Welltower Inc (WELL) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2017 Welltower Earnings Conference Call.

My name is Holly, and I'll be your conference 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 Tim McHugh, Vice President, Finance and Investments.

Please go ahead, sir.

Thank you, Holly.

Good morning, everyone, and thank you for joining us today to discuss Welltower's first quarter 2017 results.

Following my brief introduction, you will hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business and Relationship Management; Shankh Mitra, SVP, Finance and Investments; and Scott Estes, CFO.

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 this morning's press release, and from time to time in the company's filings with the SEC.

If you did not receive a copy of the press release this morning, you may access it via the company's website at welltower.com.

Before handing the call over to Tom DeRosa, I want to highlight 3 significant points regarding our first quarter 2017 results.

First, we disposed of over $1.1 billion in noncore assets, bringing our private pay, as a percentage of revenue, to 93.1% and using proceeds to retire $1.1 billion of high-rate secured debt and preferred securities.

Second, this balance sheet-focused capital allocation reduced net debt-to-book capitalization to 35.8% and net debt-to-EBITDA to 5.26%, a nearly half-term reduction from just a year ago.

And third, we reported 2.2% total portfolio same-store NOI growth for the quarter.

And we are reaffirming our guidance of 2% to 3% total portfolio same-store growth for 2017, which as a reminder, does not include benefit from leap year adjustment.

And with that, I will hand the call over to Tom for some remarks on the quarter.

Tom?

Thanks, Tim.

We're pleased with our first quarter results.

Predictable and right on track characterized this quarter.

Words that may sound boring to some, but speak to the stable growth that an A-quality, premium portfolio of healthcare real estate assets provides.

The effective new supply, oddly coupled with little differentiation in cap rates for A versus B assets, has made us a net seller of senior housing assets this quarter.

We have taken that capital and redeployed it behind the Welltower family of operators and reduced the leverage to historic low levels.

Welltower's seniors housing presence in dynamic metro markets, on the East and West coasts, as well as in Canada and the U.K. continue to provide a significant competitive performance advantage.

We continue to reinvent the way we run our business, with a focus on integration, efficiency and data.

This contributes to continued decreases in our G&A costs.

You see, we look to model the most successful growth companies of tomorrow and not the bloated inefficient structures of yesterday.

Our unique focus on investing only in premium assets has given our senior housing operators crucial pricing power and resilient organic performance that tells a very different story from national trends.

Our leap year adjusted REVPOR was up over 4%, despite a number of issues seen in Q1, like elevated and prolonged flu.

Shankh and Mercedes will offer more detailed comments on senior housing supply, but we are hearing that nonrecourse construction financing is more limited than we've seen in years, which may dampen the speculative building we've seen in many markets.

This leads us to believe that supply issues that have been impacting the senior housing industry may, in fact, start to moderate.

Mercedes will offer some comments on the investment environment, but I will say that, today, discipline is a hallmark of our investment strategy.

There are many lessons learned from the asset aggregation period of our past that, today, guide how we deploy our shareholders' capital.

We will continue to refine our portfolio by shedding noncore assets, where we do not see an adequate return on CapEx dollars, and reinvest that capital in a next generation of senior housing assets that will become an effective partner to the major health systems in the top markets in which Welltower is concentrated.

Now, over to you Mercedes.

Thank you, Tom.

I will start today by describing our first quarter 2017 investment activity, and will follow with some market perspectives, as well as an update on our value enhancing initiatives.

During the first 3 months of 2017, we completed $217 million of new investments, all with existing Welltower partners, including new perspective senior living at Avery Healthcare.

These follow-on transactions consist of recently constructed buildings and include $104 million of new acquisitions at a blended yield of 6.4%.

We also placed 9 development properties into service during the quarter, with a total value of $186 million and a yield of 7%.

Our ability to add recently constructed assets to our portfolio at attractive stabilized yields, is especially valuable given our disposition strategy.

As you heard in the first quarter, our dispositions totaled $1.1 billion and yielded 6.6%.

These dispositions included a combination of loan payoffs, outright sales and the completion of the previously announced monetization of a 75% interest in 11 Brookdale assets into our Cindat Union Life joint venture for $268.5 million.

Scott Estes will describe our uses of proceeds in more detail.

To echo Tom's opening comments, Welltower's investments and dispositions this quarter highlight our disciplined capital allocations and steady hand.

On the investments' front, we're pursuing earnings and NAV accretive opportunities, which are often off-market, while at the same time, we are careful to reject those deals that don't offer adequate risk adjusted returns for our shareholders.

Our disposition strategy is designed to improve portfolio quality, while selectively capturing the benefit of buyers -- buyer demand and attractive market pricing.

Speaking of market pricing, it's fair to say that cap rates remain aggressive, especially for widely marketed portfolios.

Our focus on off-market deals and repeat business throughout our operator partnerships keeps us mostly out that fray of buyers.

But as owners, we're observing these trends with great interest, as local and foreign institutional investors' growing appetite for healthcare assets puts a premium on quality portfolio like ours.

Regarding new supply, we continue to monitor changes in occupancy and other operating metrics, which may result from new competition.

But we remain optimistic about our portfolio's resiliency, and are encouraged by the slowing in construction financing and starts of recent quarters.

As you know, starts peaked in the third quarter of 2015 and continue to moderate.

Nonrecourse construction financing has become scarce in the last 6 to 9 months and spreads have widened 50 to 75 basis points, along with the increase in LIBOR.

This has resulted in an all-in-cost increase of as much as 150 basis points.

While starts data is volatile from quarter-to-quarter, we continue to believe that we will see a dampening from construction cost increases as we look into the second half of the year.

In addition to anecdotal evidence of these trends, the year-end seniors housing industry report published by CBRE has detailed discussions on the topic for anyone looking for more color.

I want to end by sharing a few examples of our most recent asset management initiatives.

First, we're helping operators implement industry-leading systems to better match staffing levels to current census and acuity, and to improve billing accuracy for the services provided.

These tools are tailored to fit each operating platform and should have a meaningful impact on revenues.

On the expense side, we have previously talked about our savings resulting from group purchasing of property insurance.

We're now looking to expand into other products, such as health and wellness benefits coverage.

And finally, we're leveraging our outpatient medical team's experience to reduce maintenance expenses in our seniors housing communities.

These projects use the scale and the intellect of Welltower -- the Welltower platform to drive sustainable improvement and cash flow, we're excited about the possibilities, and we will post you on progress.

Now, I'm going to turn the call over to Shankh, who's going to discuss portfolio performance.

Thank you, Mercedes, and good morning, everyone.

I will now review our quarterly operating results, with an emphasis on our senior housing business and focus on some geographic details that many of you have recently asked about.

Our overall same-store NOI increased 2.1% year-over-year.

The triple net portfolio continues to produce stable and reliable performance.

Our senior housing triple net segment grew 3.2% and the long-term post-acute portfolio grew 3.4%.

Growth remains healthy and payments remain secure.

Same-store NOI for the outpatient medical portfolio grew 2.4%.

All 3 of these segments -- business segments are in line with our expectations that we described to you in the year-end call in February.

As a reminder, we don't include fee-related income in our same-store metrics.

We think this provides a more accurate picture of underlying performance.

Our senior housing operating segment reported a growth of 0.9%, above our initial budget for the quarter.

The headline results are partly lower due to leap year effect felt in 2016, which benefited those operators that bill residents on a per DM basis.

Adjusting for 1 extra day of NOI in Q1 of 2016, on a comparable basis, Q1 '17 shows same-store NOI grew 1.9%.

Despite a 90-basis-points decline in show occupancy, revenue increased by 2.3%, due to a 4.1% increase in REVPOR on a leap year adjusted basis.

Strong pricing power is the hallmark of classic real estate and long-term value preservation.

Operating expenses increased 3% per shop.

Adjusting for the leap year, same-store expenses were up 3.5%.

Labor expense remained elevated, but the growth rate is down from recent highs.

2016 U.K. living wage growth is still impacting Q1 numbers, but we expect overall operating expense to moderate in rest of the year in U.K.

Overall, senior housing demand supply remains largely healthy, with the pockets of imbalance due to heightened deliveries in certain markets.

We have seen overall industry occupancy drop as new deliveries lease up.

It is important to understand that move outs in the quarter was elevated due to a heightened and prolonged flu season.

Much has been written about this topic, with a focus on overall population data from CDC.

If you look at 65-plus segment of the population, as we do, outpatient visits due to flu increased 70% from last year, and was 35.5% higher than the epic 2017 flu season.

The hospitalization rate in this segment almost quadrupled from last year, but was 50% lower than 2015.

While death due to flu is almost up 4x over last year, it is a lot lower than 2015.

How do these stats translate into our business?

Quality operators learned valuable lessons in 2015, and were much better prepared to deal with the bad flu season this year.

These precautions have led to many more temporary resident bans to protect our resident population.

Take, for example, what we observed in the New York Metro region.

While we saw strong demand that manifested in 5-plus percent REVPOR growth in New York MSA, admissions ban in a handful of our communities contributed to an occupancy decline of 20 -- 280 basis points, resulting in a flattish NOI growth in this market, which usually ranked amongst our top markets quarter-after-quarter in NOI growth.

We think this admission stance will prove beneficial to rest of the year's results as they have helped to protect our resident population, providing us a base to build upon as we enter the traditional moving season in late Q2 into Q3.

These markets where we did not experience this occupancy headwind, we continue -- our continued strong pricing power manifested into strong NOI growth in markets like D.C, Southern California, Toronto and London.

Our core market versus noncore market performance spread narrowed this quarter relative to last year.

Other markets remained relatively flat, but core market growth has receded from mid-single digit growth due to flu situation in New York and New England.

We expect core market growth to pick up in the second half, as we build back occupancy.

It is important to note that we also observed an interesting divergence in our IL versus AL performance from last year.

While same-store NOI growth in our IL communities was higher than that of AL communities, primarily due to lower expense growth in IL, we observed higher occupancy decline in IL versus AL.

While one quarter does not make a trend, we will continue to keep close eye on this topic.

In conclusion, our operating metrics were as expected in Q1, with the exception of RIDEA portfolio, which outperformed our initial expectations.

We're excited about the year and at the prospect of our operating performance.

We believe our operating portfolio provides significant total return or unlevered IRR opportunity driven by 3 levers: occupancy upside, rate growth and normalized expense trends.

We believe our sustained rate growth in the face of new supply exhibits only the quality of real estate that we own, but also the value proposition senior living provides for its growing, need-based resident population.

While recent buyers may dominate the mind share in very short-term, we're confident our asset class, in general, and Welltower, in particular, offers a unique opportunity to medium and long-term investors.

This is particularly interesting as investors think about comparing our portfolio to many core 4 group asset class with mid-90% occupancy levels at the time when the economy is essentially at full employment.

We hope, as our growth rate starts to reaccelerate in the second half of the year relative to the first half and shows resilient growth in next couple of years, the public markets will share the enthusiasm that we encounter every day from world's most astute private investor.

With that, I'll pass it over to Scott Estes, our CFO.

Scott?

All right.

Thanks, Shankh, and good morning everybody.

From a financial perspective, we're off to a solid start to the year as we continue to demonstrate the capital allocation discipline that we've been articulating over the past year.

As we continue to enhance the quality of our portfolio, our Corporate Finance team has ensured that our balance sheet has made commensurate improvements as well.

I'll start off by emphasizing 3 specific first quarter financial highlights.

First, we generated over $1.1 billion in disposition proceeds during the quarter, which were used to repay both secured debt and preferred stock, leaving us with limited debt maturities throughout the remainder of the year.

Second, we significantly strengthened our balance sheet through these payoffs, resulting in enhanced credit metrics and a reduction in undepreciated book leverage at 35.8%, its lowest quarter-end level in nearly 5 years.

And third, we dramatically improved the operational efficiency of our platform, as first quarter G&A declined by more than 30% from the comparable quarter last year.

Most importantly, our stronger balance sheet, and nearly $3 billion in current liquidity, will allow us to remain both disciplined and opportunistic in regard to any incremental investments, dispositions and capital raises throughout the remainder of the year.

I'll begin my detailed remarks with some perspective on our first quarter financial results, our dividend and changes to our supplement and earnings presentation.

We started off the year with solid financial results relative to our expectation, generating normalized FFO of $1.05 per share versus $1.13 per share last year.

Earnings declined, as expected, due to the nearly $4 billion in dispositions completed since the beginning of 2016 and our efforts to reduce leverage by nearly 4 full percentage points over the last 12 months.

As a reminder, we're no longer providing an official FAD per share calculation this year, but are providing additional detail regarding straight-line rent, CapEx, noncash interest expense and stock-based compensation at the bottom of Exhibit 2 in our earnings release.

Our G&A came in at $31 million for the first quarter, this represented a significant year-over-year reduction from $46 million in 1Q '17, as we continue to enhance our operational efficiency.

Based on this strong start to the year, we're tracking at or slightly below our initial G&A guidance of $135 million for the full year.

We recognized significant gains on asset sales of $244 million during the quarter.

This was partially offset by small impairments on a few held-for-sale properties and an unconsolidated entity.

We also recognized charges related to our secured debt extinguishments and preferred stock redemptions.

In 2017, we've begun capitalizing most transaction costs, which is why you see a 0 on that line on the income statement this quarter, but I would note that the $11.7 million in other expenses include some transaction costs, primarily from deals that occurred in 2016 as well as severance costs.

Moving on to dividends.

We'll pay our 184th consecutive quarterly cash dividend on May 22 of $0.87 per share, representing a current dividend yield of 5%.

We made several changes to our supplement this quarter to simplify and streamline its presentation.

On Page 6, based on analyst and investor feedback, we did revert the presentation of our triple net payment coverage stratification back to a chart format.

And I think one notable addition that was made this quarter is on Page 18, where we now provide additional detail on our debt broken out by local currency as well as related hedges.

Turning now to our liquidity picture and balance sheet.

I think the most significant capital event this quarter was the $1.1 billion in proceeds generated from dispositions, $265 million in loan payoffs and over $1 billion of property sales, which included $244 million in gains.

We used the majority of the proceeds to repay $806 million of secured debt, at a blended rate of 5.6% during the quarter, which lowered the average rate on our remaining secured debt to 3.7%.

We also redeemed all 11.5 million shares of our 6.5% Series J preferred stock during the quarter, valued at $288 million.

And in terms of equity, we generated approximately $112 million in proceeds under our DRIP and ATM programs during the quarter.

So as a result, we have nearly $3 billion of current liquidity, based on $2.5 billion of credit line availability, and nearly $400 million in cash on balance sheet.

Our significant secured debt and preferred stock payoffs allowed us to significantly enhance our balance sheet metrics during the first quarter.

As of March 31, our net debt-to-undepreciated book capitalization declined 35.8%, representing a 116 basis points sequential improvement from year-end, while net debt-to-enterprise value declined to 28.8%.

Our net debt-to-adjusted EBITDA improved to 5.26x, while our adjusted interest and fixed charge coverage for the quarter increased to 4.3x and 3.5x, respectively.

Our secured debt declined to only 9.6% of total assets at quarter-end, representing a significant 240-basis-point decline from the previous quarter.

So I'll conclude my comments today with an update on the key assumptions driving our 2017 guidance.

First, in terms of same-store NOI growth.

Based on the solid first quarter results generated across our portfolio, we're maintaining our blended growth forecast of 2% to 3% for the full year.

In terms of our investment expectations, there are no acquisitions other than those completed during the first quarter in our 2017 guidance.

Our guidance does include an additional $265 million of development funding on projects currently underway and an additional $375 million in development conversions at a blended projected stabilized yield of 7.9%.

In terms of our full year disposition forecast, we continue to anticipate a total of $2 billion of disposition proceeds, at a blended yield of 7.6%, based on $1.1 billion completed to date and $900 million of incremental proceeds throughout the remainder of the year.

And finally, as a result of these assumptions, we're maintaining our normalized FFO guidance of $4.15 to $4.25 per diluted share.

So in conclusion, our enhanced balance sheet and $3 billion in current liquidity, as a result of our capital allocation discipline, continues to provide us with maximum financial flexibility in the current environment.

So, at this point, I'll flip it back to you Tom for some closing comments

Thanks, Scott.

So let's talk about the deal of the week.

We were quite pleased to see the excitement generated by Duke's decision to sell its medical office portfolio.

In our almost 50 years in this business, we have never seen such enthusiasm for healthcare real estate.

Should we all be surprised?

No.

Revista data indicates the value of hospital and medical office real estate in the U.S. to be $1 trillion.

And by the way, 82% of this real estate is owned by health systems and physician groups, with only 10% held by REITs and 8% by institutional investors.

Over $600 billion of that is attributable to hospital brick-and-mortar and the balance is MOBs.

You should know that the majority of this hospital real estate was built around a fee-for-service model.

So if it takes 10 days to fix a hip fracture, the hospital submitted a bill to the payer and got its cost reimbursed, plus a margin.

That model requires lots of real estate.

Today, however, we are moving to a value-based model.

If it takes you 10 days to fix a hip, but the payer will only reimburse the hospital for the equivalent of a 2-day stay, the hospital must eat those 8 days.

As the focus increasingly shifts to outcomes, underperforming hospitals will be under further pressure.

You should not be surprised that 52% of U.S. hospitals lost money last year.

Like many malls, strip centers and suburban office, much of the hospital real estate in this country is obsolete and health systems are looking to evolve their real estate footprint, while they invest heavily in other areas like technology.

The shift in patient demand is being reflected in real estate demand, as spread between hospital cap rates and MOBs continues to widen.

A new generation of outpatient medical real estate connected to lower acuity settings, like senior housing and modern post-acute care needs to be built in order to facilitate the transition to value-based healthcare.

This is a huge opportunity, perhaps the most compelling opportunity the real estate industry has seen in decades.

So the enthusiasm for Duke's healthcare assets is yet another indication that we are finally being recognized as an institutional investment class.

If only a small portion of the 82% of this real estate transitions to REITs and other institutional investors, it's a tens of billions of dollars investment opportunity.

No company is better positioned than Welltower to take advantage of this opportunity, so stay tuned.

Now, Holly, open up the line for questions.

(Operator Instructions) And our first question is going to come from the line of Smedes Rose with Citi.

I wanted to ask you just quickly it sounds like there's no change in your -- or you said there's no change in your full year outlook for same-store NOI, but I'm just wondering if there is any change in the composition of getting to that?

Specifically, are you still in the kind of 1.5% to 3% change growth in your -- in the same-store shop NOI for the year?

Smedes, it's Scott Estes.

You're correct, there's no change to any of the components to the build up to our change to NOI guidance.

Okay.

And then Tom, I'm just wondering I know it's only passed the house, but the potential changes in the ACA, does that give you any changes in the way you think about being in the post-acute business, and I guess particularly some of the changes there are talking about for Medicaid?

Yes, Smedes, it's still very early to tell.

I think some of the proposed rhetoric that was coming out of -- from CMS was initially seemed to be taken as negative.

Actually it could have as easily be positive.

I think it's just we have to stay tuned.

Smedes, I come back to the fact that we need to move to lowering health care costs and improving outcomes.

Real estate -- the real estate footprint that I just talked about, is limiting the ability to reduce costs in health care delivery.

And I think the proposal for the repeal of Obamacare is very much focused on improving outcomes, reducing cost and doing that by increasing competition.

And I do believe that this should drive more of this hospital real estate to shut down.

We cannot afford to keep the lights on in hospitals that are continuing to lose money in this country.

And I think that's going to drive a lot a census to other lower acuity settings, like post-acute care and seniors housing and medical office buildings, which really will become primary sites of care versus the traditional acute-care hospital.

Your next question will come from the line of Paul Morgan of Canaccord.

In terms -- do you have any update on Johns Hopkins?

And kind of how you expect sort of the -- the first year of that venture to evolve?

And then maybe any update on progress kind of with other systems for similar ventures?

Sure.

This is Mercedes Kerr.

The conversations that we're having with Johns Hopkins Center primarily around 2 topics: research and collaboration, a clinical collaboration.

And both of those conversations are actually very active and turning more tangible, if you will, with respect to the kinds of projects or specific implementations that we might seek to collaborate on together.

So we're working on the research project that we've talked about before, having to do with outcomes and quality measures and indicators for seniors housing, as well as a collaboration, primarily, in some of the markets that they're expanding into, for example, D.C. So nothing particular that I can share beyond that today, but just, I suppose, the -- giving you a little bit of comfort around the fact that this is -- these conversations are really going in the right direction and turning into more tangible projects for us together.

With respect to other health systems, the same is true.

Conversations that were a little bit more general or conceptual in the past year, let's say, are now turning into much more specific tangible opportunities that we are pursuing, and we hope to have something to talk about yet this year.

And then just another question you commented about higher loan costs for developers kind of helping the supply picture as you look into '18.

Are you thinking about capitalizing on the balance sheet that you have as you look forward?

And maybe kind of reaccelerating senior housing development into that, maybe deceleration as you look into '18 and '19?

No, we're not, we're steady as she goes, I suppose with respect to development.

We see a lot of opportunities, especially from our existing operators.

And there are some certain operators that grow more specifically through development, others growth of acquisitions.

And so I don't see any radical changes with respect to our approach there.

It's Shankh.

I will just add that if you look at -- if you're posting is specifically about we filling the void for the construction lending, as you know, we are not a lender, we have no ambition to be a lender.

But we do think that finally the construction costs are going up, as Mercedes said, with LIBOR also on the spread, so that's something very interesting we observe, the costs are going up.

Recently, we heard from a big bank that one of their construction loans, which was priced at LIBOR plus 300, they could not syndicate it.

So we're pretty excited about what is the industry is going, there probably have been too much development that should not have happened that was -- but we're very excited where the industry is going.

And we will find opportunities, like you have seen in New York, where its core developmental will continue to pursue those.

Our next question will come from the line of Josh Raskin with Barclays.

Just trying to sort of put together just couple of the pieces on sort of the targeted markets and the discussion you guys have been leading, Tom, for the last year or so.

And I understand a lot of the new investments, which is relatively modest, is with existing partners, but when I see cities like Raleigh, and Tulsa, Lancaster, Warsaw, et cetera, I know you're, to some extent, at the mercy of where your partners are expanding, but how do you think that's just -- how are you guys affecting a more targeted strategy to really build and where you think bicoastal premier markets, as you describe it?

So Josh, I would say that our investment strategy is very much built around our operators.

These operators are largely concentrated in major markets.

But because they all share a focus on the premium part of the market, there are many smaller markets -- you mentioned, Raleigh.

Raleigh is a fantastic market, it is a high-growth market, it behaves like a major metro market in a state where there -- it is not easy to build because North Carolina is a certificate of needs state.

So we are not redlining some of the smaller markets, particularly in the South or even in the Midwest, because there are towns, whether it be Ann Arbor, Michigan or Madison, Wisconsin that behave a lot like the types of major markets that the same drivers in terms of job growth and population growth are seen in some of these smaller markets.

So in summary, Josh, I'd say we're focused about deploying capital behind the partners.

If there are partners that do not have that focus, those are likely the assets that you have seen us sell or we'll sell in the future.

And we will, again, continue to be laser focused on deploying capital into markets where you see positive demographic factors.

And the one thing that I would add to that is -- some of the conversations that we're having with health systems do center around development.

It's not the bulk of it, but there will be some element of that, and those are conversations that we are driving.

And they will potentially include seniors housing as a component.

But my point is to say that we are actually on the forefront, being proactive in trying to select our markets and select our partners, and so that on the one hand, we're receptive and responsive to our operators, and on the other hand, we're also trying to help guide the conversation with the data and other relationships that we can bring to bear.

There is one more point that I'd like to make Josh, this is Justin Skiver, SVP of underwriting, is that the distinction between triple net and RIDEA is important, in that a lot of the deal that you're referencing are triple net based structures as opposed to RIDEA, where we would expect to seek higher growth from the RIDEA portfolio than triple net.

Okay, that makes sense as well.

And then just a second question just trying to figure out the calculation on these leap year impacts.

Just to get some apples to apples comps in the others, and I understand the shop impacts about 100 basis points, just sort of finger in the air that makes a lot of sense, one less day in the quarter.

But I think you said the rate impact was 180 basis points, but the OpEx impact was only 50 basis points, so what drives the difference in leap year impacts on the different parts of the NOI?

Josh, it's Shankh.

So if you think about expenses, roughly half of the expenses are fixed and half of the expenses are floating, right?

So only that portion of the expenses, which you have floating labor cost and others or food, that will only be impacted.

But if you have a fixed expense category, that will not be impacted.

On the revenue basis, obviously, we're only -- remember, we're only looking at the 29th day of February last year.

And if you charge on a per diem basis, you have a revenue.

Now if you charge on a monthly basis, you have no difference.

So it has only impacted some operators that charge on a per diem basis on the revenue side.

And on the expense side, it only impacts the variable cost of the expense category.

That makes a lot of sense.

So the OpEx of 50 basis points makes the kind of sense if it's 50, 50 fixed and floating, but I guess I'm just struggling with the rate, if you're charging on a per diem basis, why would rate be as much as 180 basis points, right?

Because I'm assuming not everyone is even charging on a per diem.

Yes, because where do you see the most impact are higher-barriers-to-entry markets like Boston and New York, that's where the rates are much higher.

So when you get that operator in those -- in New England and New York markets, where you have 1 higher extra day, the impacts the overall report then if you just compare to our overall portfolio, which is not just those markets.

For example, I told you New York, therefore, was a 5%.

If you have 1 day of change in New York, where you have an operator, who charges on a per diem basis, you have a much bigger impact.

Right.

It's really a mix issue as well?

Yes, correct, it's a market mix issue.

Our next question will come from the line of Michael Carroll with RBC.

Yes, Tom, could you give us a little bit more color on the plans for future dispositions?

Is there anything else we should expect that you could sell outside the $2 billion that's included in guidance?

Michael, we are -- we look at our portfolio over the long-term.

And we're always trying to be in front of where we might see changes in a market that might impact performance.

So it's hard to tell you that -- to give you a specific number.

We are also opportunistic.

If someone's willing to pay us a cap rate on assets that for a variety of reasons may be very strategic for them, but are not so strategic for us, we'll take advantage of that.

So I often say, both in my personal life and in my business life, real estate is always for sale.

So I think you have to be opportunistic.

And I think over the long-term, I think that protects the shareholder.

Okay.

And then can you kind of talk about I believe on previous calls, you highlighted that Genesis had some purchase options that they could exercise in 2017.

Should we expect that tenant to exercise those purchase options?

And how are you thinking about that portfolio going forward?

Michael, that's a very good question.

So as we mentioned, Genesis has some purchase options, to acquire some assets from our portfolio that expired on March 31.

And we're pretty excited because their purchase options were priced at a certain cap rate, and the cap rates on those assets have come down significantly from there, when we exercised those -- when we struck that deal.

So what happened because, obviously, Genesis credit, as you know, has significantly improved in the last 9 months.

So in -- that happened obviously a month ago, we are currently negotiating 3 term sheets with various buyers, so we're hopeful that you will see further reduction in Genesis concentration as we go through this year.

But more to come on that, stay tuned.

Okay, great.

And is there a timing on those term sheets?

Or are those completed yet?

Or is that just kind of still in the negotiation process?

It's in the negotiation phase, too early to comment, but definitely as I said, stay tuned, there'll be more to come on this topic.

Our next question will come from the line of Rich Anderson with Mizuho Securities.

So just wanted to get to the shop portfolio.

The 0.9% first quarter same-store NOI growth was underwhelming relative to your nearest 3 peers.

I get what you're saying kind of -- not to be viewed as a trend maybe for the full year, but looking back at your comments last quarter, you were expecting flattish occupancy, and you've got a 90-basis-point reduction in occupancy this quarter.

Was that in your expectations?

And how much of the performance caused you to think a little bit about tweaking down the guidance for same-store this year?

Rich, that's a very good question.

So if you think about, when we said last year, last call about flattish occupancy, we talked about the entire year, not Q1.

So Q1, if you think about, as I mentioned in my prepared remarks, Q1 same-store NOI growth for the shop portfolio is actually higher, not lower.

So what is the difference?

First thing is, the revenue growth -- it is underwhelming, as you've said for sure, but if you look at the revenue growth, it's actually higher than most peers, I believe.

So we got slightly lower occupancy, but we got much better rates.

And we have no desire to decrease same-store RIDEA guidance for the year, we do not change guidance quarter-to-quarter on different segments, but I think we're trying to tell you we're more excited not less, about that particular business and as we think about the entire year.

Okay.

Just wanted to break that up a little bit to see if I can get some more, but I appreciate that.

And then, Tom, may be you used the word disciplined a lot in your opening remarks.

Can you quantify discipline as it relates to your process in the Duke sale?

Well, we were certainly interested in that portfolio.

I think everybody was interested in that portfolio.

They ran a very competitive process.

I don't really know any other details, Rich, regarding who was in the process.

But there must have been lots of players to drive the price to where it eventually settled.

And I think that's a positive for our industry and this property type.

Maybe I could ask it this way, I know this is a medical office and just a general focus on lower cost environment is your bread-and-butter investment approach for the here and now.

Let's call it for a 4.7, 4.5 cap rate, I don't know we can argue with the numbers, but how many -- how does that compare to the value you see in what you're looking at?

In other words, if -- let's just say the number is 4.5, if you're looking at medical office in the conversations you're having, how many basis points is that lower than where your dialogues are starting?

We've never seen cap rates at that level.

And if cap rates have been at that level, they've been situations that we have not participated in.

Yes, Rich, I guess, let me add a little bit to that.

We've been successful in acquiring more favorable cap rates, let me put it that way.

And with respect to this portfolio, I mean I would tell you, I think, it's -- there were a lot of overlaps with ours and certainly, people were very interested.

It was in terms of market concentration as well as tenant roster.

It's probably the second best portfolio out there after our portfolios of medical office buildings, and so we were very keenly interested.

But there is a point where, naturally, it needs to make sense for our shareholders, and we need to know that it will be accretive.

And considering that we have a very successful property management platform, which tends to operate at a far higher margin, frankly, than just about anything we've seen out there, comparatively.

We thought that we did a good job of underwriting it and then remaining disciplined about it.

And I would say that it is -- it's our strategy in the future to build our medical office, outpatient medical business, through the relationships that we have formed with the major health systems.

So as we keep telling you, stay tuned for that.

We don't have anything to announce to you today, but those relationships we believe will bear fruit over time.

And we'd rather build our asset portfolio in that way then in participating in major marketed auctions, whether that be in the senior housing space.

And -- you know you've not seen us build our seniors housing asset base through auctions, we've done it through our relationships.

And that's what we're trying to duplicate in the outpatient medical business.

So it's 4.5 100 basis points lower than your radar right now?

50 basis points lower?

75?

I'd say there are deals trading at 5 -- probably 50 basis points higher we've seen.

We haven't seen the 5% reached until now.

As we have not exactly, Mercedes.

Our next question will come from the line of Vikram Malhotra with Morgan Stanley.

So just, Shankh, going back on our comments on IL and AL, I thought it was interesting you mentioned, the performance was a little better in IL, but in certain metrics was better in the other category.

I'm just wondering, given all the supply in AL and limited supply in IL, what do you think is driving sort of this difference?

And what is that -- what are the implications going forward in terms of your preference for IL versus AL?

So Vikram, I think that's a great question.

As I said, one quarter does not make a trend.

I will tell you that not only the occupancy was better in AL, but also the revenue growth was better in AL.

So do we have -- does that mean that we have a better preference for AL versus IL today?

The answer is no.

We have preference for best quality real estate in the best market, run by best operators, and that wherever we find that opportunity, whether it's IL versus AL, we do not think about that any differently.

It depends on the particular asset, in the particular submarket, run by the particular operator, and we think about a lot of sort of supply where it's coming.

As you know, as much enthusiasm as we have for IL today, and we love independent living as a business, absolutely love it, it is a relatively more cyclical business, and we have to think about that as we, in particular time in the economy, which is essentially at full employment, so we do think about that.

And the other point I would tell you is, despite all of the talk of the supply, our AL portfolio is in very, very good markets and they are need-based products.

So, obviously, the care component of it, we cannot overemphasize that what's the importance of operators in this business.

So we're seeing some -- starting to see some differentiation, but it's too early to comment.

Okay.

Then just second question, can you give us some more color, and maybe some perspective on the U.K.?

One of your peers has, at least, decided, in part, to move away.

How are your recent developments that have come online?

How are they being -- how are they performing?

And just expectations for future opportunities in that market?

Sure.

It's John Goodey from SVP of International.

So, I think, we've historically restructured ourselves and our partner relationships completely differently to our peers, so we don't have the same structural impediments as you saw (inaudible) Notes in the past.

And as you know, we've got a full service team there on the ground in London.

We've opened up, I think, 15 buildings or so in the relatively recent past and occupancy across that portfolio has done really well, so we're quite pleased with the work that our partners at Sunrise Bracewell have been doing on filling those buildings.

We've got good rates as well as good occupancy, so we feel sort of cautiously optimistic about how the market is developing there.

Again, remember, you see the stats in our supplements.

Our buildings are on average half the age of the U.K. average 20 years old, (inaudible), and we're bringing online high-quality brand-new buildings into superior markets.

So it behooves us to have good occupancy and good occupancy growth, so we're happy to have put a good course together and we're optimistic for the rest of the year.

Okay.

And I guess if I can clarify just on pricing in the U.K., you talked about the U.S. being flattish, and any notable changes in the U.K.?

Well the U.K. had some structural cost increases, as you know, Shankh noted the National Living Wage, which has been escalating quite quickly, although it now starts to temper.

And because of that, the whole industry had to push pricing up, and that pricing because it has been industrywide has, obviously, stuck across the industry.

We're very lucky that we're very highly privately paid focused, so we're in a business to consumer market in some ways rather than some of our peers operations, which are receiving large amounts of government reimbursements.

On average, the private sector has been pushing rates in the U.K. between sort of 4% to 6% per market rates.

And I say that sort of the average for our partners as well in the market.

Our next question will come from the line of Juan Sanabria with Bank of America.

Just going back to one of the earlier questions on skilled nursing, you'd said you've been focused on kind of the newest operator trends, which to me, kind of talk towards Genesis' focus on a short-term rehab, that clearly is seems to be one of the focal points in terms of potential pressures from CMS -- CMS' new initiatives.

So just wondering if that changes your thinking on how you're focused with your remaining post-acute portfolio?

Are you still committed to being exposed to Genesis in their short-term therapy business over the long-term?

This is Bryan Hickman.

I guess I'll answer your question in 2 parts, first to talk a little bit about your thoughts on the CMS rule that came out.

So first, CMS' initial estimates of the impact of the proposed rule is modest with changes in payments to for-profit, and pre-standing facilities of minus 1.1% and minus 0.5%, respectively.

So this adjustment the high single digit cut of Medicare revenue, and some are suggesting may be significantly overstated.

Second, ACA, the skilled nursing industry lobbying group, has been involved in the design of this payment reform package for the past several years, with input from providers across the industry.

So CMS did not create this proposal in a vacuum.

We've been hearing from several of our operators that the proposed rule contains provisions that will help the operators to deliver care more efficiently.

For example, the increase in the allowance for utilization of concurrent and group therapy, seems like a positive, especially when you consider that in the context of our PowerBack properties, which are highly rehab focused.

Finally, the consensus on the pre-rule is it a long way from implementing, and it's going to be commented over the several months of the year.

And analog for this is the revision to the long-term care regulations that CMS implemented in late 2016.

Those were originally proposed in nearly 2015, so that process played out over about 18 months.

And furthermore, operators had ample opportunity to provide commentary directly to CMS, regarding those changes, so we expect to see that play out similarly.

As it relates to our PowerBack portfolio, we believe that, that is a -- has been a good investment for us, and we've continue to invest with Genesis.

We have a construction start that began with them in the Philadelphia metro market, a PowerBack property, and then one that's coming online in -- on the New Jersey side of their operations this year.

So one, I think as Brian stated, we're going to continue to look to invest in the next generation of post-acute care assets, whether that will be with Genesis or maybe there will be some operators that are bringing this next generation of post-acute care to the market.

It is very clear to us because of the amount of time we spend with the major academic and super regional health systems, that this is an area that is keenly important to them.

And so we are working with these health systems to try and refine the infrastructure that post-acute care can be delivered in effectively.

It's always going to be a volatile space to be in and we want to make sure that we can continue to invest, albeit it's never going to be a big piece of our business, but invest in a way that it -- that we will be getting an adequate return on the capital that we will deploy towards this space.

Okay, just one other question on the seniors housing side.

We have heard that the Holiday may be looking to transition some of their independent living assets that are facing more supply -- sorry, assisted living assets facing new supply of independent living, do you think that creates a shadow supply that may be not disclosed or highlighted in the NIC data in the independent living bucket that bears watching?

Are you seeing that trend at all?

No -- I speculate a little bit but I'd have to tell you this, this is probably more the exception than the rule.

There's frequently conversions of space that are responsive to the market.

For example, we might take some units in a building convert them to memory care if we decide that there is a lot of demand that should be met, and that we could get a nice return on that sort of conversion dollars that we invest in a property.

Things like that are happening frequently, but to have sort of whole cloth changes where you're taking a portfolio and converting it from assisted living to independent is not a common -- I've not seen that happening in any widespread way at all.

And that -- and we don't expect for that to happen.

Our next question will come from the line of Tayo Okusanya with Jefferies.

I just have a quick question about senior housing.

I think in general there is this sense out there that things would get better soon, based on slower deliveries later on the year or everyone taking a look at the some of the NIC facts, but if you do look at NIC forecast, they do still call for declines in occupancy and a tough kind of NOI outlook, all the way up on to 2018.

So I guess how do you kind of reconcile some of this kind of optimism that things turn around very soon versus NIC that's saying it could be another 18 months of a tough outlook?

Tayo, it's Shankh.

Probably your definition of soon may not exactly match with our definition of soon.

We talked about emphasize on medium to long-term, that's, of course, number one.

But I'll give you some numbers, where I want you to focus on, focus on not the whole industry, but our portfolio.

So if you go back and calculate quarter-after-quarter, we give you a 3 mile, 5 mile sort of radius, and how it impacts our portfolio, right?

Let's just talk about a broader picture, 5 miles.

In Q3 of '15, our total NOI that was impacted by supply was $83 million, that was the total.

It peaked in Q2 of '16 at about $90 million, and today that is $73 million.

So I am talking about just our portfolio.

So you saw it size up, and now it's coming down.

So we can sit here and talk about the NIC data and how that all relates to the whole industry.

Obviously, we share enthusiasm for our sector, but we're particularly talking about our portfolio, which we think will do better.

Tayo, this is Tim Lordan.

The only thing I would add to that is, one of the reasons we're optimistic about the balance of the year is the rate growth in our portfolio.

The rate of rate growth continues to exceed what we see in the NIC data and that rate growth has been there consistently, that's not something that is new for us this quarter.

So that continued rate growth combined with what Shankh mentioned earlier, slight deceleration in the rate of increase of labor driving our optimism.

That's helpful.

And then this quarter, it didn't seem like you announced any new relationships with some of your investments that you've done.

I was just kind of curious if that's deliberate in regards to you being much more selective in regards to who you're partnering up with, of if it's more of a case of you just see a lot of opportunities with your existing relationships?

Well, we have 17 RIDEA operators in our portfolio.

You hear us use this term the Welltower family of operators.

Tayo, I think we have a pretty strong bench.

There will be on the margin, you saw us add a new operator to that group last year.

I think there may be a few left, but we are focused on putting capital behind this very skilled group of operators that have dominant positions in the markets that are important to us.

Got you.

So I would doubt that you'll see us with 25 operators next year.

I thought we have always been very selective.

So we're not particularly selective now, we've always been selective, and that's not changed.

Our next question will come from the line of Chad Vanacore with Stifel.

I was thinking about same-store shop NOI performance, and we talked about revenues and occupancy, what were some of the issues that led to higher OpEx in the quarter?

And what happened in IL, in particular?

So Chad, I think you have 2 questions, 1 is not -- quarter OpEx was actually pretty favorable.

It's pretty in line to what we expected, so I'm not sure what's the -- what are you thinking behind that question.

It's pretty in line, what we had expected, it's the same issues we have faced.

Labor remains an issue.

However, we expect, as we said, we're seeing it moderating, and U.K. has an impact as John Goodey talked about.

So that's sort of one thing.

IL, there was no specific -- we saw a favorable revenue trend in AL versus IL, but we saw a favorable expense trend in IL versus AL, and that's what drove the NOI difference in those 2 property types.

All right.

But let's think about the midpoint of same-store NOI guidance for the year.

You did 2.2% at first quarter, so midpoint is bigger, 2.5%, that would imply some improvement through the year.

So what segments would be the primary driver of that improvement, if you hit it?

Shop.

It's all on shop then?

You will see sharp improvement in shop as we sort of discussed here.

Is there anything that could move the needle on the outpatient medical portion?

Outpatient medical has been relatively very steady performer.

It continues to produce a very favorable and predictable growth for us.

I mean, quarter-to-quarter, things change, but we don't see massive change in that portfolio.

That's right around 95% occupancy and 80% retention is a good forecast, so we're pretty much maxing out our portfolio occupancy as we have for some time in that part of the business.

(Operator Instructions) Our next question will come from the line of Jordan Sadler with KeyBanc Capital Markets.

I wanted to follow up on the MOB portfolio trade this week.

So it -- the one thing that seems to have surprised everybody was the price at which it traded.

You guys and as well as your peers, but at the same time, I guess, Tom, as you were wrapping up your remarks, you mentioned to stay tuned.

So I'm just curious, do you expect more sellers to basically put assets on the market as a result of this pricing?

Or how should we be reading into that?

As I think there's just been an acceleration or pick up in the number of players looking to buy MOB assets, and that was demonstrated in this price?

And I'm just curious, what brings the supply to bear?

So Jordan, if you're a buyer that needs to find assets in auctions, this was the auction of all auctions in the MOB space because we don't know of another portfolio of that size, diversity that is available.

It's hard -- there's not on our radar screen.

When I said stay tuned, Jordan, it goes back to a point that I made on another question.

We will build our medical office portfolio organically, which means that we're not sitting, waiting for some big portfolio trade, not to say if one comes out, we won't be hanging around the hoop.

But I will tell you that we believe that the major health systems that we have aligned ourselves with, across our business, we realize they cannot own all of their real estate for the long-term.

You heard me talk about that 82% of the -- of this real estate is still owned by these health systems.

They have significant capital needs.

For example, in technology, that will allow them to remain competitive.

If they don't invest in technology, and continue to sit there and think they need to own all of their real estate, they will become less and less relevant.

So we believe that we will mine medical office investments and development opportunities through -- the same way we've done it in the senior housing space, by picking our partners and being a trusted partner.

I moderated a panel last month at a research conference, where I brought not only Chris Winkle from Sunrise Assisted Living, but also Mark Shaver, who's head of strategy for the Johns Hopkins Health System.

And actually Mark looked at the audience and said, I have to tell you, we own too much real estate.

And you haven't seen -- you probably haven't heard someone at that level publicly state that.

And basically said and likely, you'll see Tom owning some of our real estate at some point in the future.

I think that's the way we're going to grow this business.

And it's important that their medical office footprint is going to be connected to our senior housing and post-acute care portfolio.

That's the future of this company.

That's why I'm so excited about our business.

I think this is one of the biggest opportunities that the real estate industry has seen in decades.

So that's why I say, stay tuned.

I don't have anything to announce to you.

That's helpful.

How do you gauge, you guys mentioned, I don't know if you're being facetious, but the portfolio that traded with the second highest quality portfolio next to yours, how do you gauge portfolio quality?

We -- by age, by occupancy, by operating margin, by retention, by the tenant roster.

So on just about every mark that you might be thinking about when you consider outpatient medical portfolios, we out rank.

On campus versus off?

Does that...

We talk about affiliation.

Be careful with that, it's affiliated or not affiliated you should care about and in our portfolio is 95% affiliated with health systems.

Our next question will come from the line of Michael Knott with Green Street Advisors.

It's been a long call, but I want to ask one question, in particular.

On your senior housing business, your full year guidance is 1.5% to 3% for same-store NOI, which is comparable to the 0.9% for 1Q, so you've talked about it a little bit on this call in different questions, but just can you help me better understand the comment that you're more excited, not less, as you think about that particular guidance range as it relates to what you reported for 1Q?

Michael, it's Shankh.

So we -- as you know, we do not update our guidance on a quarterly basis for different segments of the business.

But you heard me right that 0.9%, which we reported as the growth, is comparable to 1.5% to 3%.

So Tim, I think, cleared that, and we are more excited about that segment of the business because of the first quarter beat that we had relative to our expectations.

And it was driven by Tim Lordan said, is driven by what we see in the rate trend as well as the expense trends.

Okay.

And then what do you make of the country breakout, just to go a little deeper into it, the slightly negative trend for U.S., excluding leap year or 1% leap year adjusted is I think somebody else said earlier, was a little underwhelming, just curious how you thought about that part of it?

And I assumed that part too was also largely in line with your expectations?

It was, if you think about -- on a country basis, it was largely in line with our expectation, and we expect U.S. to perform as we look through the rest of the year.

So again, I would recommend to you one thing, obviously, we're excited about our U.S. portfolio, we think the performance will get better, but as we -- we want you to think about our whole portfolio, not just parts of the portfolio, because different parts of our portfolio came together purely because our strategic allocation, capital allocation decisions, right?

So different points in the cycle, you'll see different countries will react differently.

IL and AL will different -- react differently, but that's how we think about our capital allocation as a portfolio rather than 1 particular product type or 1 particular country.

Sure.

But then just overall, as it relates to the 1.5% to 3%, it sounds like it's mostly on the rate side to drive that sort of the 3/4 of the rest of the year from 0.9% up to 1.5% to 3%?

That's right, Michael.

Thank you.

And at this time, we have no further questions.

That will conclude today's conference call.

Thank you for dialing in to the Welltower earnings conference call.

We do appreciate your participation, and ask that you please disconnect.