Welltower Inc (WELL) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2016 Welltower earnings conference. My name is Holly 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. (Operator Instructions)

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

Thank you. Good morning, everyone, and thank you for joining us today for Welltower's third-quarter 2016 conference call. If you did not receive a copy of the news release that's distributed this morning, (technical difficulty) 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 maybe 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?

Thank you, Jeff. I'm pleased that the strong results we announced today reflect solid operating performance across all business segments as well as strategic capital allocation decisions. Normalized FFO and FAD were up 4% and 5%, respectively.

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our efforts to strengthen our balance sheet were recorded this morning by S&P with an upgrade in our credit rating to BBB+.

We are excited by these views and I'm sure our bondholders are as well. We are a long-term investor in healthcare real estate and believe that skilled nursing, while historically the more volatile asset class, will remain an important component of the healthcare delivery continuum. Given our strategy to increase private pay sources of revenue, we indicated that we would explore interest we were sitting from private real estate buyers looking to establish a position in the sector. We listened to and considered the views of our shareholders and undertook a thoughtful and measured approach. This led to numerous discussions that have resulted in a series of transactions that will take out private pay revenue mix up to 92.4% and long-term postacute care concentration from 19.9% down to 13.5% of NOI. Combine this with our sector leading balance sheet and you have a stable shift that is positioned to seize external growth opportunities as they arise and drive continued sector leading operating performance.

I want to thank our shareholders for their confidence in allowing us to take a patient approach to unlocking significant value for these dispositions. Welltower takes great pride in the capital partnership we established with CPP.ID.

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exemplifies a natural fit between long-term investors seeking returns driven by unmatched demographic trends. We could not be more pleased to be working with these fine parties.

With that I will pass the mic to Scott Brinker to shed additional light on our operating performance and acquisition and disposition activities. Scott?

Thank you, Tom. Good morning to everyone.

Very happy to tell you about several big steps we've taken to increase our tenant diversification and private pay mix.

First, in September we closed the $1.15 billion vintage acquisition, highlighting our focus on best-in-class real estate. The acquisition solidifies our number-one market share in Northern and Southern California. Both of these markets have outstanding supply and demand fundamentals.

We chose to bring in three existing operating partners -- SRG, Sunrise, and [Silverado] -- to add their unsurpassed local market expertise. Together we will create a lot of value in these communities.

And second, this morning we reported a number of dispositions. We've always been an active portfolio manager. That includes selling nearly $1 billion of skilled nursing in the past few years.

Those efforts continued last quarter as we sold a non-Genesis skill portfolio in the Southeast for $300 million. We realized $140 million gain on sale and a 13% unlevered IRR. We have also substantially repositioned our relationship with Genesis in a way that is beneficial to both parties.

So far in the fourth quarter we have closed on the sale of $1.2 billion of real estate previously leased to Genesis in two separate transactions. We've also signed a definitive agreement to contribute a third Genesis portfolio into a joint venture with Cindat and Union Life.

Cindat is a China-based institutional investor specializing in overseas real estate and Union Life is one of the leading insurance companies in China. Together they will contribute cash for a 75% interest in the venture and Welltower will retain the other 25%.

The joint venture also includes 11 seniors housing properties that we currently lease to [Brookdale]. As 11 assets are being contributed at a $45 million gain above our original purchase price for the properties.

The joint venture is valued at $930 million, roughly 70% of which represents Genesis assets. This is another example of us bringing first-time cross-border capital into the sector to accomplish our strategic objectives.

These three Genesis sales aggregate to $1.7 billion in proceeds to Welltower and have a blended cap rate of 9%. The sale price is $180 million above the price we pay for these assets in 2011 and will realize a mid 9% unlevered IRR.

Importantly, our long-term post-acute payment coverage will improve because we're selling properties with low coverage. Genesis credit will improve because the leases within new buyers have lower rent and escalators that exist today. The terms of our remaining Genesis master lease will not change, including 3% escalators and at 2032 maturity date.

To further strengthen the relationship we have also signed a letter of understanding that has two important components. First, Genesis will have the right to buy back certain properties from the Welltower master lease. Second, we will jointly market the real estate and operations of 14 non-core properties. These two transactions should generate $600 million plus additional proceeds to Welltower in 2017 and further improve out private pay mix and tenant diversification.

Below the headlines our unique relationship-based business model continues without interruption. We are known for owning high-barrier real estate, which is true, but it's the breadth and depth of these relationships that make our strategy so hard to replicate.

More than 20 of the leading operators in the sector come to us first when they find an opportunity in their local markets. More and more institutional capital is flowing in the sector, so the ability to get a first look is invaluable. As an example, last quarter we exercised purchase options on two recently stabilized senior housing properties developed and operated by a longtime partner for an attractive 7.25% cap rate.

Turning to operating results, we delivered a solid quarter, given the environment. Same-store NOI in the operating portfolio was 2.2%, rental rates were up 4%, and occupancy increased 70 basis points over the prior year. This allowed us to offset higher labor costs, which were a headwind as expected.

Pricing power is critically important right now and that means owning a lot of real estate in markets like California. It's also important to understand that, unlike any other real estate sectors the new supply in seniors housing is more heavily concentrated in low-barrier markets. In fact, the percentage increase in new supply in our core markets has been less than the remainder of the country in every single year that NIC has tracked the data.

To that point, the industry data shows the broad-brush commentary about the sector is misleading. And quarter after quarter in our own portfolio we see wide variance by market with clear outperformance from our core markets.

Turning to medical office, we have been allocating capital to this business for the past 10 years. Today we are one of the largest owners in the sector. We have always liked the outpatient business because of its convenience for customers and its low cost for payers and providers. We self-manage virtually the entire portfolio.

Mike Noto and his team are invaluable when underwriting new investments, as their market knowledge is unsurpassed. They also do a terrific job creating steady, predictable growth. Last quarter same-store NOI grew 2.5%, consistent with prior quarters. That platform is also scalable, evidenced by increased operating margins as we've grown the portfolio.

Moving to triple net seniors housing, same-store NOI increased 2.6% and payment coverage continues to move higher through improved operating performance and active portfolio management. The long-term post-acute portfolio had another strong quarter. Same-store NOI increased 3.4%. Payment coverage should improve by roughly 10 basis points upon completion of the 2016 dispositions, creating an even more secure income stream to Welltower.

I want to wrap up by sincerely thanking the Welltower team as well as our operating partners. The past few quarters, in particular, have required trust and perseverance. It was exhausting but also a lot of fun to watch them together rise to the challenge. The true test of a relationship.

And now, over to Scott Estes.

My comments today focus on the significant balance sheet and portfolio enhancements that are expected as the result is a result of our portfolio repositioning plan announced this morning. Today's announcements are the culmination of the capital allocation plan we've been discussing with all of you throughout 2016, which should importantly provide the following three benefits.

First, we will significantly strengthen our balance sheet, with leverage and credit metrics improving to the strongest levels in the modern history of the company. Second, we will enhance the quality of our portfolio, increasing our private pay mix in reducing our long-term care exposure. And third, we will improve our liquidity and financial flexibility in 2017 with our full $3 billion line of credit available, virtually no near-term debt maturities and an expected improvement in our cost of capital.

I will begin my more detailed remarks with perspective on our third-quarter financial results, our 2017 dividend payment rate and one addition we made to the supplement this quarter.

In terms of third-quarter earnings, we did our normalized FFO of $1.16 per share and 4% versus last year and normalized fit of $1.04 per share, which increased 5% versus last year. The results were driven primarily by our same-store cash NOI growth and the $2.6 billion of net investments completed over the last four quarters. The highlight of the quarter was closing the $1.15 billion vintage portfolio acquisition earlier than anticipated.

G&A of $36.8 million for the quarter came in slightly below our expectations. We recognize the significant $162 million of gains on sale. We did have $9.7 million of impairment associated with three small assets that are held for sale based on current price expectations. I think otherwise this was a fairly straight forward quarterly report.

Moving on to dividends, we will pay our 182nd consecutive quarterly cash dividend on November 21 of $0.86 per share, a rate of $3.44 annually and a current dividend yield of 5.1%. Our sizable disposition expectations were a significant consideration as we set our dividend policy for 2017. Based on the strength of our platform and confidence in our longer term earnings growth potential beyond 2017, we are announcing a 1.2% increase in our 2017 dividend payment rate today that will commence with the February payment.

We also made one notable addition to the supplement this quarter, which is on the bottom of page 16, where we are now providing the NOI contribution from the 13 core markets that comprise 57% of our [idea] portfolio.

Turning now to our liquidity picture and balance sheet, the most significant capital event this quarter was our decision to opportunistically raise a total of $358 million of equity through a combination of our ATM and the RIP programs, where we issued a total of 4.7 million shares at an average price of $6.98 per share. We also generated $489 million of proceeds, $60 million in loan payoffs and $429 million of property sales, which included $162 million in gains on sale.

Last, we did repay approximately $191 million of secure debt at a blended rate of 5.4% and we issued our assumed $79 million of secured debt at a blended rate of 3.7%.

However, really the biggest story today is how we expect to improve our balance sheet upon completion of our portfolio repositioning plan. Importantly, we expect

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For FFO post the sales. And you talked a little bit about the dividend, but what the pro forma payout ratio is and why you feel comfortable with that reset number.

Sure, Juan. Thanks for the question. I do think we provided quite a good bit of detail in regard to sources and uses to provide the pretty good run rate. You can see the disposition proceeds of $3.274 billion and then the specific uses. That's really the numbers I think everyone should use to start thinking about 2017.

We will provide guidance in February. We will also get all the models and everything done at that point.

The one thing that will benefit 2017 are a couple things beyond what's just in this press release, though. As a reminder, obviously you should model same-store NOI growth. We are going to have some development conversions, and obviously doesn't include any acquisitions as well. So we gave you a fourth-quarter number effectively with our guidance this year and I think I would just model off the in-place NOI from the numbers we give you in the release.

Okay. And then on the SNF dispositions, is the cap rate you guys quoted, 9%, is that affected at all by any rate cuts that the buyers have received, or is that the cap rate, i.e., loss NOI to Welltower? And if you would give us a sense of the delta on the reset rents?

Sure, Juan. It's Scott Brinker. Thanks for listening today. So the cap rate that we quoted is based on the in-place rent that exist today under the current master lease divided by the purchase price from the third party, so pretty straightforward. In terms of the rent adjustment that Genesis received, a goal all along here was to create a better relationship, stronger relationship between Welltower and Genesis and to improve Genesis credit.

So I think we were able to come up with a pretty creative way to accomplish that in that we agreed with Genesis and the third-party buyers to essentially reduce the rent going forward by about 5% on both portfolios, so that's about $8 million of year one rent. And in exchange for that, Genesis gave us a note with a four-year term that bears interest at a 10% rate, but a good part of that is payable in kind versus in cash. They have a sizable cash flow benefit in year one from this transaction, not to mention materially lower increases going forward.

So one of the challenges in the Genesis portfolio has been a 3.5% lease escalators for the last five years, which George and his team frankly have done an amazing job of keeping up with because our payment coverage has been basically flat for five years now after the big Medicare cut. But it's tough; Medicare and Medicaid rates are growing 1-ish percent per year at best, plus the occupancy challenges in the business -- it's tough to keep up with that kind of an escalator.

So when the new leases with the new buyers, they have agreed to 2% or below escalators for the next 15 years. So that over time there's a meaningful benefit to Genesis.

And just to wrap that up, did you guys -- there was no reset to your remaining rents or changes to the escalator; correct? If you wouldn't mind giving us any price per bed that was implied by the transactions?

Yes. On your first question, that's correct. The remaining Welltower master lease is unchanged, so no change in rent, no change in escalator, no change in maturity date. And the price per bed -- in the aggregate it was probably $160,000-plus per bed. I know it by portfolio but I don't have the aggregate number of the top of my head. But it was in that range.

And these are high quality properties and generate a lot of cash flow, so the price per bed is quite high.

Great. And maybe just one last question, if you don't mind, for Scott Estes. Obviously, a much lower levered balance sheet and a position to grow. How should we think about the target range of where you could re-lever to and where you feel comfortable and maybe just where you think acquisition cap rates will be to think about using that firepower?

Sure. The reality is I think we've reset the balance sheet to some extent. I feel really good about those new leverage metrics, the 34% to 35% area is a great one for net debt to underappreciated book. And they like the lower fives on the debt to EBITDA. So obviously resulting fixed charge and interest coverages are good.

And at the end of the day, we will capitalize on acquisition opportunities first and foremost with our existing partners but don't have to. And the key word here is really optionality, in my opinion. I think we have great optionality where the balance sheet is.

And maybe, Scott, I don't know if you want to comment on just cap rates and what you are maybe seeing in the current market in terms of pricing?

I would just say at the beginning of the year we told people that this was a year to be extremely disciplined, just given where the market is from an operating environment and where we believe our cost of capital is relative to our NAV.

So we have been pretty selective about what we bought. Our acquisition volumes are lower this year than they have been as long as I can remember. But that's not because of lack of opportunity, that's because of conscious decisions we've made.

And even though we now have a substantial free cash flow on our balance sheet, I don't think our mindset is going to change. There are deals that make a lot of sense, virtually all of them with existing partners in our core markets. Some of that is in the fourth-quarter acquisition guidance that we gave this morning.

But outside of that I don't think you should expect us to change our approach that we shared in the last three quarters, which is to be really, really disciplined in this environment.

Thank you, guys. Congrats on getting all this done.

Paul Morgan, Canaccord Genuity.

Maybe give a little bit of an update on what you're seeing in terms of your external growth, your acquisition pipeline looking forward. Obviously it's been a very busy quarter or two in terms of in these asset sales. But now you have closed Vintage.

And as you look into 2017, what does the opportunity set look like? And I think, based on your comments, we should think about post-close the 2017 external growth being on a leverage-neutral basis?

Yes. The outlook is favorable in that we have 20-plus operating partners in senior sizing [alone] that are regularly coming to us with opportunities. Right now a lot of that is actually redevelopment where we may provide a portion of the capital to help them get the project up and running and then we have a purchase option when the project stabilizes.

That is a run rate volume of $500 million plus of modern, purpose-built properties that we get the first right on. And occasionally we have an opportunity like Vintage that we work in tandem with one or more operating partners to fill out their existing core footprint.

And you should expect us to look to do more of those types of investments. There are a few, handful of operators in our core countries in US, Canada and the UK that we're still looking to establish as new partners and bring into the portfolio. So we have our targets and we are building those relationships.

Just picking up on Scott's point, one thing we consistently remind people of is that this large portfolio of operators that are part of the Welltower family still own real estate that we don't own. And that provides us somewhat of an annuity stream of high-quality investment opportunities.

And again, our operators are typically the dominant regional players in the best markets in the country. And those markets behave differently than a lot of the secondary markets where a lot of the new supply is coming into.

So they still see good growth opportunities. Our strategy we talked about on the last call is to continue to go deep in the top markets in the US. And so we still see very good opportunities in the senior care business.

Scott talked about some development opportunities because there are markets like Manhattan, where the product does not exist for us to acquire. So we are developing it.

And I think we will see some interesting opportunities that will come from other sectors of healthcare delivery, where we like the medical office business and we will continue to look for opportunities to grow that business because not only are we a good acquirer, we also have an excellent management company based down in Jupiter, Florida.

Fax. And then just my other question. You've obviously spoken to a lot of new institutional capital investors in looking at healthcare real estate over the past few quarters as well as your ongoing relationships.

But do you have any takeaways from the disposition process with respect to Genesis and the conversations you had? How deep and how broad are the pockets that are increasingly looking at healthcare real estate right now?

We see lots of interest. As I mentioned in my remarks, we received significant inbound interest by private investors in owning postacute long-term care assets as well as senior housing assets.

So we are seeing continued interest from private capital sources to build positions in healthcare real estate.

Maybe the one addition would be as the foreign institutional capital comes into US healthcare real estate for the first time, almost across the board their first question is, do you have a portfolio or an opportunity on the East or West Coast? They always ask that question. You never hear that question from US buyers, especially in seniors housing, medical office. Nobody cares, right?

And that's why we've said it for years, there is no -- very little differential in cap rate when you look at differences in asset class, building quality and particularly location. Everything is sort of the same. And our view is that that's going to change pretty dramatically.

You've seen that in other real estate sectors, where there's a huge difference in cap rate among building in New York/New Jersey, in California or secondary location in middle America. There's no question that healthcare real estate is going to move in that direction in our portfolio and operating partners are going to benefit from that because the foreign capital is coming in a major way, and that's the thing they care about. You see, again, huge pricing differential in other real estate classes. We don't yet see that in our sector but it's coming.

The other point on foreign capital coming in, which I'll make with respect to Cindat, China has the same aging demographic issues that we have in the United States except it's amplified there because of the size of the population. We believe one of the reasons that Cindat was attracted to forming this joint venture with us is that they want to learn how to invest in this asset class because it has relevance to what will happen back in their home country.

And the other piece of this is that Genesis has a business in China. And so that's also important here.

So, there are lots of synergies at play here for Cindat forming the joint venture with Welltower and acquiring an interest in Genesis assets.

Great. That's great color, thanks.

Vincent Chao, Deutsche Bank.

I just want to stick with the Genesis asset sales. Can you just talk about a little bit about how the decision to include certain assets was in the disposition pool versus the key pool? And what does the profile look like for the stuff that will remain going forward?

That's a great question. I think we spent more time on that particular topic than we did in picking the buyers that we chose to go forward with. So the concept with all the buyers that we talked to is that the properties that they bought would be a representative pool of assets. So we decided to keep all nine powerbacks in the Welltower master lease, servers are not included. But the traditional Genesis long-term-care properties have been allocated among the Cindat joint venture, the Lindsay Goldberg purchase, the Genesis buyback portfolio and the remaining Welltower master lease in a way that everybody gets a broad cross-section of assets.

So nobody cherry picked for the positive and nobody got cherry picked to the negative. And we all looked at a very comprehensive asset quality scoring metric that included things like building age, operating margin, occupancy, quality mix, star ratings and clinical outcomes so that everybody felt like they got a representative sample of assets.

Okay, thanks for that. And of the 7% that remains, how does that break down between power backing and traditional?

Well, the percentage would be -- I'll have to get back to you with the exact number, but the percentage is probably roughly 20% power back, 80% long-term-care, if we are able to execute on the $600 million plus of additional 2017 dispositions that we talk about in the press release. But I'll get back to you with the specific percentage.

Okay, that's great. And maybe another question just on the sources and uses -- that was very helpful in terms of outlining exactly how that breaks down. But I was just curious; on the debt repayments and some of the preferred stuff, how should we think about timing of that? Are you going to be able to do that all at the end of the year? And should we expect some FDA prepayment penalties?

We are going to do it as quickly as possible, as the proceeds comment. And we will keep you updated, I think, probably just modeling-wise most of it you can generally assume at the end of year in terms of the run rate. The one piece for sure, the preferred stock redemption, is in March 2017.

And the reason we put the $48 million of aggregated debt extinguishment and other costs in there -- that's the number you asked about. So that ties that to the same uses as the proceeds.

Okay, got it. Thank you.

Michael Carroll with RBC Capital Market.

Scott, was there a difference in the Rate among the three Genesis portfolio sales? I believe it was announced the Lindsay Goldberg purchase had an initial cap rate of about 9.4%. How does that relate to the 9% that you guys quoted?

Yes, there was some differential. I can't comment specifically on what Omega reported; I'll leave that to them. But in terms of the cap rate as we view it, there was a differential, and a couple of things drove that.

One, the asset quality was the same, so that was not the issue. But there was a timing issue in that Lindsay Goldberg was the first to step up. That's why they are the first one to close. They bought a bigger portfolio, which was relevant. It wasn't easy to finance; that's a lot of money to raise in today's environment. So that was meaningful to us.

And the last thing I would point out is that they bought 100% interest. So it was a free and clear purchase versus a retained interest. But frankly, we're pretty happy about the joint venture with Cindat because it gives us a lot of optionality. After five years, either party is able to create a liquidity event that we could either take more or exit the portfolio.

And we are going in with the expectation we are going to grow the partnership with Cindat and Union Life. But it's nice to have that optionality. So I think that mix of structures is actually quite beneficial to our shareholders.

Okay. And what about the potential Genesis sales in 2017? Is there a type of an agreement you have with the tenant about the $120 million of non-core sales and the cap rates that you would give them for the rank credit? And is there a discussion on the cap rate for the $500 million of potential buybacks that the tenant has?

There is, and it would be in line if not a bit below the 9% cap rate that we reported today on the dispositions.

Okay. And then finally, can you talk a bit about the remaining exposure you have to Genesis in the post-acute care facilities? Are you comfortable with your exposure now or would you like to reduce that further?

We have very publicly stated that it is our intention to grow our private pay mix. So you should expect to see us continue to grow that by acquisition and in some cases by disposition.

Great, thank you.

Vikram Malhotra, Morgan Stanley.

Thanks for taking the questions and my thanks as well. I'm sure you guys did a lot over the last quarter do get this done, lot of moving parts.

Just first question, just picking off of the last comment about growing private pay, can you maybe just update us? I think the portfolios out there for the large caps are probably more different today than they have been in recent past. And I'm just trying to understand, having post-acute in your portfolio, how do you view that, whether it's even smaller for me or not but just your view on is it important to be part of a diversified portfolio like you guys have?

We believe that it is still important to have some investment in the post-acute care space. If you talk to the leading hospital systems in this country, they will tell you that they are very interested in having a viable post-acute care option to work with as they look to their futures because post-acute care is a much lower-cost setting than the inpatient hospital setting.

So we believe this is not going away. And we also believe that post-acute care in the future may look different than the historic skilled nursing model that you are familiar with.

So Scott used a word that we often use around here called optionality. We are a long-term investor in healthcare real estate. And we want to maintain optionality to be opportunistic and deploy capital across the spectrum if we believe it's in the best interest of our shareholders.

Okay, great. And then just on senior housing triple net sales, the 6-3 cap was pretty impressive. I'm just wondering if you can give us some flavor of type of assets, what percent were maybe below uncovered and what prompted the sale overall.

Sure. It's a combination of a couple of things. One is that we think this is an opportunistic time to be a seller in the seniors housing market. And secondarily, these are portfolios that are not a perfect fit for our strategy at this point.

They are operators that, generally speaking, we are not growing with and therefore we are probably better off freeing them up to grow their business with a different capital partner. And it helps to have an existing portfolio to bring to the table for that. And for the most part these have quite low payment coverage.

So we are optimistic that the triple net senior housing portfolio that we have left will have improved credit metrics and payment coverage than what we had before.

Do you have a pro forma coverage post this?

It's not going to move materially, in any event, when you think about just the size of that denominator. But our hope would be that it's moving up 1, 2, 3 basis points, which it has been the past couple of quarters. After a number of years of steady decline, driven by one operator in particular, we are now finally trending up because we have some development projects stabilizing and we have been able to remove some of these lower covering master leases.

Okay, thanks. And just a last quick one on the shop portfolio -- within expenses there's an all other bucket that includes, I think, 8%. Can you give us some sense of what's in there and what led to that increase?

Yes, I can. One is management fees. So we generally pay a base 5% management fee to our operating partners. And there are always incentives up and down based on their performance. It's also things like insurance, professional fees, workers compensation.

So I wouldn't -- we've said this before, including the first quarter, when we reported 5.5% NOI growth, and I'll say it again this quarter, when we generated 2.2% NOI growth, is that 90 days is just too short a period of time to make conclusions about performance of the portfolio or trend or trajectory.

It just -- $1 million is not much money in the scheme of things, and yet it moves the same-store growth rate by 50 basis points. So small accruals, adjustments that typically happen and, they are unpredictable, move that number a lot.

So by the same argument I wouldn't read too much into that Other line item this quarter. The fact is operating expenses are driven by labor; that 60% or so of the total operating cost. And we have been saying for over a year now that labor costs are the headwind.

That's the biggest challenge that our portfolio is facing. And today, our operators, our properties have done a remarkable job offsetting that cost pressure.

Okay, great. And this is for Scott Estes but also the whole team. I think it's just a comment from my side. It's pretty impressive, given all the portfolio activity you've had, to take the dividend up 1.5% for next year. So congrats, guys.

Rich Anderson, Mizuho Securities.

Another very busy quarter for you guys -- so to anyone in the room, if you had done this Genesis sale 2, 2 1/2 years ago you probably would have gotten an [A] cap on it. And I don't know that that's a precise number, but clearly things have gotten -- Question marks have come to the table and it has resulted maybe in a little tougher sell there.

And I'm wondering if anything about this is a teaching moment and if you should be thinking a few more steps forward on a go-forward basis. For example, it seems -- you mentioned the escalators coming down on the sold Genesis portfolio but yours are staying at 3. Is there any reason to think about that more proactively and saying maybe we should be re-assessing our escalator for the next 16 years with Genesis or anything like that, that you think is more on the forward thinking docket for you now, having had this experience with the Genesis situation?

Well, I'll just start off by saying that I think we are a very forward-thinking organizations. And we take a long-term view of our investments, and we own and manage a diversified portfolio of healthcare investments. So that will not change.

We don't have crystal balls. We try and make as sound investment decisions as we can, and I think we have a pretty good track record of that.

Okay. And so -- and no argument on your process. I'm speaking just specifically on the Genesis sale and if -- again, how does Genesis produce a situation where they will do better than 3% growth over the next 16 years versus your escalator? I'm just curious if you are giving that any thought at all.

One of our goals in selling assets out of the portfolio was to have a remaining Genesis portfolio that had better coverage so that there was a broader cushion. And to the point earlier, they have actually kept up with the escalator to date. So the rent payment to HCN is going to be more than cut in half as a product of these transactions.

So we are confident that they will continue to pay us the 3% escalator.

All right. To Scott Estes, you gave some guidelines about timing of use of proceeds, the preferred (technical difficulty)

-- population is moving, where there is job growth. We see that strategy as -- in terms of concentrating our assets in centers of wealth as a mitigant. But we are also of the opinion that healthcare will be moving much more in a private pay direction, that, in the future, those who can pay for their health care will be shouldering a bigger percentage of their healthcare costs. We know that Medicare is quite challenged and not prepared for the aging demographic that we are going to see over the coming decades.

So we believe that the markets that we are focused in, delivering a product that is a premium product for the upper end of the market who will have no choice as they age other than to seek alternative residential setting to live productively. So we see this business as not a nice-too but I must-have.

And we don't know what that world looks like. We've never experienced a world where the 85-plus percentage of population will start to dominate. And so we think that staying at the top end of that market is a good place to be long term.

Okay. And then last question for me -- and Brinker touched on this when you talked about optionality and the joint venture. Is it a fair way to think about this is so post-acute skilled is going through a week uncertain patch right now, but longer term it could be a great business again, depending on how it evolves.

And so if you get down to 11% or 12% of your portfolio is post-acute skilled but giving yourself the optionality to get back, are you timing this in some ways where you think ultimately this is a good business and don't want to leave it, and that's the mindset that you might have to take a few steps back and then a few steps forward?

Is that how you are thinking about post-acute on call it a 10-year horizon type of time frame?

Yes. We're trying to look forward, so I think you just summed it up well.

Okay. Thanks very much.

Mike Mueller, JPMorgan.

I just had a couple of quick follow-ups on asset sales, Tom. I heard your comments about trying to reduce further exposure via acquisitions and maybe some asset sales.

But can you help us try to put some brackets around dispositions for 2017? It sounds like you have another $600 million here of skilled nursing tied to Genesis. In the past you've talked about normalized calling of call it maybe $300 million-$400 million of just normal-course stuff.

So should we think of a base case for 2017 as being that $600 million, because it's highly likely, plus a few hundred more to get you to $1 billion or so? Is that reasonable?

That sounds like a reasonable assumption. I think we are giving you a little bit more clarity than we normally do because we've talked about the Genesis portfolio.

So we are constantly looking at our assets. We own about a little over 1,500 buildings today, and we have very dedicated asset management, a very dedicated asset management function here. So we are always looking at the real estate we own and the markets that we are in and trying to make as educated a decision about which assets we want to own for the long term because that could change every year.

So we do the best we can here. I think you've seen some of the systems that we've built here to better assess the long-term viability of the assets we own in the markets that we are in.

So I would say we will always, as we have in the past, dispose of assets in a year. And we will continue to do that in the future. And I think that your assumption is probably a good one.

Got it. And last follow-up on this -- for the $500 million option for Genesis, what do you think would cause them not to exercise that?

Well, they have to raise the capital to do it. So with this announcement and continued stable operating results, their stock price recovers. One of the benefits at the time of going public two years ago was that they would have liquidity to raise equity to buy back assets. So that clearly hasn't gone as planned today, but our expectation and hope is that the stock will start to rebound as they announce important transactions like this one and stabilize the operations.

And they may raise joint venture capital. I think they have a number of options, but that would be the biggest one. They clearly like [the buildings], so that you diligence and underwriting isn't a problem; they just need to raise money.

Clearly, a major institution's choosing to own Genesis real estate doesn't hurt the story that Scott just outlined. That should all be a positive reflection on Genesis.

And they can finally turn their attention to that opportunity. They have been bending over backwards to help us, and we will forever be grateful, to help us get these transactions done. They can only do so many things at once. They are an operating business, not a transaction business. So they have been super helpful and cooperative. This is a good deal for both companies. And now they will be able to focus on the $500 million buyback, which is a great opportunity for them.

Okay, thank you.

John Kim, BMO Capital Markets.

I had a question on the changing landscape in senior housing. So over the last couple days there have been at least two new private capital sources entering the senior housing market, acquiring at about the 7% cap rate. But at the same time, when you look at Brookdale's share price, it suggests a dislocation between public and private market values. And given they are one of your major partners, I'm wondering if there's something that you could do bigger with Brookdale.

Brookdale has a large footprint in senior housing in this country. And they are dealing with challenges that relate to the emeritus transaction. We are always looking for opportunities in the senior care space, and there may be opportunities that come from Brookdale or some other senior care operators in the US that are not currently part of the Welltower family of brands.

We like the space. We believe in the long-term viability of the space. And we, every day, look for opportunities to make smart investments in the space.

And I would just add -- I think it's important the way we look at transactions always would be like the Genesis. We would want transactions that would be a win for Welltower as well as a win for our partners. That's the way we would approach any operator relationship.

And I think Tom mentioned Cindat's interest in Genesis assets, and that's partially due to their business in China. But what about their interest in Brookdale? Was that specific to Brookdale? Did you bring those assets forward to them, or do they want an interest in the national operator like Brookdale?

Well, I think, like Genesis, I would say that again Cindat's and Union Life's investment here is to understand how to invest in this sector, and that's not just skilled nursing; it's also seniors housing. If we have a need, a long-term need for good quality senior care in this country, they've got it. They've got it on the multiply higher perspective. So, Scott?

That's exactly right. They want to invest with a best-in-class capital partner and high-quality, well-known operating partners. And Brookdale and Genesis clearly fit that bill. These are 11 high-quality properties, mostly on the West Coast, that have continued to perform well. So they have not been as challenged as some of the other, maybe, portfolios or properties that Brookdale is working through right now. So that's the background.

Okay. And given the joint ventures you have established in the past year and, I think, your focus on increasing scale, will you be more focused on AUM growth going forward rather than balance sheet asset growth? Or is balance sheet asset acquisition still a major part of your strategy?

It will be both.

Chad Vanacore, Stifel. Chad, your line is open.

Todd Stender, Wells Fargo.

Just on the theme of the joint venture, can you share some of the details about the exit or buyout options that exist for you guys within the JV?

I don't want to get into the details of the joint venture, but it's pretty straightforward. After five years there's a mutual right to seek liquidity rights. So going in with the expectation we are going to do more with Union Life and Cindat, but it's nice to know for both of us that that's there if we choose to change our exposure to the postacute space five years from now, one way or the other.

And then on acquisitions, is it limited to just the US? Is this something that you could enter China with one of the partners or both? What constraints or what opportunities exist?

We see tremendous opportunities in the markets that we already have a foothold in. One of the things we've said -- we're not prepared to go into markets unless we are prepared to put significant boots on the ground like we have in the UK and like we have in Toronto. And actually we are putting significant boots on the ground in Los Angeles, because of the percentage of assets that we will own that are in Southern California.

So we see lots of opportunities in those markets and we are not very actively looking for opportunities outside of those markets.

Okay, thanks, Tom. And then just to stay with you, Tom, if you don't mind, you've touched on Brookdale's large national footprint. In that theme and consistent with how you allocated operators to certain markets around the country like you did with the recent California acquisition, do you see operators becoming more sharpshooters like the Silverados or the Brandywines, as opposed to more national operators?

That's a good question, Todd. I do think so. I think that you will see some of these operators may be expandable a bit across state borders. Some of them were just in one given state with great concentration. I think you'll see some of them expand regionally. But I would say, other than Sunrise and Brookdale, we don't see any of our operators having great aspirations to develop a national footprint.

We think there are a lot of benefits in having a deep position in quality markets, and that's what we like to see.

Great, thank you.

(Operator Instructions) Smedes Rose, Citi Research.

It's Michael Bilerman with Smedes. Scott Estes, I was wondering if you can just provide a little bit more clarity in terms of the run rates. And as you said, the fourth quarter implied we can get to, which is about $1.05 to $1.10, $1.11. But obviously the timing of the dispositions and the reinvestment of those proceeds has a significant effect to where you are, sort of December 31, on a quarterly basis.

And so what would be really helpful is just to understand what that quarterly number is, where our starting point is from an annualized perspective heading into 2017.

I understand the desire for clarity. I think I've got to stick with our numbers. We have a blended yield on disposition proceeds right there at 8%, you have a blended yield you can calculate. I would assume that all of the proceeds come in right at year-end and then, obviously, we are going to work as fast as we can. So you could make some general assumptions

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on some of the things like secured debt may take a few months to pay off, and the preferred stock, as I mentioned, is March.

But that's really the way you are going to get the run rate from the number you just cited for the fourth quarter. And I would tell you, more importantly, the first quarter really isn't that important. We're going to get all these things done. We have all the benefits attendant. We are going to work as fast as we can to give you updates and there's a lot of things that will help 2017's earnings that I mentioned like the same-store NOI growth and development in acquisitions. So we'll give you the full update in February.

So again, just doing simple math, you have about $0.09 of quarterly dilution. So how much of that -- it sounds like most of that $0.09 is not in the $1.05 to $1.11 in the fourth quarter.

And the only reason I'm asking -- the Street is at $4.70 for next year. Clearly, with almost $0.40 of dilution from doing this and potential other dilution from these sales into next year, again putting aside all the benefits you will get from the development coming online in the same store, there's a significant amount of earnings that will have to come off.

And I think I just want to better understand how much of that $0.09 of dilution is actually in the $1.05 to $1.11 in the fourth quarter. It sounds like it's nothing.

I would say the way to answer that is we talked about closing $1.1 billion or $1.2 billion of the Genesis transaction that was just announced today, so you have about that amount that's already in the numbers. So assume November 1, and then I would assume the rest of the numbers are roughly at the end of the quarter.

Okay. And then from a balance sheet perspective, that's the other part of it in terms of the deleveraging. It sounded like you would rather stay at these levels -- five times debt to EBITDA, mid-30s from a debt to unappreciated book, so that we should expect any future investment should be funded either by increased about all, so leveraging that, or through additional sales or new common equity.

Is that a fair way to characterize it? Or do you want to have the ability to go back up to the mid-5 debt to EBITDA and towards the 40s debt to unappreciated book? How should we think about the goalposts?

I would think that modeling for everyone generally on a leverage-neutral basis, based on these new numbers, is the way to go. And we obviously would have those options available to us if we saw good options and have always been pretty conservative. But modeling-wise I would say assume leverage neutral, based on these new numbers.

And then can you just review a little bit -- the loan receivable book, at least at quarter end per page 20 of the supp, is at $950 million. If memory serves, that excludes the development loans you have outstanding. You have another $150 million coming in, in the fourth quarter, $75 million of which was the note you took back from Genesis. So you're going to be at $1.1 billion.

Can you review the chunks of that in terms of cash pay versus PIK and any large sort of [borrower] orders in that $1.1 billion?

Yes, Michael. I'm happy to try to give some color. This big picture is that we rarely, if ever, make loans as a standalone business model. It's always done to support an important real estate relationship.

In many cases, the loan is secured by real estate and is reflected that way on our balance sheet. The loan balance is a bit higher than it has been in the past at roughly $1 billion. We are actually expecting substantial repayments in the fourth quarter from Genesis and others.

So I think you will see that loan balance decline going forward, even though we are taking back the $75 million of loans from Genesis. And it should meaningfully decline if you take a longer term view, meaning into the late 2017 time frame.

So what's the current yield on that $1 billion? How much is cash pay versus PIK? And if -- because my assumption is if it's producing higher than average earnings, right, so pretty high yield, the reinvestment as that loan balance comes down is another diluted effect to earnings and cash flow.

Yes, that is definitely the case. The yield on most of the loans is in the high single digits, if not 10%, on average. The vast majority, Michael, is cash pay. There are a couple that have PIK interests, including these takeback notes from Genesis. But that's the exception.

And is there any concentration within that $1 billion in terms of to a certain borrower? Like what are the top two or three borrowers in that? And how much is real estate versus non-real estate? There's a footnote that says some of it is not real estate.

Yes. By far the biggest amount is with Genesis. So there's the $330 million or so of first mortgage loans on our books as of September 30. That number will continue to decline going forward. And then there's the $72 million term loan that we made to Genesis last quarter that's not secured by real estate.

And then we will add this additional $75 million note to Genesis here in the fourth quarter. That's by far the biggest component of the $1 billion.

And the difference between the two you can just see right on the face of the balance sheet. $630 million is the number that's real estate loans with the remainder being the non-real estate loan component.

And so there's another $230 million to other operators as loans outside of the $72 million to Genesis?

Correct.

It would be helpful just -- if you like about supplementing disclosure, and we do certainly appreciate the continued improvements in the supplemental, just having, now that it's a much bigger balance at $1 billion relative to your enterprise value, having that level of detail in terms of yields, amounts, borrowers because it is really lacking both in the 10-Q as well as the supplemental.

That's a good point, so we can look into that. Michael, I'll just give you one example of the loan portfolio that is the $40 million note that was repaid in September, a number of years ago. We had made a loan to an important operating partner to help buying out the old ownership group. And as part of the disposition of that skilled nursing portfolio last quarter, for $300 million they've also extinguished the $40 million note receivable.

So that's the type of situation, generally speaking, where we have used loans. And we have a very good track record of having them repaid.

Yes. Okay, thank you so much.

Karin Ford, MUFG Securities.

Just wanted to ask about the 1.45 times coverage level that you are going to have on the Genesis portfolio post-disposition. Would you consider that to be market coverage and do you feel good about the cushion that you will now have, considering the challenges that are probably ongoing in the industry?

Yes. I want to start by clarifying a couple of things. One is the coverage that we've talked about is after a management fee. So not everybody reports that way. That's important because the coverage before a management fee is often 40 basis points higher.

The second verification is that that coverage ratio that you talk about, Karin, is for the entire long-term postacute portfolio. It's not for Genesis in particular. And then as to your specific question, it's 10 basis points higher than it is today, so we are definitely happy about that. We would like it to be higher, but at this point I would say it's above market, not below market.

And the evidence for that would be two very sophisticated and knowledgeable investors, Lindsay Goldberg and Omega, just bought Genesis assets at roughly 1.3 coverage, plus or minus. So we feel good about having 1.45. We hope it keeps going higher, but it's certainly not below market.

Thanks for that. And then my last question is, were the Genesis notes receivable calculated as part of the 9% cap rate?

Yes, we include those as proceeds in terms of the sales price. That's right.

At the $70 million number?

Correct.

Okay, thank you.

This concludes today's Welltower third-quarter 2016 earnings conference call. You may now disconnect.