Welltower Inc (WELL) 2017 Q2 法說會逐字稿

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

My name is Dorothy, and I will be your operator today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

Now I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments.

Please go ahead, sir.

Thank you, Dorothy.

Good morning, everyone, and thank you for joining us today to discuss Welltower's Second 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 those 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 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 wanted to point out 4 highlights regarding our 2Q 2017 results: first, we reported 3.5% year-over-year same-store growth in our senior housing operating portfolio, driving total portfolio same-store growth up 3% for the quarter; second, we increased full year total portfolio same-store guidance to a range of 2.25% to 3%, lifted by first half senior housing operating performance at the high-end our initial expectations; third, we paid down $182 million of debt in the quarter, bringing year-to-date retired debt and preferred securities to $1.275 billion at a blended rate of 5.6% and a cost of less than 3% of principal.

Finally, as a result of this stable core operating performance and efficient balance sheet management, we finished the quarter with debt-to-adjusted EBITDA of 5.17x.

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

Thanks, Tim, and good morning.

We are pleased with our operating results for the second quarter as well as the success of our efforts to further improve our balance sheet and drive operating efficiencies across the Welltower platform.

The strong year-to-date performance of our seniors housing business, which has resulted from strong rate growth, focused asset management and a rebound in our U.K. business, gives us the confidence to announce the increase in our same-store NOI guidance for the year to 2.25% to 3%.

We are broadcasting to you this morning from Welltower's offices in Beverly Hills, California.

When you walk the streets here and see scores of for lease signs over the windows of high-end shop space, you cannot help but be reminded of the disruptive impact e-commerce has had on traditional retail real estate.

There are clearly disrupted forces at play in healthcare as well, but Welltower's real estate portfolio stands to benefit from this disruption.

As health care delivery moves from a high-cost acute care hospital-centric model to smaller, more efficient disease management sites of care connected to: ambulatory, post-acute, seniors housing, memory care and home, our current real estate assets become even more consequential and valuable.

Further, this phenomenon calls for a new class of real estate to be developed.

Welltower has uniquely positioned itself at the table with the leading providers, payers, distributors, data and technology companies that are transforming health care, so that we can deliver a next-generation class of real estate.

This potentially represents the largest capital deployment opportunity we have seen in decades.

I'll come back with some closing remarks, but it is now my pleasure to hand the mic over to my colleague, Mercedes Kerr.

Thank you, Tom, and good morning, everyone.

The Welltower team completed $292 million of investments in the second quarter of 2017, as we remain disciplined in our approach to the market.

This amount consisted of $110 million of acquisitions at a blended yield of 6.5%, $162 million of development funding with projected yields of 7.8% and $20 million in loans with a blended rate of 6.6%.

Our investments continue to be made with existing operators such as Legend Senior Living, Sagora Senior Living and Ascension Health.

So we were also pleased to welcome a new partner to the Welltower family, the University of California Irvine Health through the acquisition of an outpatient medical office building less than a mile from the highly-regarded Hoag Hospital in Newport Beach, California.

This acquisition advances our stated strategy to increase our participation with the academic medical center community.

In addition, we put 10 high-quality development properties into service during the quarter, representing total invested capital of $273 million and a blended stabilized yield of 7.6%.

These properties operated by well-known Welltower partners, such as Sunrise Senior Living, Brandywine Living and Kisco, will enhance our operating results for years to come.

We remain committed to working with our partners to fund development and acquire best-in-class properties on a more off-market basis across our countries of operations.

This relationship-focused strategy delivers its highest value during market periods like the one we are currently experiencing, where widely auctioned portfolios generally don't seem to offer our shareholders acceptable rates of returns.

We completed $160 million of dispositions in the quarter.

This activity consisted of $43 million of loan payoffs at an average yield of 8.9% and $117 million portfolio sale of 11 skilled nursing facilities with a yield of 9.3% and unlevered IRR of 11.4% and a gain of $42 million.

To provide some context for our investment decision-making process and how we behave across cycles, I would like to share a glimpse into our multidisciplined 8-member investment committee and how it works.

When we scrutinize underwriting results, we focus as much on going in cash yields as we do on the long-term growth potential of an investment opportunity and the CapEx required to sustain that cash flow growth.

This results in a total return or unlevered IRR-driven investment process.

As we review new investments and dispositions, the committee also focuses on diversification of operators, asset type and geography, which we believe enhances the stability of our portfolio returns.

The rating agencies seem to agree as evidenced by our recent upgrades after the reduction in our concentration in certain operators.

Our often used RIDEA structure gives us opportunities to optimize operating performance more directly.

You have heard us speak about our initiatives around this before.

We have invested in the people, systems and infrastructure to actively manage our RIDEA portfolio, and we have Welltower boots on the ground enhancing our shareholders' interest in the markets where we have strong concentrations such as London, Toronto and Beverly Hills.

Our market leadership position ensures we see the vast majority of what is marketed, and we consider each opportunity carefully relative to our cost of capital and standard lease real estate metrics such as replacement costs.

In periods where we don't see a positive balance between the market's pricing of risk and return, we may report modest market investment volumes at least when measured by Welltower's own history.

We may also monetize selected investments opportunistically during these periods to crystallize value for our shareholders.

And importantly, we always seek to drive value from our exiting portfolio.

We feel confident that our approach and discipline through the cycles will prove to be the correct strategy to drive superior shareholder value in an enduring way.

Our off-market investment pipeline for the balance of the year is promising, and we will fit in -- we'll fit the criteria that I have described.

We look forward to sharing our news on progress.

I will now turn the call over to Shankh Mitra for a discussion on portfolio performance.

Thank you, Mercedes, and good morning, everyone.

I will now review our quarterly operating results with an emphasis on our outpatient medical and senior housing business.

We are pleased with our operating results and are increasing our same-store NOI for the overall portfolio to 2.25% to 3%, which we believe is appropriate given the strength of our SHO portfolio.

I'll remind you that we do not update our outlook on segment level NOI growth through the year, but we are tracking towards the top half of our original 1.5% to 3% guidance for the SHO portfolio.

Our overall same-store NOI increased 3% for the year.

Our triple net portfolio continued its reliable performance.

Our senior housing triple net segment grew 3%, and long-term for secured portfolio grew 3.1%.

Our outpatient medical portfolio reported 1.6% NOI growth in Q2, which was below our expectations.

New leasing is ahead of our expectation for the year, but we had some later-than-expected rent commencement due to delays in tenant fit-outs and few move-outs in the quarter that are shifting economics to later quarters.

Despite this quarter's performance, our expectation for the outpatient medical segment remain unchanged for the year.

We remain confident in our team's ability to execute and expect growth to bounce back in the second half.

Our senior housing operating portfolio is the highlight of this quarter with meaningful outperformance relative to our budget.

Occupancy trends were lower than expected, however, those were significantly offset by our pricing power, which resulted in strong rent growth 2.9% (sic) [3.9%] year-over-year and better expense trend 1.7% year-over-year.

Our operating partners are constantly optimizing rate and occupancy equation to maximize revenue at this point in the cycle.

We're very proud that they have achieved this growth while keeping expenses in check.

While labor costs remained elevated, they continue to moderate from the highs as our partners strike the right balance between excellent care delivery and efficient staffing model.

Our group purchasing power and other cost initiatives being realized through expense savings in food, professional services, insurance, utilities and incentive management fees.

Geographically, the U.S. and Canada were neck and neck from a performance perspective contributing solid growth, 2.6% and 2.8%, respectively with U.K. being the clear winner as we continue to benefit from our U.K. team's significant asset-management efforts in last 18 months.

We continue to expect U.K. outperformance for quarters to come.

Overall, growth was driven by our core markets, which bounced back as we hoped and discussed last call.

SoCal, NoCal, Toronto, London, Seattle were significant drivers.

Following up on our conversation from last call, the New York MSA has started to demonstrate better results, but New England continuous to be challenging though it is improving.

With respect to different product types, we have observed significant outperformance of both revenue and NOI in assisted living versus independent living this quarter.

Much has been written about the supply stats in AL versus IL, which is appropriate and relevant.

But as long-term owners of Class A real estate, we have observed greatest thickness of demand in AL versus IL when new competition opens around a given asset.

We would also like to point out the recent absorption metrics for both product types as reported by NIC.

For Map 31 and Map 99, respectively absorption for AL was 4.3% and 4.2% for the quarter and 2% and 1.9% for IL for the quarter.

This absorption numbers are more than 2x of current 85 population growth, signifying a greater acceptance of this need-based products and validating the value proposition that community-based care provides to our residents versus the alternative or receiving care at home.

This above population demand growth indicates the true long-term growth potential of our asset class, as that growth in acceptance of the asset class augments the acceleration of 85 population growth in the decades ahead.

Overall, we are very pleased with our operating performance of our portfolio.

We allocate capital across geographies, product types and operating partners, so that you, as our shareholder, can enjoy sector-leading inflation plus growth through the cycle.

We believe our results so far this year is proving out that strategy.

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

Scott?

Great.

Thanks, Shankh, and good morning, everyone.

From a financial perspective, I think the highlight of the first half of the year has been our ability to maintain our capital allocation discipline.

Most importantly, it has allowed us to take advantage of the current market dynamics to both sell assets and raise equity opportunistically to further enhance our balance sheet.

As a result, we're uniquely positioned to capitalize on high-quality investment opportunities as soon as they become available in the future.

I'll start my comments today by emphasizing 3 financial highlights from the second quarter: first, our strong total portfolio same-store NOI growth of 3% and $292 million in growth investments allowed us to report a solid normalized FFO result of $1.06 per share; second, we utilized disposition proceeds and the equity capital raised to further strengthen our credit metrics and reduce our undepreciated book leverage to 35% at quarter end; and third, we ended June with over $3 billion in liquidity, providing considerable financial flexibility as we move into the latter half of the year.

My more detailed remarks will begin with some perspective on our second quarter financial results and dividends.

Our second quarter financial results did exceed our expectations, generating normalized FFO of $1.06 per share versus $1.15 per share last year.

Year-over-year earnings were supported by our solid same-store cash NOI growth, and $2.8 billion of growth investments completed over the last 12 months but declined as expected due to the $3.7 billion of dispositions completed over the same period.

Importantly, these dispositions and equity raised allowed us to significantly lower our leverage by over 4 full percentage points over the last 12 months.

Our G&A came in at $32.6 million for the second quarter.

This represents a significant 18% year-over-year reduction from $39.9 million in 2Q '16, as we continue to enhance our operational efficiency.

Based on our strong first half of the year, our G&A forecast is now tracking closer to the $130 million to $132 million range for the full year versus our initial guidance of $135 million.

We recognized significant gains on asset sales of $42.2 million during the quarter.

This was partially offset by $13.6 million in impairments on several seniors housing properties currently held-for-sale and some minor charges related to secure debt extinguishments and loss on derivatives during the quarter.

And in terms of dividends, we will pay our 185th consecutive quarterly cash dividend on August 21 of $0.87 per share, representing a current dividend yield of 4.8%.

Turning now to our liquidity picture and balance sheet.

During the quarter, we generated $160 million in proceeds from dispositions through $117 million of property sales and $43 million in loan payoffs, which included an additional $28 million of Genesis loan repayments.

In terms of equity, we generated over $190 million in net proceeds under our ATM program during the quarter.

We did use the majority of our net proceeds to reduce our line of credit borrowings by $137 million and to extinguish $182 million of secured debt at a blended rate of 4.4% during the quarter, while we issued or assumed $172 million of secured debt at a blended rate of 3.1%.

So as a result, we sit today with over $3 billion in current liquidity based on $2.6 billion of credit line availability and $442 million in cash on balance sheet.

Our balance sheet continued to strengthen during the second quarter.

As of June 30, our net debt to undepreciated book capitalization declined another 80 basis points on a sequential basis to 35% while net debt to enterprise value declined 160 basis points to 27.2%.

As Tim said, our net debt to adjusted EBITDA improved to 5.17x, while our adjusted interest and fixed charge coverage for the quarter increased to 4.5x and 3.7x, respectively.

Our secured debt declined by 10 basis points to 9.5% of total assets at quarter end.

So I conclude my comments today with a brief update on the key assumptions driving our 2017 guidance.

I think in short, there are relatively few changes this quarter in terms of same-store NOI growth, the team said based on the solid performance across the portfolio, but really highlighted by the seniors housing operating portfolio in particular.

We're increasing our blended growth forecast 2.25% to 3% from the previous 2% to 3% range for the full year.

And consistent with our normal practice, there are no acquisitions other than those completed during the first half of the year and our 2017 guidance.

Our guidance does include an additional $173 million of development funding on projects that are currently underway and an additional $143 million in development conversions at a blended projected stabilized yield of 8.8%.

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 $1.3 billion completed year-to-date and $700 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, I think we're in an excellent capital position with an even stronger balance sheet and over $3 billion of current liquidity, providing us with significant financial flexibility to execute upon our plans as we move into the second half of the year.

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

Thanks, Scott.

So since the start of our call, the sun has now come up on the West Coast, and we can see outside our windows which are just 1 block from Rodeo Drive, many of those empty Beverly Hills retail storefronts I mentioned at the top of the call.

So like you, we wonder about the future demand for this premium retail space.

Our street retail space here on Bedford and Brighton Way, formally leased to traditional clothing and jewelry retailers, is about to be occupied by a next-generation pharmacy with infusion therapy capabilities and a surgery center walk-in clinic for one of California's largest academic medical centers.

This major health system realized they need to have a more consumer-friendly, retail-facing ambulatory care strategy.

They chose Beverly Hills, and they chose to be at the Welltower.

Yes, the 4 buildings we own in Beverly Hills are branded Welltower, and people here talk about seeing their doctors at the Welltower.

In one of the world's most sought-after retail destinations, the new anchor is Welltower.

This is an important indicator of where health care delivery is headed, and we cannot be more excited about the opportunities before us.

So now, Dorothy, please open up the lines for questions.

(Operator Instructions) Your first question comes from the line of Michael Mueller with JPMorgan.

Quick question on development.

It looks like you have about $1.6 billion of unstabilized developments.

And out of curiosity, how long is the average property staying in that bucket?

And are there any changes in terms of the trends of staying in there longer or shorter period of time?

Traditionally, our development projects might take roughly 18 months to complete, and we traditionally also expect anywhere between 18 and 24 months for lease-up, and I'm talking now about seniors housing.

As you probably know, in outpatient medical when we develop properties by and large, they are 75% or more preleased before we even commence construction.

So I hope that gives you some rough estimates of how we see our fill-up and so on.

Okay.

But nothing is really changing where it's taking longer or shorter period of time, it's fairly static.

Is that right?

No.

No, nothing has changed in those kind of -- those are very standard assumptions that seem to prove out consistently.

Got it.

Okay.

And one other question.

In terms of shop same-store occupancy ended the quarter at about 89.5%.

Can you talk a little bit about where you see that going through the balance of the year and even into 2018, if you could?

So without being too specific, Michael, as you know there is a seasonality in the business, right?

So if you're purely thinking sequentially, we would expect some occupancy improvement through the year, as I mentioned before.

That occupancy trends have been lower than what we expected.

And to be honest with you, we're not trying to optimize or maximize occupancy.

We're trying to maximize revenue.

So we will see -- as you sort of think about, the revenue maximization, we'll see what market gives us, but we are constantly playing occupancy versus rate gain and we'll see what market gives us.

But definitely, we will see sequentially as we've seen in the business slight improvement sequentially through the end of the year.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

I guess I just wanted to talk -- I know you guys have been very active with overseas partners and investors and the Chinese in particular.

And I'm just wondering if you've seen any change in terms of their appetite given all of the, I guess, rhetoric that's come out of the country about deploying capital overseas.

That's a great question, Steve.

If you think about from the 2 or 3 categories of overseas investors, we have seen a material increase in the larger companies or larger insurance companies with very large balance sheets and overseas operations, including the sovereign wealth funds, very, very active.

I've never seen them this active before.

But if you look at sort of the smaller insurance companies and asset managers, the capital control might have some effect on the other.

Private equity, the most of the money is in Hong Kong.

There has been no change, not an increase or decrease.

That capital seems to be pretty steady and interested in U.S. health care assets.

Okay.

And then, I guess, maybe a question for Scott Estes, just on sort of the issuing of equity.

Obviously, the balance sheet was in great shape before you tapped the ATM.

How are you guys thinking about the usage of the ATM raising equity capital at these levels?

And what is the kind of the primary drivers -- make sure it's FFO-accretive, it has to be NAV-accretive.

I mean, how do you guys think about that?

And what should we think about going forward?

Sure.

I think NAV accretion is a good benchmark.

But you think about it, I would say we were just opportunistic really.

If you think about it, we did complete about $300 million of growth investments this quarter.

We have a pretty active development pipeline.

We have about $540 million in projects underway and there's some more coming.

So again, I think in small amounts if it's NAV-accretive.

That's how we've chosen to play the ATM.

Your next question comes from the line of Chad Vanacore with Stifel.

So just thinking about the senior housing occupancy trends which have been getting lower.

Are you seeing anything that indicates a change in that trend on the horizon, any acceleration or deceleration?

No, Chad.

As I said, sequentially, we'd expect some improvement.

But year-over-year, I think you will still see a decrease.

Obviously, I'm talking about U.S. We're having -- we're seeing significant improvement in occupancy in U.K. So we're trying to maximize revenue, not occupancy.

I cannot emphasize on that enough, that how we are thinking about this.

Yes.

Chad, from a leading indicator standpoint, I think you will have to look at capital availability for construction in seniors housing.

The supply you're seeing today has a lot to do with capital availability that started back in like late 2013, '14, '15.

That is driven the supply that's really coming on -- that started coming on the market last year.

Anecdotally, we've been told that capital availability for new construction in senior housing is back to 2009 levels, which means that that's minimal.

So if you think about that with the aging curve, the 85-plus cohorts starting to accelerate in just about 2.5 years from now.

You would have expected that the supply of capital would be today to meet that demand.

So -- but that's not the case.

So we think, actually, they'll be -- there potentially is a supply-demand imbalance when the -- really when the demographics when start really propelling our business.

All right.

So capital availability getting tighter?

It's tighter.

And absorption is pretty good in the industry, so what's...

[indiscernable]

Yes.

We're pretty encouraged.

Yes, I would say that it's very market-specific.

We keep harping on the fact that we have -- and I'll use Mercedes' words, curated our portfolio.

It's concentrated in high barrier to entry, more resilient regions of the U.S., Canada and the U.K. And that is what is behind our performance.

There, you can't paint the U.S. or any of the other markets with 1 brush.

So we are now -- we also have said we were seeing spikes in labor costs in the major markets earlier then you were seeing in smaller secondary markets.

So in a way, we always believed we were seeing the spikes last year, into early this year.

Now we're starting to see that moderate.

It's hard to predict that, but I think the major markets that Welltower is focused in are behaved differently and again that's what's driving our performance.

All right.

So now I'm going to ask a granular question, and hopefully, either you or Mercedes can answer, which is if you're talking about the MSAs that you're in, are you seeing any difference in what NIC MAP is recording in those MSAs and then your performance in those MSAs?

Chad, if you don't mind me answering that question.

We definitely, as you know, that we have very significant concentration in great submarkets.

So when you think about NIC MAP, you think mostly MSA.

We do not think of our business in MSA terms, we think about our business in submarket terms, even more granular than that.

And we are in a very wealthy locations in the submarkets.

Obviously, they're significantly -- their reports are significantly higher than average MSA.

So we're seeing outperformance, but I would not just attribute that to very difference of sort of MSA position.

It's just a submarket and wealth location is driving that, but we're definitely seeing very significant demand growth, and many, many locations that I mentioned, SoCal, NoCal, Seattle and everything else.

From another -- the one place that we are not seeing that, I think I mentioned that, is New England, is under -- there's some supply in New England.

So the MSA is under pressure.

We're seeing that too.

And New York MSA is the same thing.

It's just that New York MSA is starting to bounce back in our portfolio.

We are hoping to see that New England follow very soon.

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

Shankh, just following up on the RIDEA side, would you be able to give us what the change in occupancy was across regions?

Yes.

If you look at -- we usually don't do that, but I want you to think about our business as a diversified portfolio where we allocate capital, not just U.S. or U.K. or Canada.

Our focus on 1 particular country because it's doing well and not so doing well.

But just for this quarter, I'll give you the numbers.

The occupancy in the U.S. is down 180 basis points this quarter.

Canada is down 120 basis points, and U.K. is up 180 basis points.

Okay.

And then just sticking to RIDEA, you obviously -- you had great cost control.

Can you maybe just elaborate a bit on that, like what were the exact drivers?

I saw in the other bucket that was down about 6%.

Could you just give us some color for what that was?

Yes.

So I think I tried to mention that in my prepared remarks.

That bucket, if you look at consist of, a, first is we saw very significant cost control success in raw foods and utilities.

But moving to the other buckets, we are seeing some very significant improvement in worker's comp, insurance, marketing, professional services and also our incentive management fees.

So we have seen that pretty much across the board, we're now enjoying the fruits of our efforts for group purchasing and others that we have been talking about for years to come, and very significant and focused asset-management efforts in these areas.

So across the board, there's not 1 line item that I can talk about that is driving that, but we're seeing it across the board.

No, I was just going say, no, it is actually very strong performance across the board, so congrats on that.

Thank you.

Vik, this is a business that really requires the real estate partner to be very hands-on.

And I know Mercedes mentioned this in her remarks.

I mean, we have over a number of years made significant investments on the asset-management side here.

Our U.K. turnaround has a lot to do with the people that work in our U.K. office.

We have 10 people in London.

They are very hands-on.

There were a number of management challenges that were negatively affecting the performance of our U.K. portfolio.

Those issues would not have been addressed had Welltower -- Welltower's team really been on the ground there and making sure that the right initiatives were being implemented, so we could turn that performance around.

And that is the same -- that's the same story across Canada and the U.S. This is a roll up the sleeves real estate business.

And we feel that because of that investment we've made, we take some level of risk out of this business.

Yes, Tom.

And I want to include that our operators, I think, over time as some of these initiatives are starting to play through, have really grown more and more comfortable with our ability to collaborate in some of these projects that Tom was describing.

And so it's an evolution that we feel very comfortable about.

And I just want to make sure that I mentioned that our operating partners naturally are an important component of it.

No, that makes sense.

And Tom, I have to ask you since you talked about Beverly Hills and Welltower.

When you changed the name of the company, did you think people would go to -- will be going to the Welltower store?

I hoped they would.

They would think about it.

But it's very interesting here.

At some point, we'll bring some analysts to see what we have here.

What we're doing is, in a sense, creating a wellness district through the real estate that we own here in Beverly Hills.

And now the retail, which again if you came here 5 years ago, you would have seen typical Beverly Hills retail in medical office buildings.

What's happening is, we are starting to drive a new class of retail here.

And people even on the -- I think on -- in the mall and shopping center sectors have been talking about how they want to drive health care to the traditional up mall or street or strip center.

We're actually doing it here.

And I -- the fact is, I was very surprised how quickly people have grabbed onto the Welltower name.

But it's interesting -- again, looking out our windows, I see Neiman Marcus and Saks Fifth Avenue on top of buildings.

And across the street are 4 buildings that say Welltower.

So people are starting to recognize this name.

And what we hope it stands for is quality real estate.

That if you are in health care, you are a health care user, being in a building that says Welltower stands for quality and stability.

Your next question comes from the line of Tayo Okusanya with Jefferies.

I have 2 questions.

First of all, the shop portfolio.

Could you talk specifically about the outperformance in the U.K., like what are market kind of fundamentals doing in the U.K. that's making it kind of have this consistent outperformance versus the other markets?

Yes.

Hi, there.

It's John Goodey from International team.

It's a good question.

I think -- good morning.

The market dynamics are relatively benign right now, is the only stance.

So we have, in the U.K., a rough balance between supply and demand in the sector that we care about, which is the first in business class cabin equivalent of the industry.

The big difference, I think, is the partnership, as Mercedes said, that we have with our operating partner, Sunrise, that run the Sunrise in great well-branded buildings there.

So we've been working diligently with them for the last 18 months on how to maximize the performance of those buildings in the complex of the markets.

And Shankh used the term (inaudible) neighborhood.

It's a neighborhood-related business.

And it's been just real diligence hard work, hard work on cost, hard work on positioning those buildings on the revenue side as well and seeking to maximize the overall revenue from the buildings, not just occupancy or rate growth.

So because of the superior locations, and you'll see it in some of our supplemental disclosure, our ability to drive the revenue-occupied room in those buildings has been exceptional this year.

It was good last year.

It's been very good this year.

And that's just aligned with our overall occupancy growth of nearly 2 percentage points across the portfolio.

So it's just all those hard work elements seems to be coming together now, and it's just driving performance.

And it's durable.

It's not a 1-quarter change, at least not for now until the basis of performance changes.

We feel good about H2 as well.

Got you.

But how do you end up measuring kind of oncoming supply versus in the competitive kind of property set versus your assets?

Yes.

So unfortunately, we don't have a NIC database in the U.K. But as you can imagine, we have our ears to the ground on performance all across the portfolio.

And a lot of that is also around what our competitors are doing and what's coming on the supply.

And there are local clusters where there is strong supply growth, because there's strong demand growth as well.

So we have -- this is not -- Welltower is not operating in a vacuum.

We're not the only people doing what we do in the U.K. I think we do it best, but we are in balance in many of the markets.

And what we're seeking to do?

And I think I've said this before, we own a small fraction of the facility set in the U.K., but a very high fraction of the quality that Welltower likes.

So what we're doing is selecting meaningful acquisitions, small time, but also quite a lot of construction.

And that takes hard work, like it does in Manhattan and other high-wealth areas.

This is where the operator relationships and the Welltower capabilities come together to build buildings in areas of London.

For example, they're really hard to access.

They take multiple years just to find a site and then to construct it.

So it's -- that's the competitive advantage, is finding these high barrier to entry markets with real resilience to entry as well, and then working hard to plant the Welltower flag there.

And Tayo, I will just add one more point to that.

If you think about our U.K. business is primarily London-focused, London is probably the toughest market to build that we operate in, maybe other than west side of LA.

So it's significantly harder to build in London than in New York MSA, for example.

So you are seeing the U.K., you just -- I want -- I don't want you to think just as U.K. results.

This is more Greater London-centric results.

Got you.

That's helpful.

Then one more from me, Shankh.

The MOB portfolio, I mean you did talk about a turnaround in performance in the back half of '17.

What specifically are you looking at that, that's going to -- are you looking at, that's going to end up resulting in an acceleration in same-store NOI growth for the MOB portfolio?

Yes.

I mean, as I said, if you think about the quarter, obviously, we're not so pleased with 1.6% NOI growth.

But it's just a question of timing.

If you think about every quarter, it's a snapshot of 90 days, right?

We -- as long-term owner of real estate, we don't run our business for a 90 days increment.

So leasing, as I said, has been pretty strong and running ahead of our expectations, but there has been a couple of unexpected move-outs as well as it's taking longer for tenant fit-outs and other things, for the tenant to come into the space and commence the rent.

So it's just a question of timing.

You will see the economics have shifted from quarter-to-quarter.

We don't really focus too much on that.

But given from here, you will see the acceleration, of course.

Yes.

Tayo, the MOB portfolio has been unbelievably consistent for years and years and years.

The occupancy has been 94.5% to 95%, and we very consistently generated the 2% to 2.5% growth.

So that's what we continue to expect in short-term here.

Your next question comes from the line of John Kim with BMO Capital.

I think with your balance sheets strong as it's been for a while and getting strong in the near term, I was wondering if you could elaborate on what you're seeing in terms of investment opportunities as far as the investment type and the timing?

So we have been working for some time.

I think I mentioned earlier that we are reticent to participate in widely auctioned sort of processes where there seems to be some exuberance and a little bit of a frothy market, not enough growth for what we think our shareholders deserve.

And so what we have been working on instead is this off market, more proprietary type of a pipeline.

We are actually very encouraged by what we see.

Some of it we will take longer to materialize because the relationships, for example, with top health systems, ones that we are building from scratch, and -- but we have some real momentum in that case.

And then there is the -- what we sometimes have referred to as our shadow pipeline, the ongoing business that we get from our own existing operating platform from our partners, which is very consistent, again largely off-market, so that we're not knocking ourselves out, trying to compete in the market with others.

And so there is a very solid pipeline ahead.

It is -- in some cases, I think we'll be able to talk about it yet this year.

In some cases, these are larger opportunities, like the ones that Tom was describing in the disruption of health care real estate.

That may take just a little longer to materialize, but will be significant.

Mercedes, you mentioned increasing your exposure to academic medical centers.

Is life sciences an asset class that you would consider entering back in again?

It's not something that we're considering at this time.

It is such a unique and different asset class.

Even though I know sometimes it's considered in the health care category, I suppose I understand why.

But from our perspective, with respect to how it is underwritten, how it is managed, it's just such a different animal from what we are focused on right now.

Your next question comes from the line of Smedes Rose with Citi.

Tom, I wanted to follow up.

You mentioned your sort of Welltower health district in Beverly Hills.

And I was wondering, could that kind of strategy of creating consumer-friendly health care facilities for consumers -- is that something you could formally see targeting other U.S. markets to create a similar kind of concentrated health care facilities?

Definitely, Smedes.

We think that it's really important that health care and the concept of wellness, which are to be -- really come to Mainstreet, and that's what we are seeing here in Beverly Hills.

And we clearly think there are other markets for that.

Our concept of wellness is finally rising to a priority, not only for major health systems, but also for the health care industry at large.

And if you think about the only institutionalized wellness model that we know of exists in the senior housing industry.

So when I -- and when I say wellness, I mean nutrition and hydration and physical movement, social cognitive engagement, safety.

These are the elements that we deliver to the 85-plus cohort.

But the fact is, other populations need that wellness model as well.

So we think that there's an opportunity in partnership with health systems, in partnership with major health insurers to start to take wellness and bring it to Mainstreet, bring it to the consumer.

So we are very excited about that.

Okay.

And I just wanted to ask one more on your shop year-over-year comparisons.

I know there are some footnotes here, but I was just wondering if you could provide a little more color around the adjustment to last year's numbers, which helped 2.6% growth for the U.S. portfolio.

Could you just walk through that a little bit more?

Sure, Smedes.

This is Scott.

It sounds like you're just referencing the normalizing adjustments and again I was talking for everyone's benefit.

We have a strict policy that we review with the audit committee every quarter and these are just really unusual items.

So actually, a lot of the things that happened in 2016 were benefits that we didn't take like we received some insurance reimbursements, proceeds of almost $8 million we've accessed that out of our last year's numbers.

There are some minor adjustments for like our worker's comp and the payroll accrual that we didn't take the benefit of.

So they're all listed there in the footnotes on Page 24.

And if you wanted to spend more time, we'd be happy to do it, but it's pretty straightforward.

They were not a lot of adjustments in this quarter.

There were more things that we did and were in our supplemented 2Q '16.

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

So the NIC data suggests that the underconstruction pipeline continues to wane, and HCN's portfolio looks relatively good on this basis.

And it seems to have shown up a little bit in your sequential performance year-over-year at least.

So do you believe that show fundamentals have bottomed here?

And how are we setting up into 2018?

Jordan, it's too early to comment on 2018, but we definitely think that the show fundamentals for the year have definitely bottomed last quarter.

So I can tell you that overall, I mean, I will not -- if you think about the numbers as we said, starts at peak in Q3, Q4 of '16, and they're coming down.

If you think about average, it takes us over 18 months to 24 months impact.

I still think we have few quarters to go to a top operating environment.

We're very pleased that kind of performance we're generating even in that environment.

But I would not be saying that the supply impact has bottomed just yet.

But we hope to see it in next, call it, 12 months.

It's very hard to predict, but definitely -- we know a time horizon.

We're very excited that it's in near-term.

Okay.

And then on the -- this is complete non sequitur, but on the acquisition of the on-campus MOB in the quarter, I guess, in Austin, Ascension Health asset, it looks like a pretty good state -- little -- pretty good yield.

I'm wondering, one, if that's a stabilized number?

And two -- or if it's the going in number?

And two, if you see significant incremental one-off opportunities for outpatient medical purchases?

Yes.

That's actually -- there is -- it's a multi-tenanted building but there is a gap master lease, if you will, that supports master lease from the health system in place that is for now bridging frankly a very small difference between what the actual occupancy or the real occupancy of the building is and what we would consider stabilized.

So we're -- we have a support mechanism in place, but soon to probably be of no need, because it will have the space occupied with the final users.

So that's for the property that you're asking about in Texas, the Ascension property.

And you are right, we are -- so Ascension is a system with which we have a large relationship.

We have actually many of those.

And to the extent that we can be helpful to them even on a one-off basis, given the existing relationship, the nature of existing contract, et cetera, it just makes it efficient for us to, from time to time, do a single property, a single development or acquisition, whereas sometimes we might look -- try to move the needle faster.

But this is a more efficient.

Like you said, it's a good yield.

There is no reason why we wouldn't be doing a follow-on business here.

And so we really enjoy that.

That's part of the shadow pipeline that I was referring to earlier.

Okay.

So that seller provided the master lease?

No, it's actually the health system.

That's in -- and like I said, it's a really small amount of space.

I'm talking about maybe 5,000 square feet or something like that.

I think that largely, that space is now occupied.

I don't have the number in front of me, but if you would like more details about that, we can speak separately.

Your next question comes from the line of Vincent Chao with Deutsche Bank.

Shankh, maybe just a question for you back to the optimization of the show same-store revenue growth 2.3% in the quarter.

I was just curious how close you think you are to optimal at this point?

Or do you think that we could see occupancy dip maybe even more below where we're used to seeing most real estate have pricing power?

Yes.

So I think -- thanks for your question, Vin.

If you think about -- again, if we have to -- see, this is not something we do sitting in front of a computer and deciding what the optimized revenue occupancy or rate should be.

You have to see what the market gives you, right?

You have to see what the demand is.

And you are doing this on a daily basis.

Obviously, our operators are very sophisticated.

They understand the market, and they're doing it on a daily basis.

This is a very asset management intensive business, right?

So you have to see that.

I can tell you where things are going sitting today.

I'll tell you how things are played out.

Sequentially, we should expect some occupancy improvement.

And as I said that year-over-year, the occupancy is down.

Can we see that it will down more?

We absolutely can see.

We're trying to maximize revenue, not occupancy.

And -- but sequentially, we'll probably see some improvement from here from an occupancy perspective.

And it's too early to talk about '18.

Okay.

And then maybe a question on the pipeline, Mercedes.

It sounds like there's a pretty healthy pipeline there, but investment volumes, as you said, are low by historical standards for yourselves.

What do you think is the delta, the pipeline is strong, is it just seller expectations are too high at this point?

Not in -- I hope that not in the pipeline that I'm talking about.

This off-market pipeline, we think, is going to bring adequate returns.

I would almost -- as we sit around our table and talk among ourselves, we sometimes think that if we continue to remain disciplined like I described before, we are likely to do much better even with a lower investment volume than others will, who might be putting more dollars to work, but with a lot -- less torque if you will.

So we actually do feel like this proprietary pipeline that we are describing.

It's going to not only show an opportunity for us to put money to work, but then for us to put money to work really above average.

We know you all have to get on another call in 2 minutes, we just have time for 1 other question, we'll be happy to take.

Those of you who are in the queue who did not get your question answered, please reach out to us today.

So final question.

Your final question comes from the line of Michael Carroll with RBC Capital Markets.

But Shankh, could you go real quick.

I think last quarter, you talked about you had 3 terms sheets out for the Genesis portfolio, at least portions of the Genesis portfolio.

Can you give us an update on that?

Yes.

We are still negotiating a lot of these term sheets, and we see very significant demand, as I said, from overseas as well as domestic sources.

It's too early to comment.

You know these things obviously take a long time.

As we have told you last year that we have a steady hand on the wheel here, and we will continue to execute better.

As you know, unfortunately, real estate transaction takes longer than 90 days period to get done, but we have a lot of interest from a lot of investors, including those 3.

Okay, great.

And then just last question.

On the remaining portfolios, is there many -- is there much differences between what you have left versus what you sold in the prior quarters?

Yes, absolutely.

So if you think about our crown jewel in our Genesis portfolio, that's our PowerBack asset.

We have retained all those assets -- most of those assets in the remaining portfolio.

So we're going to wrap up here, and please reach out to us with any questions you have.

Thank you.

Thank you for dialing into the Welltower earnings conference call.

We appreciate your participation, and ask that you disconnect.