDEA structures, so no leases.

Okay. Thanks. How about the rent coverage? Could you tell us what the rent coverage was on a trailing basis and what you underwrote it at?

For the Vintage portfolio, Todd?

Yes, and maybe bifurcate it between independent living and assisted living, if you can.

Sorry, there may be some confusion. We're using the RIDEA structure, so this is just management contracts. There's no lease or payment coverage in place.

Okay. Can you tell us what it was covering at?

It was owned by a different operator and a different owner. I'm not sure even how their deal was structured. I don't know.

We're just looking at it from how we underwrite it. We're happy to help walk you through that offline if you'd like.

Got it, okay. And how about funding sources? I know disposition proceeds are going to be factored in. How about any assumed debt?

There's a really small amount of assumed debt, like $35 million, in the low 4%s with an eight-year maturity. Otherwise, it's cash.

And we're in a good place from a cash position, Todd, with almost $1 billion of pending dispositions and $467 million of cash on balance sheet currently.

Great. Thank you.

(Operator Instructions)

Our next question comes from the line of John Kim from BMO Capital Markets.

Thanks. Good morning. I was wondering if you could provide some color on the assets held for sale as far as composition, skilled nursing, senior housing, and MOBs.

I have that. John, how you doing? Scott Estes. I'd say it's about half skilled nursing, and then the other 25% is about evenly split between live-in medical office buildings in that pool and some triple net seniors housing. Probably what happens more heavily in the third quarter, as well.

I didn't comment too much on that, but, again, our guidance was flat. You have $300 million of incremental dispositions, largely in the third quarter, about evenly offset by the benefits of the Vintage acquisition that's probably more toward the later part of the year into the fourth quarter, plus some better operating performance netted each other out.

Great. Then a couple follow-ups on the Vintage acquisition. Can you discuss the number of units in the portfolio, average age, and also if there's any development expansion opportunities?

There are 19 properties, 2,600 units. There's excess land at particular properties but we'll focus first time on filling the buildings that we have. Was there another question, John?

Average age and development expansion.

Most of the buildings are in the 10- to 15-year range. There are a couple older buildings that have been completely redeveloped, renovated, including one in San Francisco that's technically 100 years old but if you walked in you'd be blown away. It materially throws off the average. But most of them were built in the late 1990s, early 2000s.

And development?

Sorry, I thought I covered that. There is excess land at particular campuses, but that's not part of our expectation right now. We want to focus on maximizing the value of the existing buildings.

Our next question comes from the line of Rich Anderson from MUFG Securities.

No, Mizuho. What does Vintage get you to from a RIDEA perspective? You're a 38% now. Where do you get to?

It depends how many dispositions we have but it could easily be in the low 40s, Rich.

Okay. What would your comment be just in terms of the elevated profile, risk profile that would suggest in an uncertain economic environment and so on? How would you respond to that?

We don't think it elevates the risk profile because we have very seasoned operators and an infrastructure to manage RIDEA assets that's unparalleled. We feel much more comfortable in our ability to manage our RIDEA assets than we might with certain triple net, just by the nature of how the ownership is structured. Not that we would say that triple net is necessarily riskier, but we think we know how to manage rusk and enhance value through a RIDEA structure better than anybody.

Okay. I'd like to talk about RAC audits now. No, I'm just kidding. (laughter) But I do want to talk about Genesis. Is it, first of all, true that whatever else you may sell after the $68 million that you have under contract will be just real estate, it will be areas where Genesis plans to stay and continue to operate those buildings? Is that correct?

That's mostly correct, Rich. There may be a handful of properties, 10, plus or minus, that they would prefer not to be in through acquisitions. There's some states like Ohio and Kentucky where they've got a very small footprint and prefer to exit. We're the landlord on those and we'd be happy to participate in a complete exit from those properties. Otherwise, yes, they will remain the operator.

Okay. So, if that's true -- and, by the way, did you give a cap rate you're expecting in the $68 million? Is it in the 9s or 10?

No, it's lower than that. But what Scott gave is the blended yield for the entire held for sale bucket is in the low 9s.

Okay. My question is, if Johnson's plan is to stay in the majority of the stuff that you may sell in the future, that would indicate that these are pretty good assets. And I think you probably are going to agree with that without any question. If you were a private investor as opposed to a publicly traded REIT, could you see yourself taking a shot and committing more to Genesis and working with them through this, particularly since these assets that may be sold are assets they welcome to maintain operations in. I'm just curious, is the publicly traded element of your story at all driving your decision to be a seller at what can be argued is a pretty inopportune time right now at this point in the cycle?

I don't know if it's inopportune.

It's not a great time for skilled nursing. We can all agree with that, right?

It hasn't changed that much from when we bought it.

The point is, the cap rates and the payment coverages haven't really changed over the years. We can talk about it when we actually announce something, Rich, but I think it's fair to say that when you compare the cap rates at the property level when we entered the portfolio six years ago to what we think we can exit at, they're awfully similar.

I'm not sure what's happening elsewhere, whether it's in this sector or inside Genesis, but our properties, I think, are quite valuable, and we're seeing a lot of interest from buyers.

Then why sell them?

Today we announced another fantastic quarter and we spent 90% of the call talking about Genesis.

(laughter) Sorry.

Let's now talk about RAC audits. (Laughter)

Okay, that's all. I won't keep it going. Thanks very much.

We have now reached the end of today's call. Thank you for your participation. You may now disconnect your lines. And have a great day.