Welltower Inc (WELL) 2017 Q4 法說會逐字稿

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

My name is Nicole and I will 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 Investment.

Please go ahead, sir.

Thank you, Nicole.

Good morning, everyone, and thank you for joining us today to discuss Welltower's fourth quarter 2017 result and outlook for 2018.

Following my brief introduction, you'll hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business & Relationship Management; Shankh Mitra, SVP, Investments; and John Goodey, EVP, CFO.

Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements in the meaning of the Private 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 projected results will be attained.

Factors and risk 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, 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, I want to highlight a few significant points regarding our 2017 results.

One, we realized full year total portfolio average same-store growth of 2.7%, at the high end of our original guidance, driven again by the consistent outperformance of our senior housing operating portfolio.

Two, we continue to opportunistically take advantage of favorable capital markets through disposing of $1.5 billion of noncore assets and raising over $600 million through our DRIP and ATM programs at an average stock price just above $71 per share.

And three, we have redeployed that capital in a very disciplined manner, extinguishing $1.4 billion of high coupon debt and preferred securities and recycling $1.2 billion into high-quality acquisitions and developments, finishing the year with a well-capitalized balance sheet and a 94.2% private pay mix.

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

Thanks, Tim.

In the most challenging environment we have seen for REITs in a number of years, I am pleased to report Q4 2017 financial results, our outlook for 2018 and some important strategic initiatives that all speak to our optimism about the power of the Welltower platform.

We run this business to be the most effective, global capital and operating partner to the broad health care delivery landscape including seniors housing and have not been afraid to make bold decisions regarding people, capital deployment, asset mix and operator alignment to ensure our ability to drive our strategy and deliver shareholder value for years to come.

Here are some highlights.

Despite headlines of oversupply in flu, our seniors housing operating portfolio continued to deliver solid growth throughout 2017 and the outlook for 2018 remains positive.

We delivered on our strategy of tying major health systems to our business platform, as is evidenced by our Mission Viejo JV with Providence St.

Joseph's, the third-largest health system in the U.S.; and Simon Properties, the world's most prominent mall owner.

We announced $1.2 billion of gross investments for 2017, and by month-end, we will have closed on $0.5 billion of accretive new investments in 2018.

We negotiated a successful restructuring of Genesis HealthCare that has significantly enhanced the credit quality and sustainability of the Genesis business model.

I'm sure you are all waiting to hear more about that from our friend, Shankh.

Now Mercedes Kerr will give you an overview of new operator relationships, new relationship investments in Q4 and her view on how we expect to grow in 2018.

Mercedes?

Thank you, Tom.

As detailed in our earnings release, we completed $334 million of growth investments in the fourth quarter of 2017 in the form of acquisitions, development funding and loans, at a combined average yield of 6.6%.

For the whole year of 2017, our investments total $1.2 billion and had a combined average yield of 6.9%.

Consistent with prior periods, more than 2/3 of our investments in the fourth quarter were completed on an off-market basis and 80% of the transactions completed in the fourth quarter of 2017 were repeat business.

Our focus on off-market, relationship-based transactions is possible because we have purposely assembled a roster of best-in-class partners with scalable business models.

Our unique operator alignment features incentivize us to grow together, so our partners often help us design off-market opportunities themselves.

This was during the fourth quarter when we expanded our relationships with new perspective, Sagora Senior Living, Florida Medical Clinic and Ascension as well as our recently announced acquisition with Sunrise Senior Living, where we're buying 4 rental CCRC communities for $368 million at an above market yield of 7%.

These project returns are especially noteworthy given the highly desirable markets where these properties are located, such as Washington D.C. and Miami.

I should add a note of congratulations to Chris Winkle and the rest of the team at Sunrise Senior Living, which was recently ranked the highest in customer satisfaction amongst senior living communities in J.D. Powers' first-ever senior living satisfaction survey.

It's great to see them recognized for their hard work.

Every year, we selectively identify new operators and health care providers to bring into our fold.

In the fourth quarter, we were proud to introduce Summit Medical Group to our portfolio.

This is the oldest and largest physician-owned multispecialty medical practice in New Jersey.

We also announced a new collaboration with Mission Hospital, part of the Providence St.

Joseph's health system, a formidable and progressive health care provider.

Our project together at The Shops at Mission Viejo, speaks to the evolution of delivery of care models and how Welltower and premier health systems can partner to bring state-of-the-art infrastructure solutions to the market.

Since the start of 2018, we also expanded our relationship with Cogir Management Corporation by bringing them into our partnership pool.

We're extremely pleased to have created a joint venture vehicle with this important next-generation Canadian operator and look forward to working with Mathieu Duguay and his team in this new construct.

I want to take a moment to speak about the flu, which can impact seniors housing revenues and expenses through a voluntary and mandatory admission stamp, higher-than-average move outs due to illness or death and also with higher costs any time that caregivers are temporarily replaced by agency labor when they're sick.

We monitor these trends closely and we know of individual cases where flu has impacted our communities.

This year's flu season has been the subject of headlines due to its severity and widespread nature.

In its most recent report, the CDC is calculating a 130% increase thus far this season in outpatient visits related to influenza-related illnesses for individuals 65 and over in the United States when compared last year and a 92% increase when compared to the difficult 2014/2015 period.

The season is not over, so it's hard for us to quantify the precise impact of the flu at this time.

Having said this, we're satisfied with the work our operating partners are doing to care for their residents and staff and also to minimize the financial impact that flu may have on our communities.

Finally, a quick comment about Brookdale Senior Living's announcement this morning.

We hope that their decision to end their strategic review process, which has been the focus of much of management's attention for a protracted period, will now allow them to get back to the basics.

Like we have said before, we're satisfied with our portfolio holdings with Brookdale and we will continue to collaborate with them going forward, just as we have before.

With that, I will turn the call over to Shankh Mitra.

Thank you, Mercedes, and good morning, everyone.

I'll review our quarterly operating results, reflect on our full year 2017 operating performance relative to our initial expectations and provide you with our preliminary assessment of 2018 operating environment with a specific focus on our SHO portfolio.

Our same-store portfolio grew 2.1% in fourth quarter, bringing the total average same-store NOI growth to 2.7% for 2017, towards the high end of our initial expectation of 2% to 3%.

Our senior housing operating portfolio grew 1.5% in fourth quarter, which was below our expectation for the quarter.

Late quarter occupancy decline due to flu, contributed to this performance.

This has tempered our outlook for 2018.

Despite that, we believe we'll have a year of positive same-store NOI growth in that business, representing a significant relative outperformance due to our best-in-class assets and affluent market run by premier operators.

Specifically, our 2018 outlook for SHO portfolio is flat to 1.5%.

As you know, actual results will be driven by a combination of rate growth, occupancy and expense growth.

Low 3% rate growth, 50 to 100 basis points of occupancy decline and a 3% to 4% expense growth builds to our same-store NOI growth expectation.

We set our initial expectation of 1.5% to 3% growth in SHO portfolio for 2017 and achieved 2.5%.

However, this was done through a different combination of rate, occupancies and expense growth than we thought.

Rates were better, occupancy was lower, so were expenses.

In addition to our operator-focused relationship strategy, our heavy investment in data and analytics capabilities are starting to bear fruit.

We have outperformed in the upcycle and we'll continue to outperform in the more mature part of the cycle.

We're confident that this superior relative and absolute performance over the entire cycle, every year, on a consistent basis will ultimately result in a significant differentiation in cost of capital at some point in time.

Another important update for the quarter is regarding Genesis.

As we started this journey, our focus was to maximize shareholders' value on our total capital committed to Genesis.

Since we last spoke to you in November, we are continued to be encouraged by the relative stabilization of cash flow in our retained portfolio.

Additionally, important changes have taken place in this relationship.

As Genesis announced last night, they have come to a restructuring agreement in which all of their credit parties have come together to recap Genesis' balance sheet and put the company in a position of strength.

A key element of this restructuring is an injection of $555 million of fresh capital into the company by MidCap Financial Trust, a wholly owned subsidiary of Apollo Global Management, a strong vote of confidence in Genesis and the industry.

These recapitalization is a critical state in Genesis' previously announced broader restructuring effort, which is expected to result in $80 million to $100 million of annual fixed share of improvement through the combined effort of the multiple credit parties.

Our main contribution to this restructuring is a reduction of $35 million of annual cash rent, as I mentioned in the last call.

However, we also negotiated a 5-year lease extension and an option to reset the rent after 5 years to recoup that $35 million.

Genesis also committed to pay back $105 million of loans by April 1.

So, so far, we have sold $1.9 billion of Genesis' loans and real estate with a realized IRR of 10.3%, and with today's restructuring, Genesis is now 5.2% of in-place NOI with a pro forma trailing 1.34x of EBITDAR and 1.73x EBITDARM coverage at the property level with a corporate guarantee that is significantly stronger.

As with any asset in our portfolio, we retained a complete optionality with this high-quality PowerBack heavy portfolio in the future.

Since the $400 million Genesis purchase option expired in March of last year, we have communicating -- we have been communicating multiple possible path of action while negotiating with a public tenant that has been in clear need of a recap for last 2 years, whilst aim to keep our investors attuned to all possible outcomes while maintaining a public negotiation posture that ensured our optionality in order to maximize our shareholder value.

We feel strongly that our approach with Genesis has substantially enhanced our flexibility in providing the highest value outcome for our shareholders while minimizing reliance on any one operator.

Today, we have materially spend in corporate credit, standing behind a well-covered lease, which is in the stark contrast of what you're seeing in the industry.

A recapitalized Genesis, refocused on its core market is poised to win market share.

More broadly, in context of shrinking supply and a pending demographic surge, demand for skilled nursing beds is projected to surpass inventory by '24 to '25.

While the $35 million income loss is not ideal, though necessary in the short-term, we will participate in this positive trend through our rent reset provision offering in year 5 of the restructured master lease.

We'd like to thank you, our shareholders, for supporting us in this transformational journey.

As dispassionate capital allocators, we change when facts change.

It is important to summarize that we're noticing the following changes: Operating performance is stabilizing in our retained Genesis portfolio; two, a material credit improvement as a result of Genesis recap has happened; three, we see a tectonic shift in the sentiment of smart investors toward the post-acute space.

All publicly announced deals, you have noticed that Humana was TPG in case of Kindred and now MidCap forward in case of Genesis.

We believe you'll see more; number four, we preserve full optionality going forward.

With that, I'll pass it over to John Goodey.

Thank you, Shankh, and good morning, everyone.

It's my pleasure to provide you with the financial highlights of our fourth quarter and full year 2017 and our guidance for 2018.

Despite the challenging U.S. senior housing market conditions you have heard about from others, our portfolio delivered solid financial results for Q4 and in 2017 overall and we are positive on the prospects for 2018.

Once again, our superior portfolio, excellent operator relationships as well as the strength of the Welltower platform to allocate capital and asset manage have enabled us to outperform our peers.

In addition, it is noteworthy that our 2017 financial results are being delivered in a year where we've also continued to refine our portfolio and lower our financial leverage.

In 2017, we generated $1.5 billion of dispositions with a gain of $344 million realized and a realized IRR of 11.3% and further improved our balance sheet to be one of the lowest levered in the REIT industry.

These actions place us in a strong financial position to pursue our strategic plan in 2018 and beyond.

As detailed by Shankh, our SHO portfolio grew by 1.5% in Q4 2017, with seniors housing triple net and long term, post-acute both growing at 2.8% and outpatient medical growing at 2.0%.

Overall, same-store NOI growth was 2.1% in the quarter and averaged 2.7% for 2017 overall.

This quarter's growth was augmented with in-quarter acquisitions and joint ventures of $223 million along with $142 million of divestments in loan payoffs, they've enabled us to report a normalized Q4 2017 FFO result of $1.02 per share.

Overall, we delivered $4.21 of normalized FFO per share for 2017 in total.

In addition to this quarter's joint ventures and acquisitions, we've completed $42 million of developments, bringing full year deliveries across all operating segments to $548 million at a stabilized yield of approximately 7.3%.

We're truly excited by the future earnings growth potential of these new state-of-the-art buildings.

In Q4, we normalized a number of items including allowance for $63 million relating to a Genesis loan restructuring.

We also normalized $58 million of noncontrolling interests and unconsolidated equity impairments, the majority relating to write-downs of certain unconsolidated JV investments.

In addition, we also normalized $60 million of other expenses and transaction costs, $41 million of which related to the donation of our Toledo headquarters and $18 million of which is a mark-to-market impairment against our Genesis public shareholding.

Additionally, we normalized $17 million related to a deferred tax and valuation allowances including the impact of the Tax Cuts and Jobs Act.

Welltower continues to focus on our own corporate operational efficiency by further optimizing systems, processes, human capital and physical infrastructure.

Our G&A for the quarter was $28.4 million, a 13.5% reduction over Q4 2016.

For 2017, overall, we reduced our G&A by nearly 21% compared to the year prior.

We continued to implement further initiatives to improve our operations and efficiency in 2018.

Our balance sheet remains in great shape and leads our peer group.

We will continue to maintain balance sheet strength and financial flexibility.

During the fourth quarter, we extinguished $137 million of secured debt, bringing our full year retirement of debts and preferred securities to $1.4 billion at a blended average rate of 5.4%.

We ended 2017 with cash and cash equivalents of $244 million and a $2.3 billion of available borrowing capacity under our line of credit.

Our leverage metrics remain at or near historically low levels with net debt to adjusted EBITDA of 5.4x with a net debt to undepreciated book capitalization ratio of 36.3%.

And our adjusted fixed charge cover ratio remains strong at 3.4x.

Based on announced 2018 acquisitions and planned dispositions for the year, we see year-end 2018 leverage being in the low 5x net debt to EBITDA area.

Our debt maturity profile remains well controlled and we will opportunistically access bond markets in 2018 to further manage our profile.

As we previously noted to you, our deep liquidity position affords us significant flexibility to pursue value-enhancing acquisitions, development opportunities and to reinvest in our portfolio to drive growth.

I will conclude my remarks with our outlook for 2018.

As noted in our earnings release, we have adjusted our overall same-store NOI and long-term, post-acute growth outlooks for the impact of the $35 million Genesis master lease restructuring.

Starting with same-store NOI, we expect average blended same-store NOI growth of approximately 1% to 2% in 2018, which is comprised of the following components: Senior housing operating, approximately 0 to 1.5%; senior housing triple net, approximately 2.5% to 3%; long-term, post-acute care, approximately 2% to 2.5%; and outpatient medical, approximately 2% to 2.5%.

We anticipate funding developments of approximately $297 million in 2018 relating to projects underway as of December 30 -- 31, 2017, and we expect development conversions during 2018 of approximately $413 million, which are currently expected to generate stabilized yields of approximately 8%.

We've incorporated approximately USD 1.3 billion of disposition proceeds at a blended yield of 7.2% in our 2018 guidance.

This includes approximately $553 million of proceeds from dispositions previously expected to close in 2017 and $741 million of incremental proceeds from other potential loan payoffs from property sales.

We also replaced the 2017 Genesis disposition placeholder of $400 million in proceeds with $225 million of expected dispositions and loan paydowns this year.

This comprises of $120 million of noncore property sales representing approximately 10% of our portfolio which are in advanced negotiation stages and $105 million of expected loan payoffs tied to the Genesis restructuring recently announced.

Moving to G&A expenses.

We anticipate 2018 general and administrative expenses of approximately $130 million in 2018.

This level remains significantly below our G&A spend for 2015 and 2016.

Based on the above, the aforementioned Genesis restructuring and other items discussed, we anticipate 2018 normalized FFO attributable to common stockholders to be in a range of $3.95 to $4.05 per diluted share with normalized net income in a range of $2.38 to $2.48 per diluted share.

As usual, earnings guidance excludes any additional acquisitions beyond those which have been announced but does include our planned dispositions.

I'm pleased to announce the Board of Directors approved a 2018 quarterly cash dividend at the maintained rate of $0.87 per share, being $3.48 per share annually.

As such, on February 21, 2018, Welltower paid its 187th consecutive quarterly cash dividend.

The current annual dividend represents a yield of approximately 6.4%.

Based on our overall outlook for 2018, stronger liquidity position and our high-quality portfolio poised for growth through operational gains, accretive acquisitions and development pipeline delivery, we remain comfortable with our dividend at this level.

With that, I'll hand back to Tom for his closing comments.

Tom?

Thanks, John.

When I became CEO almost 4 years ago, it was the tail end of a rapid asset accumulation period.

I knew that was not sustainable, nor was asset accumulation a viable long-term business strategy.

Since then, we have taken advantage of strong asset pricing, and by year-end 2018, we will have sold nearly $5 billion in real estate at an IRR of 10.5%.

While radically improving the overall asset quality, we also massively delivered the balance sheet.

You now know about the plan for Genesis.

Three years ago, we made the strategic decision not to abandon the post-acute sector.

This is a critical component of the health care delivery continuum and we see a role for Welltower in reinventing how this sector operates and is capitalized.

From here, Genesis has a stronger capital structure and a refocused business strategy on its core markets to effectively participate in value-based care.

It feels like we are coming to the end of our asset-optimization journey, and I believe both sides of the balance sheet are now positioned for growth.

I want to thank the shareholders who have stood by us through this process.

We benefit from a business construct based on an operating platform that is focused on delivering real estate settings that promote wellness and provide health care at lower costs than acute-care hospitals.

This platform is built upon our unique alignment with the leading senior housing companies operating in major urban markets in the U.S., Canada and the U.K. and health systems like Providence St.

Joseph's.

I'm also now proud to say that I work with the smartest, hardest-working, most diverse and highest-integrity team in this business.

This team is now completely aligned around the objective of driving long-term shareholder value.

On February 28, we shed our old stock symbol for one that speaks to this strategy: W E L L. Now WELL will bring wellness to the attention of the global financial markets as well as Welltower.

Now Nicole, open up the line for questions, please.

(Operator Instructions) Your first question comes from the line of Vikram Malhotra with Morgan Stanley.

Shankh or maybe Tom, just sort of stepping back on your last call, you talked about sort of providing a rent cut and simultaneously doing an asset sale, the size, obviously, was not known, but at least I took it as being a fairly large chunk of the portfolio.

You've sort of walked through some of the components of maybe what's changed.

But maybe if you can elaborate what has changed between then and now, and more specifically on the outlook, given what you're seeing right now, should we expect potentially more dilution from any further asset sales on Genesis?

So Vikram, I'll tell you that a few things have changed, right?

If you think about Genesis, management has done an extraordinary job of bringing all its credit parties together, just not real estate owners but all the credit parties together to get to a point of a sustainable capital structure.

That's extremely important, which we thought they're making progress but they have really surprised us on the positive side of (inaudible) $555 million of fresh capital into the business.

So that's something financially puts the company in a position of strength going forward.

But more importantly, for our retained portfolio, as you can see, our portfolio now is obviously -- is a much smaller portfolio that is much more focused.

It's PowerBack heavy, and we see, after a long time, as I mentioned, and stabilization of cash flow in that portfolio.

So that's -- one of the other things have changed.

So operating performance has changed, credit quality has changed.

Now as you can imagine, that as capital allocators, we look at every asset on our portfolio is on sale, right?

So we're looking at this asset quality that we own.

We know the coverage.

We know what the operating -- really, the operating outlook for those buildings, and we're thinking at this strategy, is it a buy, is it a hold, is it a sell.

And I don't know the answer to that question.

Like every asset, the Genesis assets are also for sale at the right price.

We retain complete flexibility and optionality going forward.

I'm not going to tell you that we'll not sell further.

I'm not also going to tell you those asset will not be sold.

So that's sort of the messaging as we change when information change, when facts change.

And Genesis, today, is drastically a different operator than it was 90 days ago.

And Vik, let me add to that, that we always look to enhance optionality in terms of how we manage this business.

And the strongest statement I can make to you is, because Genesis is a dramatically stronger credit based on this restructuring going forward, it means that Welltower is a stronger credit going forward.

Got it.

And just to clarify on that.

I think you alluded to the fact that you're now in a position to sort of grow cash flow, grow earnings.

Would it be safe to say that, assuming there are not too many changes from here on, and you keep things intact, would we -- would you be in a position to actually grow cash flow AFFO and see very little dilution, if any, from Genesis?

We hope so, Vik.

That's how we run the business.

Vik, as Tom said, like we feel like we're at the -- towards the end of the journey.

Whether we are in the seventh inning or eighth inning, I can't tell you that, but we're definitely, as everybody else, seems to be starting their journey will feel like we're at the very end of that journey.

Every -- we always have to look to asset manage our portfolio.

There'll always be something for sale, but we feel confident with our balance sheet and with, hopefully, where we are in the cycle, that we'll be able to deploy capital as you have heard from Mercedes and Tom.

So I'll emphasize the fact that we made a number of tough decisions when the wind was at our back.

We've never felt the wind less at our back than we do right now.

And I'm very glad, and you should be glad we did take those tough decisions when we did them because this is not the time to be starting that.

So I want to emphasize, we do believe we're kind of toward the tail end of this journey, and we are -- that is what speaks to the optimism that you heard from everyone here on this call today about the future.

We are very optimistic about the role that Welltower will play in fixing health care delivery.

And if you redline certain sectors of the health care space, or at least the nonhospital health care space, you reduce your ability to participate in this change which we believe will drive significant shareholder value in the future.

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

A couple of questions.

So on the same-store NOI growth, if you would go in and I guess not adjust it for the $35 million rent reduction, what's the post-acute same-store number and the overall same-store growth?

So that was the question, was if we've adjusted -- not adjusted if it was just as per the January 1 rent coverage, right?

I'll describe that number for you.

And I think it's -- at the midpoint, it's minus 12.25%, I believe.

Yes.

And for the total portfolio, Mike, it's positive 0.5% to negative 0.5%, the midpoint of flat year-over-year.

Got it.

Okay.

For overall, okay.

And then you talked about the pro forma Genesis coverages.

What were the coverages beforehand?

So how much improvement is there with all the transactions that have been announced?

If you look at our coverage, we'd give you a range and if you look at the range and the sub, it will see that it was close to 1. And it's a very important question, Mike, because if you think about the history of rent cut in this sort of rent-ry profile in this sector, you will see that majority of the times, the landlords have taken the tenant back to sort of 1 coverage, did not give them flexibility to invest in their business, did not give them flexibility to actually grow their business, and that's why they went back to where they started, right?

So we absolutely did not want to do that.

As Tom said, we're never afraid to take bold decisions.

This was needed and this happened.

So we feel like, going forward, that you can feel a very significant assurance that we have taken -- we didn't kick the can down the road.

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

So today's news doesn't sound exactly like you're recommitting to the skilled nursing business or to Genesis per se, but it does sound, at the margin, that you're willing to hold today rather than be a seller at an excessive discount.

I'm wondering, one, if that's a fair characterization.

And then, two, would you be willing to invest incrementally in Genesis beyond the incremental term loan piece you're lending?

John, if you think about a triple net lease, it's a credit, right?

So with our credit significantly improved at the property level from a coverage perspective, as you also said, the most important thing is the EBITDARM coverage of about 1.7.

And remember, management fee is subordinate to the rent payment, right?

And it is guaranteed by the corporate, so at every level you look at it, the 3 level of stratification, it's materially improved.

So I want to reemphasize that point.

And I also want to reemphasize the point, the rent reset that I talked about.

So if you look at the demographics and negative supply, if you believe in the demographics, and you believe that nothing is going to change from a utilization perspective, there's going to be a crisscross of demand and supply, in a not-too-distant future and we will be able to recoup that $35 million of rent, as I said.

Will we invest in Genesis going forward?

We are, already are.

If you look at, we have a PowerBack development, that's in progress, and we believe in that model, so if there are other opportunities to invest in that PowerBack hub and spoke model that Genesis drives its business from, we'll be happy to do that.

That's no change from what we have done.

Jordan, you've heard me say consistently that we are not going to abandon this sector.

Why do I say that?

Because when you interact with the leaders of health care in this country, which are the CEOs that run the major regional health systems, they all say they need a viable post-acute care option.

The problems that the REIT sector has been dealing with were capital structures that were not sustainable given some of the changes that occurred in reimbursement.

And as Shankh said, and I say a lot, you can continue to kick the can down the road until you just keep kicking the can at the wall and it keeps coming back at you.

What was announced last night and what we have -- are talking to you about this morning is a fix that needed to happen years ago, but the industry kicked the can down the road.

We have fixed the Genesis capital structure.

It's not just Welltower.

It was every one of their capital partners and we brought in a new capital partner.

I think that says something about the future of Genesis.

So we are in the business of maintaining and enhancing optionality, optionality for where we deploy capital in the best interest of our shareholders.

And so nothing has changed.

You've heard me say this consistently, and I took a lot of stones and arrows for saying it, but I think our strategy will prove out to have been in the best interest of our shareholders.

Yes.

No, that's consistent, I think, with the messaging you've relayed over time.

So my follow-up is really on Genesis again.

I don't know if this is for John, but specifically as it relates to guidance.

What is the total loan forgiveness that you've either recognized in 4Q and that you expect to recognize in '18 of the $400-plus-million or so you've got to Genesis -- you had the Genesis?

And then what's the embedded total interest income that's in the $4 FFO guide?

So Jordan, I'll answer the first part of the question.

The answer is 0. We have not forgiven loans.

We have reserved against those loans, so there is a significant difference in that.

And two, hidden in your question is, there's something that I saw a lot of confusion about.

If you go back and look at our financials of our last 2 quarters and see what we've said, our entire Genesis loan book was in payment in kind.

We gave them as they were doing the whole restructuring for last few months.

We did not go through a hard cash part PIK payment today.

We went from a complete PIK to a part cash, part PIK payment today.

With that, I'll pass it over to John.

Yes.

And so I think on the pennies front, Tim's going to answer for you on the actual pennies recognized in FFO from Genesis loans.

Yes.

And so part of that answer is, and this is important to note, just on a few notes this morning, we are just recognizing cash interest on Genesis in 2018.

So in our FFO guidance this morning, it's just the cash.

And as noted in both Genesis' release and that's prior to this, there was no -- these loans ticked from 11/15 to November 15 of last year through February 15 of this year.

So if you look at the full year of 2018, important to note, from January 1 to February 15, it was all PIK, and we did not recognize that through FFO.

So that's roughly $0.01 of -- on a cash basis of income that if you went full year, full recognition we would have recognized.

And then for the rest of the year, they're -- the PIK component represents about $0.05 if you're not recognizing through FFO.

What we are recognizing is about $20 million of interest income in our 2018 numbers.

Okay.

So on the forgiveness piece, the -- I guess I'm confused because I'm reading the piece about the bridge loans, the $275 million they have -- you want them to repay no less -- (inaudible) continued to make progress to pay no less than $105 million of obligations.

What happens to the $170 million?

So the -- as part of the announced restructuring for both Genesis and ourselves this morning, is the commitment based upon contingencies of having a financing partner step up in that $105 million refinancing.

The remaining piece is assumed to be outstanding for the rest of 2018.

So that $170 million will be current cash paying.

It is current cash paying right now because after February 15, it went back to cash paying.

And the assumption our model is that $105 million is paid back around midyear and the remaining piece of that real estate loan and the term loan remain outstanding for all of 2018 in our cash paying.

And I think I'll just reiterate, Jordan, what Shankh said.

We have not forgiven them loans we have taken a reserve against -- because some of this is collateralized that we have to test the collateral that's underneath the orders as us can imagine make us do that, and that was the reserve that we've had to take relates to the collateral, not to a write-down or the loan that Genesis will, therefore, be forgiven.

So there's a big difference as Shankh said, we've not forgiven the $60 million write-down.

Your next question comes from the line of Daniel Bernstein with Capital One Securities.

I just want to make sure I understand that the 5.2% exposure to Genesis, is that including further loan paydowns or just where it is today?

The 5.2% is -- so the way that we calculate our in-place NOI is off of just our property NOIs.

So if you think about as of the end of the fourth quarter what's currently in our supplement pre-rent cut is a 7% exposure to Genesis.

The 5.2% is pro forma for the rent cut.

So it's just that.

As well as the asset sales.

Yes.

As well as the held for sale assets as of 12/31.

That 5.2% is essentially our pro forma NOI exposure to Genesis after rent cut and after sales.

Okay.

I appreciate that.

That's helpful.

And then is the change in view on Genesis so much the improvement of credit but also the improvements at the property level?

I think you mentioned that a little bit in your comments.

So I just want to understand a little bit better what's changing at the property level or operational level at Genesis that makes you a lot more confident in the company there in your assets?

So if you look at -- again, I want to emphasize the fact in our retained portfolio, there's a portfolio that, obviously, we're selling now that is transitioning out of Genesis as an operator.

Genesis is -- has sold and in process of selling lot of noncore states.

So it is important to understand they are refocusing on their core market.

Core market's why Genesis always has done very well.

In our retained portfolio, which is, as I said, it's very PowerBack heavy, we're seeing cash flow stabilization after a long time.

And we believe that if you think about how this plays out, that we will be able to grow cash flow in the future.

So that's one of the points, and credit is obviously very self-explanatory.

If you can look at the coverage, and you look at the EBITDA coverage and EBITDARM coverage, that's significantly improved above market coverage.

And the corporate guarantee is extremely important here, which is today, with the Genesis is -- if you look at the Genesis' debt to EBITDA, it got almost cut in half, that's definitely an improvement in the credit.

So that's why we feel optimistic.

Again, as Tom said, we retain all of optionality, as in any part of our portfolio.

Okay.

And just real quickly on the demographics, I mean, that you talked about and skilled nursing, it sounds like it would apply to seniors housing.

Last quarter, you talked about maybe looking for opportunities to more -- loosen more triple net leases to perhaps RIDEA, is that still something you're thinking about working on?

This is Mercedes.

We look at that, obviously, just selectively with our operators.

I mean, there's a lot of things that we might take into consideration.

As you know, we like to invest in RIDEA when we think that there is a lot more opportunity for upside than downside risk.

And so yes, from time to time, there might be a portfolio that we're seasoning and in a triple net structure that might actually become candidate for a conversion to a partnership.

And we don't have anything to talk about right now, but that's something that we obviously look at all the time.

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

My first question is around your same-store NOI outlook for the SHO portfolio.

You guys do have an outlook that is positive.

Your peers have outlooks that are generously negative.

I'm just curious if we just talk a little bit about why your outlook is much more bullish than theirs?

Yes.

So Tayo, I mean, it's a very good question.

I would like you to look at our performance relative to our peers every year for last 7-plus years that we have been in the RIDEA business.

That will give you the answer, but it's really -- it speaks to the quality of the portfolio and the operators and micro markets.

So we have invested -- sort of if you think about how this industry has evolved, people are mostly triple net investors, right?

Even when you're investing in credit.

Investing in RIDEA is investing in real estate equity.

That requires a different type of skill set, and we're the ones who have invested in technology, in people, in data analytics and asset management.

So you are seeing the impact of that pretty much every year, probably every quarter, and that outperformance should not be surprising, but we're -- obviously, as I said, that if you look at over a period of time we hope that will give us a better cost of capital.

That hasn't happened yet, but hopefully, people will accept that we have a much better quality portfolio.

And I do have to add that it also has a lot to do with the operators that we have partnered with.

So it's a combination of great locations, a high barrier to entry markets, asset quality, but it's also, of course, having to do with the operators that are in the trenches and that are also willing to collaborate with us and the initiatives that we are trying to source for their benefit and for the benefit of the residents who live with them.

A lot of it comes from not becoming a passive owner of senior housing real estate.

We see ourselves truly as an operating partner and that drives better results.

Got you.

That's helpful.

And then just to confirm with Genesis, it's as a result of the recapitalization plan that the loans are now cash paying rather than the status they were at back in November, correct?

Correct.

Your next question comes from the line of Rich Anderson with Mizuho Securities.

The -- if I could step back to November, December time frame, could you describe what was going on there?

Did you kind of have some sort of clairvoyant moment where, heck, we better keep these Genesis assets, and that's what rolled up to where we are today?

Or did -- was it -- you kind of backed into the situation where you weren't getting the pricing you wanted, you weren't feeling like the rent cut and asset sales were going to protect your debt investments, and so the market worked against you.

And now you're kind of like, woo, I'm glad we didn't sell at that time because of -- well, everything you're saying on this call.

I'm curious -- the chain of events that got you to this point.

Was it luck or skill?

Probably a combination of both.

If you look at what happened is that we always said that you think about what we're doing, right?

Effectively, Genesis management, as I said, pulled off an out of indiscernible] restructuring with all of its credit parties that you never know that will actually be able to get to the finish point, right?

Finish line.

Second, we absolutely did not think they will be able to get fresh capital of the size that they did from the entity that they did, so there's one point.

You are always interested, Rich, as an observer of -- a longtime observer of the industry, how the tree leaves are changing.

I would like you to see what happened in that time frame with Kindred and Humana, Welsh, Carson.

You could see today what happened with, obviously, fresh injection of capital.

I can't talk about a lot of other things because they're nonpublic in nature but things that are happening in the industry.

So going back to -- very specifically to your question, do we have the ability to do a transaction?

Absolutely.

Did you get the price that we wanted?

Absolutely.

Is that counterparty still around for us to do a deal?

The answer is absolutely.

So the question is, today, as we are thinking about it, at 1, 3, 4 coverage, with a company that is -- leverage has been cut in half, right?

From a 7 to 3, is this group of assets we have called a part of the portfolio, as you heard from John, right?

The 10% of the portfolio, is there -- at that price is this a buy, sell or hold?

That's what we think about for every asset class.

I share the enthusiasm of the market participants have about 4.5 cap asset classes that grows 2%.

But think about -- at the end of the day, we are here as a capital allocator to make money.

Despite all the noise around Genesis, our unlevered IRR is double-digit.

The math that is mentioned in low 4%, mid-4%, at a cap rate going in with a 2% growth with a 12% to 15% CapEx, you'll never even get to 7%.

We're here to make money for our shareholders.

And every time we are making a decision as a group of assets to see, is it a buy, hold or sell?

That's what we did.

Okay.

Follow-up question is, essentially Welltower shareholders are paying for this Genesis lifeline.

And I'm not saying that tongue-in-cheek, clearly, the fortunes of your tenants accrue to the REIT, so it is what it is.

You did what you had to do.

But going forward, you kind of get into this risky thing where we don't want Genesis, we do want Genesis, we don't want Genesis.

So if you were -- ultimately were to sell more, it kind of changes the narrative.

So is there some risk that you kind of put yourself into a corner and almost have to commit going forward?

Or you don't feel that way?

That is precisely what we did.

Tom said every call that we're not getting out of the post-acute business, right?

Triple net lease is a credit commitment, right?

We're happy to make that commitment if we get the right price.

Investing in real estate is all about basics.

So if we get the right price, we'll sell, if we don't get the right price, we think this is something that our shareholders can enjoy, their cash flow growth will do it, but we absolutely believe it is derisked not only from the position of coverage but also escalators are down, right?

From 2.9% to 2%.

That should be appropriate for the business in the footprint where they are, so we have never flip-flop should we sell Genesis, not sell Genesis.

We're looking at all of our assets and thinking, is this a buy, sell or hold at the price that the market is willing to pay?

We actively manage our business.

And like any business, things change and we have to be able to be flexible to do what's in the best interest of the business, which is ultimately in the best interest of the shareholder.

The public markets were screaming at us to have taken a different approach with Genesis.

I think we took the right approach.

You may want to debate that with us and we're happy to debate that.

But I think we took -- we did the responsible thing for Genesis and for our shareholders, and I think that will prove out versus other roads we could've gone down.

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

Tom, I wanted to dive a little bit on your comments on the post-acute space.

What is your outlook on the reimbursement changes?

Where do you believe we are in this transition?

And are the major shifts from the post-acute care space now behind us?

I think it's very difficult to predict what will happen in Washington.

The only thing I can say is that you've seen the current administration look for ways to take some pressure off the post-acute care space with respect to litigation.

So I think that we take some comfort in the fact that there is a recognition that we have to drive individuals into lower-cost settings.

If the government continued to try and put the skilled nursing business because of their reimbursement programs, then we would have a much bigger problem in this country because people would be stuck in very expensive acute care hospital beds.

I think there is a changing view in Washington and we hope that a rational thinking will prevail here.

We need to drive people into lower-cost settings.

The health care industry, the hospitals are still trying to deliver value-based health care in fee-for-service-built real estate.

That doesn't work.

We will -- our economy will hemorrhage if we continue to think we have to keep hospital beds filled.

We need to drive people to lower-cost settings, and so that is why we have never abandoned the skilled nursing sector.

And it will be bumpy, but we think now with the restructuring of Genesis, we have the right coverage and credit profile to withstand potential choppiness.

And Mike, that's the most important point.

There has been a lot of restructuring change -- I mean, lot of reimbursement changes other than RUGS-IV, none of them have been you huge, right?

They've been small (inaudible) for sure.

But why that has been amplified in the industry is something that I would encourage all of you to think about because of the massive leverage in the system, right?

If you think about what happened 10 years ago, people got really excited about the (inaudible) chase and massively levered all these entities.

And what we have seen this cycle is the unwind of that.

Has there been -- would have been choppiness even if there was equity finance on these deals?

Absolutely, probably would be, but these operators would be in a much stronger position, and that's the key -- is post-acute industry, like any other industry, but post-acute industry is in a very interesting point in its life cycle where it needs to be reimagined and recapitalized in a different way.

Okay.

And I just wanted to clarify you guys' stance on the post-acute space.

When you're saying you're committed to it, does that mean you just want to kind of maintain your exposure to Genesis and maybe if a good deal pops around, you could grow it then?

Are you underwriting new deals?

Are you looking for new investments outside of Genesis?

Or you're just happy with your Genesis exposure right now?

We look to deploy capital to good quality real estate in the right markets with good operators in sustainable structures.

So if all those pieces line up and it's an interesting new post-acute operator for us, we will consider that.

We will consider that if we think it's in the long-term best interest of our business and the long-term best interest of our shareholders.

But no, we will not redline the space because of some confusion about what's happening in the industry that was largely due to bad capital structures.

Certain people made a lot of money when these post-acute care companies found their ways into the hands of REITs, and REITs until RUGS-IV had well-covered real estate, the world changed and what you've seen us do is fix what was a problem that we've been dealing with for years.

We think we've largely addressed that.

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

Turning to Page 11 on your SHO statistics, it looks like CapEx increased this quarter to 34% of NOI versus 22% in the third quarter.

And I'm wondering: a, why that occurred; and b, what is in the other CapEx?

Is that renovations?

Or is that redevelopment CapEx?

So the answer is, quarter-by-quarter, it does vary.

We tend to historically underspend our budgets in the first couple of quarters and overspend relative to the pro formas in the second quarters that come out roughly where we think.

And so I think we do see some reinvestment in portfolios.

I think we've said on a number of calls, part of having a great a balance sheets is we can drive growth out of existing buildings through CapEx.

So as Shankh was saying, how do we look at capital, we also look at existing buildings on the buy, hold, sell mentality for investing more capital.

The capital doesn't come for free, as you're well aware.

So I think we do address capital requests in that way.

And other capital, just -- it is exactly that it is, our other CapEx in those buildings in terms of our -- as I described, our -- I guess our significant reinvestment capital as our best way to described it, I think.

Yes, and plus all the Vintage CapEx in fourth quarter...

CapEx is -- was above all.

So we expect more normalized run rate sort of back towards normal.

Next year, we don't have a substantially different view of CapEx need this coming year than last year because there are number of projects that we want to do to drive growth, but I said again we do that on a sort of ROI-based model.

Okay, so redevelopment CapEx is a separate bucket.

This is more kind of renovation type work?

Both.

Okay.

You referenced Brookdale, the major announcement this morning.

Can you just update us on your relationship with them going forward?

Do you plan to reduce your exposure and sell assets or maintain it and also the rent coverage because I think last quarter, you were mentioning 1.15x.

I'm just wondering if -- what would that be on the outlook.

Yes.

Our portfolio is fairly steady.

So like I said in my comments earlier, we're satisfied with what we're holding.

We are always in conversations together.

And We have a lot of business together, so we feel very close to one another.

So I expect that to continue.

Other than that, I guess I could just -- there isn't anything that is glaring right now.

We, as you know, always have options with respect to our portfolio.

I mean that's one of the real strengths of Welltower is that we have such a diverse and geographically as well as in terms of different kinds of platforms, operator base, and so we always have a lot of alternatives.

We feel always like we have a sort of a may be a head start in that perspective -- from that perspective compared to others.

So nothing here to report right now.

And when do your leases expire with them?

We have a couple of leases, few leases, 3 of them actually that are expiring later this year.

We're not in a notice period with them yet.

We, again, have had conversations with them about extending them.

We have, once again, opportunities to put some properties with other operators.

And considering that the properties are -- these are covering a group of assets, we don't feel like there's any sort of friction that would come of it if we were -- have to move them to somebody else.

Your next question comes from the line of Juan Sanabria with Bank of America.

First question, Vintage.

What was the contribution to same-store NOI in the fourth quarter?

And what's the impact for 2018 guidance?

Answer to your first question is negative 10 basis points in the fourth quarter.

I don't have the '18 guidance with me, but I'll get that to you later.

I'll give you a call.

And this what the drag for fourth quarter is because as I -- and as John said, that we are -- we spend a lot of capital on the renovation projects that are going on in fourth quarter.

So a lot of reading back to commission and the capital deployed as well.

Which was part of our plan.

Let me just add something here, particularly about Vintage because if we're looking at this, we have to -- one of the values of that one portfolio was always kind of our long-term outlook for the strength and the opportunity of having those really select markets, really markets that can be irreplaceable in some cases.

And so just as a -- kind of one of the things -- even though we're working through all of the CapEx and (inaudible) might be out of commission while we're working through all of that, I can tell you that the rate of growth in the Vintage portfolio actually exceeds the average Welltower growth rate, which, as you probably know, exceeds the market average as well.

So the cities themselves are -- they're [almost] kind of holding out hope for and that we think is an important driving decision for that investment.

So it was a benefit in '18 but it was a drag in the fourth quarter?

Why was it a drag in the fourth quarter given the low occupancy starting point?

It's a lot of CapEx, as I said, is being spent on Vintage.

Right now the renovations are going on.

I would not necessarily think it will be a benefit to '18.

It will be drag in a few quarters and benefit in a few quarters, right?

I would be hopeful that Vintage as a run rate starts to help the portfolio growth starting '19.

But as you can see from the CapEx page, that most of the CapEx started to get spent in fourth quarter.

So that's kind of drag into Q1 and Q2, and you'll probably see the impact of that towards the fourth quarter.

Yes.

On the dividend, what are you guys thinking about going forward?

It looks like on your FAD guidance it's in the low to mid-90% payout ratio.

So how should we think about that?

Any risk of a dividend cut at any point if you decide to sell more Genesis assets for whatever reason or other high-yielding assets?

No.

I think, when you -- I mean, so when you look at our FFO payout ratio, we feel comfortable with that.

I think we've done a great job in the last -- we think about it this way, I guess, Juan, which is, dividends are an output, I guess, not an input.

And I think there's components to that, the first component is the quantum of your income stream to pay them and the second is the quality of your income stream.

And obviously, our FFO guidance for this year is down by roughly $0.20 to the midpoint, but the quality of that income stream has gone up very dramatically.

Elements -- so that's refining our portfolio through 2017, elements of taking the rent restructure on Genesis, et cetera.

So we feel very comfortable with the quality of that FFO dividend stream, which gives us comfort around paying the dividend that we've proposed or the board approved going forward.

So we feel very comfortable with that.

The other thing is we got a great deal of balance sheet flexibility.

As you know, we've got pretty much the lowest-levered balance sheet in the sector.

So we have the financial flexibility on the balance sheet side as well.

I'd just amplify that, that in a very long time, based on the quality of the business model here, because of the changes that we've made, the asset quality, the improvement in the balance sheet and the strong cash flow from the decisions we've made to improve the overall quality of this business, the dividend has never been more secure.

Okay.

Just a quick question on Genesis.

Is there ever any discussion with Genesis about that formation with regards to them to tipping in any equity as part of this restructuring?

We talk to formation all the time.

So I'm not going to get into specific conversation about what we might or might not have discussed with formation, but you should assume that as majority owner of Genesis, we're in constant (inaudible) formation.

(Operator Instructions) Your next question comes from the line of Jonathan Hughes with Raymond James.

I don't think I've heard this yet but could you break down your Shop guidance assumptions in terms of occupancy RUG-IV and operating expense growth and then may be how that occupancy comp should trend throughout the year given the strong flu season to start?

Yes.

So I did.

I'll reiterate that for you.

We're expecting a low -- no, we're modeling a low 3% rate growth.

That's -- obviously, we did 4% rent growth in '17, low 3% rate growth, 50 to 100 basis points of occupancy decline and a 3% to 4% expense growth.

But as I said, to give you the occupancy assumptions at the beginning of last year, but we got to the same results, actually better-than-expected results, using a different combination.

So I would not -- if I were you, I would not assume these are all independent variables, right?

And see where we end up, but we feel comfortable they will be in the range probably through a different combination.

The rates could be better, they could be worse, maybe at occupancy, we're thinking down 50 to 100.

It could be worse than that or better than that but expenses could be better.

So there are 3 levers that drive that number.

So that's how I would think about it, not focus on one variable.

And from a -- your other question was about how occupancy will trend.

Obviously, given the flu, you'll see lower occupancy at the beginning of the year, hopefully, which will ramp back into the end of the year.

That's how -- usually, that's how seasonality works in this business anyway.

So you'll probably see them more and more pronounced this year because of flu.

Okay.

And then just one more on Shop.

So with the national average U.S. renter, I guess REVPOR like $4,000 a month and yours is north of $7,000.

As the new product under construction, really even that competitive to your properties?

I mean, I'm assuming most of the new builds are going to price at about 125% of market, so that'd be roughly $5,000 a month.

Just curious as to your views on how serious the new supply threat is to your U.S. Shop assets?

There is absolutely no doubt that the new supply is impacting our performance.

But obviously, it's impacting our performance lot less than the market average and our competitors.

And one of the reasons is what you outlined.

The another one is what Mercedes talked about, is the quality of our operator.

We have the best assets in best submarkets, not only the markets, which are not only difficult to build but also they're premier asset.

Obviously, the quality of care and reputation of those assets in those market matters.

And do we think it's competitive?

Absolutely.

Do we think that we are positioned better than our competition, rest of the market?

Absolutely, yes.

Think about what Mercedes said earlier about Sunrise and J.D. Power.

There were 6 categories.

They ranked #1 in 5 of the 6 and the one they didn't ranked #1 in was price, which means they're probably a little bit more expensive than others, so they didn't get the #1 ranking there.

But that is very significant.

You've never seen J.D. Power, the most respected research house for consumer research, ever rank senior housing operators.

And it's pretty extraordinary that Sunrise was by far the #1 name in the business.

And I would tell you, if you haven't seen that ranking, we'll send it to you because I think it'll be interesting to see where some of the other names have ranked.

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

We appreciate your participation and ask that you disconnect.