Welltower Inc (WELL) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Fourth Quarter 2018 Welltower Earnings Conference Call.

My name is Nicole, and I'll be your operator today.

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

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

Please go ahead, sir.

Thank you, Nicole.

Good morning, everyone.

And thank you for joining us today to discuss Welltower's Fourth Quarter 2018 Results.

Following the Safe Harbor, you will hear prepared remarks from Tom DeRosa, CEO; Shankh Mitra, CIO; and John Goodey, 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 its projected results will be obtained.

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, the company's filings with the SEC.

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

Before I hand the call over to Tom DeRosa, I want to highlight a few significant points regarding our fourth quarter results.

Welltower achieved 1.6% total same-store growth in the quarter.

We are particularly encouraged by the 40 basis points year-over-year occupancy increase in our seniors housing operating portfolio and the sequential coverage increases in both our Triple-Net seniors housing and long-term post-acute portfolios.

Fundamental performance in the quarter was consistent with our expectations, partially offset by delayed timing of investment activity and equity issued to prefund announced acquisitions, resulting in $1.01 per share of normalized funds from operations.

In the fourth quarter, we issued $552 million of equity at a weighted average share price of $68.41, and since the start of the year, we have raised an additional $195 million at $73.97 per share.

With equity raised since our December investor day and 2019 dispositions closed or under contract, we have now fully funded all publicly-announced acquisitions.

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

Tom?

Thanks, Tim.

In our Investor Day on December 4, we took the notable step of announcing 2019 FFO guidance.

Based on our Q4 results and our confidence in our outlook for 2019, I'm pleased to reaffirm that guidance this morning.

Our guidance of $4.10 to $4.25 in normalized FFO per share represents a 4% increase at the midpoint in our guidance range over our 2018 results.

As Tim highlighted, our continued strong operating results in Q4 reflected the positive momentum in our seniors housing business that we've talked about throughout the year.

Most notable in the quarter was the fact that we completed $559 million in acquisitions at a blended yield of 5.6%, nearly 90% of which are medical office buildings associated with investment-grade health systems.

These investments help drive total investment activity to over $4 billion for the year.

Our ability to source accretive investments has continued into 2019, with the announced acquisition of 55 outpatient medical buildings from CNL health care properties for $1.25 billion, further enhancing our ability to deliver growing, high-quality and sustainable cash flow growth.

Given that CNL and the majority of our announced investments will close by midyear, we expect FFO to accelerate in the second half of the year, setting us up well for 2020 and beyond.

In the fourth quarter, we raised $552 million of equity, driving down sequential leverage and pre-funding late quarter and early 2019 investment activity as we continue to manage our business with a focus well beyond the current quarter.

This included a $300 million direct investment by the Qatar Investment Authority, one of the highest-quality and most resilient capital partners in the world.

This is part of a broader investment partnership that was a long time in the making.

We are honored to have entered into this partnership with the QIA, which illustrates their belief in Welltower's unique business model and strategy for driving the future of health care real estate.

Now I'm delighted to pass the mic to Shankh Mitra who will give you a closer look at our operating performance and investment activity.

Shankh?

Thank you, Tom, and good morning, everyone.

I will now review our quarterly operating results and provide additional details on 2 topics: one, operating results and trends; two, recent investment activities.

We are cautiously optimistic about the recent performance of our seniors housing portfolio.

On last quarter's earnings call, I discussed the narrowing of occupancy gap in year-over-year results.

It appears that occupancy has reached an inflection point this quarter, specifically in SHO occupancy increased 40 basis points year-over-year.

Sequentially, fourth quarter over third quarter occupancy and revenue growth has been the best we have seen since Q4 2015.

While one quarter does not make a trend, we are particularly encouraged by the 120 basis points of occupancy increase in our assisted living segment, as the impact of new supply is starting to wane and the demand is beginning to pick up.

We also saw a sequential occupancy increase of 90 basis points in our seniors housing triple-net portfolio, driving coverage up 1 basis point.

Our reported portfolio -- our reported growth rate of 2.2% in SHO is somewhat masked by lower growth in international markets, whereas core U.S. market experienced 2.7% growth.

Expense growth remains elevated, driven by labor.

We continue to look for greater use of technological and analytical solutions such as OnShift, Arena, Smart Winner amongst others to drive greater efficiency in the labor model.

We are beginning to see results.

For example, since implementing Arena, Sunrise has seen a 27% decrease in 90-day employee turnover and 40-day decrease in 20-month employee turnover.

While we're working actively to mitigate labor challenges, the demand side of the equation is starting to look brighter.

While it is true that the explosive growth of the 86-plus population is still a handful of years away, median age, by definition, suggests an equal number of our customers are below that age mark and the population will begin to grow significantly starting later this year and into next year.

We are also gaining confidence in post-acute business.

While it is unlikely to be a V-shaped recovery, it appears that the industry fundamentals are on the mend.

Meanwhile, pricing of skilled nursing assets has materially increased due to the flood of capital deployed in that space.

For example, during the first quarter of this year, we sold 22 Genesis assets that were below market coverage for $252 million at 8.95% yield.

At market coverage and rent, that represents $40 million-plus of value creation.

As you would recall, we bought HCR ManorCare assets only a few months ago at a significantly cheaper price and in a materially better credit structure.

While we keep reading about how skilled nursing facilities should be around 2x EBITDARM coverage, this Genesis transaction highlights the significant gap between theoretical assertions versus how practitioners behave.

This is no different from the seniors housing triple-net coverage rhetoric I described during the last quarterly earnings call.

While Genesis assets -- selling Genesis assets is short-term earnings dilutive to the tune of 2.5 cents per share, we believe our shareholders have achieved significant value and an improved growth profiled for the enterprise going forward.

Roughly 4% of our NOI currently is attributed to Genesis, down 70% from peak and a significant portion of what remains is in PowerBack format.

We continue to invest in the model through purpose-built developments.

PowerBack Piscataway, we just opened 13 months ago, is currently 64% occupied, demonstrating the power of that product.

As we have consistently told you, our investment philosophy is driven by price and total return, not a desire to solve for specific operator or segment exposures.

This brings me to my last point.

Since last quarter's earnings call, we have announced $2.25 billion of acquisitions comprised of $1.5 billion in medical office and $725 million in seniors housing, bringing our total announced or completed medical office transactions to $2 billion over last 6 months.

This has prompted speculation in the research community that Welltower is actively trying to tilt its asset mix towards medical office.

As we have consistently said, we like the medical office business, but at a price.

We are buyers and sellers of almost any asset at a price and implied IRR.

The cap rate at which MOB portfolios have traded during the frenzy of 2017 did not make any economic sense for Welltower shareholders.

We passed on every one of these opportunities and would do so again at those economics.

As cap rates have expanded, we returned to offense and have since executed $2-plus billion of Class A medical office at a blended cap rate of 5.7%, resulting in 7-plus percent IRR.

This diligent approach adds excellent value for our shareholders.

While we feel very bullish about our acquisition pipeline, we will not buy any assets unless the total return make sense, regardless of our current advantageous cost of capital.

We remain disciplined and look for off-market or broken-marketed transactions as sellers increasingly focus on certainty and reputation more than just price in this volatile capital market backdrop.

Increasingly, highly reputable developers and operators are joint venturing with Welltower by recapping their current portfolios and forming mutually beneficial growth plans by leveraging our data analytics platform.

While we remain very selective on opportunities to pounce on, we are delighted to announce that we have locked up a $3-plus billion development and under-construction pipeline across 7 separate relationships in both seniors housing and medical office over last 6 months.

This pipeline is not an obligation, but our option to deploy capital at an attractive return and base this with first look and last look and will create enormous amount of value for our shareholders.

The first project of this pipeline is in the development of 2 Class A trophy medical office building in Midtown Charlotte, with Pappas Properties.

These 2 buildings are 100% leased to Atrium Health for the next 15 years and will be an anchor as we build out this terrific mix-use project with our partner.

On the seniors housing side, we are delighted to inform you that since our last call, we have committed to roughly $725 million of acquisitions at a blended cap rate of 6.6%.

This acquisition has an average age of 4.5 years and will be managed by 3 different operating partners.

Our pipeline remains strong in seniors housing across both existing and new relationships.

Our data analytics capabilities, seniors housing and health system relationships and our team's creativity, reputation and integrity are the main reasons why more and more highly reputable partners are reaching out to us today, while historically, it was primarily us who reached out to them.

We are very proud that we compete on the capabilities and not on cost of capital.

In summary, while the fundamentals of many asset classes and industries are starting to mature, both the internal and external growth prospects of Welltower are accelerating.

We remain disciplined, vigilant and cognizant of the fact that we exist to create value for you, our shareholders, and we feel the prospects have never been better.

With that, I'll pass it on to John Goodey, our CFO.

John?

Thank you, Shankh, and good morning, everyone.

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

As you just heard from my colleagues, Q4 has been a very successful and active quarter for Welltower as has 2018 overall.

Before I proceed with usual commentary, I wanted to highlight 3 points.

One, we are confident in our continued growth in 2019 and reaffirm our 2019 guidance, given at our Investor Day, with growth expected in all our business segments.

Two, our strong proactive and efficient capital -- efficient raising of equity capital in 2018 and in 2019 to date has enabled us to reduce financial leverage and prefund all announced acquisitions.

Three, we are accretively investing $2.1 billion -- sorry, $4.1 billion in 2018, making it one of the most active years in the company's history.

Our overall Q4 same-store NOI growth for Q4 2018 was 1.6% for the quarter and 1.6% for 2018, overall.

This being above the midpoint of our full year guidance.

Seniors housing operating same-store NOI grew by 0.6% in the quarter and by 0.4% in 2018 overall.

As Shankh noted earlier, we're encouraged by another quarter of improved occupancy.

Seniors housing triple-net grew by 4.3% in the quarter and by 3.7% for the year, again, with improved occupancy.

Outpatient medical grew by 1.8% in the quarter and by 2.2% for the year.

Finally, long-term post-acute grew by 1.4% in the quarter and by 2.1% for the year.

We continue to focus on Welltower's operational efficiency, even with significant investments in technology enablement and data science and the hiring of additional, high-quality colleagues to our team, our G&A expenses relative to the size of our portfolio leads the sector.

Overall G&A spend was $31 million per quarter and $126 million for the year.

Today, we are reporting a normalized fourth quarter 2018 FFO result of $1.01 per share and $4.03 per share overall for the year.

These numbers reflect the increased Q4 2018 equity raise total and as in the past, we do not include one-off income items or fees in our normalized numbers.

Last year -- sorry, I apologize, last quarter and 2018 overall, we were very active for Welltower on the balance sheet and capital raising fronts.

We continue to be efficient and proactive raisers of equity capital to fund the growth of our business.

During Q4, including the $300 million strategic investment made by the Qatar Investment Authority, we raised $552 million of gross proceeds from common equity issuance at an average price of $68.41 per share.

This included $129 million raised after our Investor Day in Q4, originally modeled to be in 2019.

Overall, for 2018, we raised $795 million of gross proceeds at an average price of $67.51 per share.

In addition, since 1 January 2019, we've raised $195 million of gross proceeds at an average price of $73.97 per share.

During the year, we issued a total of $1.85 billion of senior unsecured notes at a blended yield of 4.34%, with an average maturity of 13.8 years.

We also closed on a new $3.7 billion unsecured credit facility, with improved pricing across both our line of credit and term loan facility.

Our Q4 2018 closing balance sheet position improved, with $215 million of cash and equivalents from $1.9 billion of capacity under our primary unsecured credit facility.

Our net debt to adjusted annualized EBITDA improved from last quarter, and sit at 5.8x at year end.

In summary, Welltower continues to enjoy excellent access to a plurality of capital sources.

During the fourth quarter, we completed $559 million of acquisitions at a blended yield of 5.6%, the majority being in the outpatient medical segments.

This brought us to a yearly total of $3.4 billion in aggregate across all segments at a blended yield of 7.3%.

Including development funding and other activities, total gross investments for the year were $4.1 billion, making it one of the most active years in the company's history.

During the quarter, we completed $349 million of dispositions and received $46 million in loan payoffs.

Overall for 2018, we completed dispositions totaling $1.6 billion, with $209 million of loans being repaid.

I would now like to turn to our guidance for the full year 2019.

We are reaffirming our normalized FFO range at $4.10 to $4.25 per share.

Starting with same-store NOI, we expect average blended same-store NOI growth of approximately 1.25% to 2.25% in 2019, which is comprised of the following components: seniors housing operating, approximately 0.5% to 2.0%; seniors housing triple-net, approximately 3.0% to 3.5%; outpatient medical, approximately 1.75% to 2.25%; health systems, approximately 1.375%; and finally, long-term/post-acute care, approximately 2% to 2.5%.

As usual, our guidance includes all the announced acquisitions and includes all disposals anticipated in 2019.

On February 28, 2019, Welltower will pay its 191st consecutive cash dividend, being $0.87.

This represents a current dividend yield of approximately 4.5%.

And with that, I'll hand back to Tom for final comments.

Tom?

Before we open the line for questions, it's important that I mention that in 2018, Welltower achieved significant milestones in our environmental, social and governance initiatives.

Highlights of the year include being named to the Dow Jones World Sustainability Index, one of only 2 North American REITs in this most prestigious index.

Further -- furthering our commitment to climate change, Welltower continues to be recognized for the number of new Green Building Certifications added this quarter and throughout 2018.

With respect to social impact, the Welltower foundation and our employees donated over $1.5 million in 2018 to organizations engaged in health, wellness, the arts and education.

We were also recognized by the National Diversity Council as one of the top 15 companies for diversity in Ohio.

With respect to governance, I am pleased to announce the appointment of Kathryn Sullivan to our Board of Directors.

Kathryn has had a 35-year career in the health insurance industry and was most recently the CEO of United Healthcare's Employer and Individual Local Markets, an operating division of United health group.

Kathryn joins Dr. Karen DeSalvo, former Acting Assistant Secretary for health at the U.S. Department for Health and Human Services and Johnese Spisso, President of UCLA Health and CEO of UCLA Hospital System, who both joined our board in December of 2018.

We are delighted to bring these 3 recognized health care leaders to the board of Welltower.

At the same time, we are sad to see Judy Pelham and Geof Meyers retire from our board in May.

And on behalf of our shareholders, we thank them for their guidance and stewardship.

Welltower seeks to model the most successful, American corporations.

In order to be counted among the truly excellent companies, you need to be a leader in ESG.

I am pleased by the fact that with our recently announced board appointments, 60%, that's 6-0, of our independent directors are women and minorities, the diversity of our employee base, our leadership team and our board continues to be a priority at Welltower.

This is not only a key component of good governance, but it is a proven driver of higher returns to shareholders.

This is something we should all be proud of.

At Welltower, we deploy capital in the most relevant sectors of health care real estate to deliver sustained cash flow growth, all with an eye toward maximizing long-term shareholder value.

We were the top-performing, large-cap REIT in 2018, delivering 15.3% total shareholder return.

This reflects, not only the high quality of our differentiated business model, but the fact that we have articulated a path for growth.

As you will see in 2019, we position the company to continue to deliver for our shareholders.

Now Nicole, please open up the line for questions.

(Operator Instructions) Your first question comes from the line of Nick Joseph with Citi.

Can you break down the key components of your 2019 same-store NOI guidance for the SHOP portfolio between occupancy rate growth and expense growth expectations?

Nick, we -- at this point in the year, we would like to keep flexibility on how we think that will play out.

But obviously, we're very encouraged by the occupancy growth.

We think that we'll continue to have moderate rent growth and expenses are challenging.

So we'll see how the year plays out.

As you understand that we are trying to maximize our revenue, not one component of the revenue, we'll see how the year plays out.

Too early to comment on specific breakdown.

And can you provide an update on ProMedica's integration of the skilled nursing assets?

At the Investor Day, you mentioned that trends so far were better-than-expected.

You have heard from the leaders of ProMedica and HCR ManorCare on our Investor Day.

It -- I mean heard from them directly that now the leadership team expects better synergies in a medium -- short to medium-term.

We are encouraged overall by what's going on in the post-acute sector.

I'm not going to make too many comments, given that Genesis is a public company, but look for their release and see how, obviously, that sector is playing out, but we're definitely encouraged by the sector.

Just remember that about half, 45%, to be exact, of that HCR ManorCare transaction is attributed to seniors housing.

We're seeing occupancy in that seniors housing, both Triple-Net as we mentioned, both Triple-Net and The Shop segment is starting to come.

So those are some of the data points I would point out to you as you think about overall ProMedica, HCR ManorCare construct.

Your next question is from the line of Karin Ford with MUFG Securities.

I wanted to ask about your seniors housing portfolio.

Your same-store NOI guidance is over 200 basis points higher than your peers on both The Shop and the Triple-Net portfolio.

Why do you think you're seeing superior performance?

And can you confirm that there's no incremental rent relief or portfolio transitions expected in your triple net portfolio?

So I think, Karin, should not be a surprise to you if you look at the history.

You will see that our portfolio has generated better growth and that sort of alpha, if you will, has widened as the cycle got tougher and tougher.

And the second thing I would mention that if you look at we have very granular view of where our portfolio, our assets should be.

You've seen our data analytics presentation, how we're thinking about asset management, very active asset management.

And you've seen we have taken a lot of proactive steps to sell assets and not afraid of dilution on the short-term basis.

So we're very encouraged by the business.

Now it's very hard to comment on these things on a quarter-to-quarter basis, but we are encouraged where that population growth is coming and the supply is starting to roll over.

Karin, let me just add that it's no secret that we've sold a lot of seniors housing assets over the years.

I think what you're seeing is a plan-dedicated critical view of what we own from an asset management standpoint, and when we see assets in seniors housing that we do not believe have long-term viability, we will exit those assets.

We'll take the short-term dilution that you get from that.

And all with an eye towards owning the best-in-class assets for the long-term and as Shankh said, in the right markets.

And I think you know, particularly, Karin, we take a very granular view of how we define the markets that we want to own seniors housing assets in.

I think what you're just seeing is the benefit of an active asset management program, with the view to the future of the business versus trying to manage FFO per share on a quarter by quarter basis.

That's good color.

And my follow-up is more of a bigger-picture question on seniors housing.

You talked about the demand, the demographics, and the timing.

Do you think technology is allowing for greater autonomy for seniors later in life?

Things like grocery delivery, wearable monitors, improving focus on wellness?

Do you think that might delay the demand for seniors housing?

If you look at the demand growth for last 3 years, for example, I mean, NIC has a lot of this data, you can look at it.

You will see that demand has been running, particularly in the assisted living, IL plus AL, AL minus segment, 3x of population growth.

So there is no evidence that we have seen that's the case.

Do we think that technology will change this business for better?

And that will be very helpful for seniors in their home environment?

Absolutely.

But just to recall that as lot of seniors' homes are our communities as well, right?

Those technologies, and I mentioned a bunch of them in my prepared remarks, will help us drive the margin as well.

So we'll see how this plays out.

It's very difficult to sit here and predict what might happen, but there is no doubt that in the recent past at least, we've seen the demand has been running 3x of population growth.

You know seniors housing provides an environment for the aging population to live safely.

A lot of historic housing in this country works against seniors' health and wellness.

So you could put some new technology in an obsolete, residential environment and I'm not sure at the end of the day, you're achieving the goals of improving health outcomes at lower cost.

As Shankh said, we are very much on the forefront of bringing new technology into our settings and also thinking really hard about what the settings of the future look like.

And that's why we are so focused on the markets that we're in, because seniors housing is a very expensive product.

As I always say, it's a luxury good no one aspires to own.

But it's a necessity.

But it's with -- it's actually out of reach for the majority of the population.

So we've been very careful about where to own that real estate.

Because the cost of delivering the care, as you all know, has been growing significantly.

So you need to be in places where people can pay.

Over time, I am hopeful we will figure out how to deliver a much-needed environment, a much-needed real estate setting at a cost that is not without reach for the majority of the population.

So stay tuned on that, Karin.

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

Shankh, I know you don't want to give components of the guidance, but is it safe to assume that within the guidance expenses of about 4% are baked in and that you're likely to see the trajectory improve, given the expense comps get easier through the year?

You know.

As you know, as you can look at our numbers, you will see that the expense growth has been challenging for last 5 years.

So this is nothing new.

I would expect that 2019, we'll continue to see that.

Maybe we'll see some moderation in 2020 because a lot of the California markets by then will actually have $15 of wage growth, so which has driven a lot of those increases.

But 2019 will continue to be a challenging year and obviously, hopefully, we'll be able to mitigate that like we have, using some pricing and some occupancy.

Okay.

And then my...

You are correct about the trajectory, given obviously, year-over-year growth is not just a function of what happened this year, but also function of what happened last year.

So you're correct about the trajectory.

Okay.

And then just my follow up, just your comment on not really looking at portfolio composition but looking at what's available and what the price is.

Your reference to skilled nursing sort of pricing moving up, does that make you more a seller today versus a buyer?

And how would you describe this pricing across your different subgroups?

I'm not suggesting by any means that we don't have a view of what our ideal portfolio should be constructed.

I'll also say that view is evolving.

So it's not a static view.

But what I was trying to drive at that most importantly, we deploy capital to make money.

So even if we assume that we had a long-term view of some percent of assets from some segments or some operators, we are not prepared to get to that view, to execute that view, to realize that view.

We're not prepared to pay a price that does not make sense from a total return perspective.

That's what I was trying to drive at.

Okay.

If I may just...

Second, for skilled nursing is we are, as you have seen, within 12 months, we have come from an opportunistic buyer to an opportunistic seller, right?

Every asset this company owns is for sale at a price and total return.

So that's no different from skilled nursing, no different from any other buildings we own in any other segment.

Okay, if I may just sneak one more in.

I was a bit surprised, maybe it's also early in the year, but the $2.25 billion of acquisitions you've done, obviously, you've closed Hammes.

And specifically, CNL, it seems like it's modestly accretive.

You talked about the trajectory improving for FFO, but it also suggested maybe your midpoint could move up, just given the amount of acquisitions you've done for this year.

Yes.

Vikram, Tim here.

I think the pre-funding that we pointed to, at that point, it makes sense for us to think about that from a conservatism on the closing side of these acquisitions.

So as John mentioned in his prepared remarks, not only did we have the issuance from the fourth quarter, but we continue to issue $195 million of equity into the first quarter and had $270 million of dispositions that have already closed as well.

So when you think about kind of where we're at from a funding perspective, our balance sheet is actually in a very good spot to start closing on one of the acquisitions that we've spoken to.

And the combination of the timing of our closing the acquisition, plus the seasonality of our seniors housing, which steps down in the first quarter, but then picks up throughout the year, is what is driving that acceleration of earnings from the first quarter kind of through the end of the year.

So understood on your comments around where we are at midpoint, but at this point, we're maintaining the range because that makes no sense with the publicly announced information.

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

A couple of things.

The guidance, I'm just trying to understand kind of what's in and what's out, given the large amount of transactions that are being contemplated at this point.

It sounds like the CNL transaction is in the numbers and all the acquisitions announced pre-CNL, but I'm trying to understand the $725 million of deals in the pipeline that Shankh talked about, are those in the numbers?

And it also seems like the dispo guidance went up from $800 million to about $1.4 billion.

Has that increased also in the guidance?

Yes.

Tayo, it's Tim again.

Answer is yes and yes.

So on the acquisition side, we have the $1 billion of acquisitions we announced on our Investor Day, which -- $180 million of which have closed in the fourth quarter, and the remaining of which we'll close during 2019.

And then as you said, we announced CNL on January 2, and that's $1.25 billion.

So between the Investor Day announcements and the CNL announcement, you're getting to your acquisition, your publicly announced acquisitions.

And our dispositions of $1.4 billion that we revised this morning is all included into our 2019 number.

I'll just add one more point.

If you think about it, we have raised the equity already.

But as you know, those transactions take time to close, right?

You have a 6-month gap between when you're raising capital versus when you're deploying capital, which is a prudent thing to do.

We're not going to take that kind of market risk.

We have a big balance sheet to maintain.

But that's sort of driving the dilution this year.

But if you can -- as sort of you can refer from Tom's comment that we don't think that impacts the run rate earnings growth.

So you're going to see a good chunk of that run rate earnings growth shows up in the second half, and then flows through 2020 and beyond.

Yes, yes.

Understand.

Okay, that's helpful.

Then number two, again, the $3 billion of development pipeline that you announced, Shankh, I found that pretty interesting.

Will you just talk a little bit about, again, the timing around when all of that could be deployed, whether, again -- I know there's kind of like a ROFO of first look, last look type situation.

But of that $3 billion, how much realistically do you actually think you guys could execute on this and what timing?

Yes.

So we do think that through the number I mentioned is the one that we can execute on.

And as I said that we want to do it.

We have several different structures, and we don't want to do a ROFO, just as we mentioned.

But we are deploying capital in various ways, equity, debt, different parts of the capital structure.

And we're not equity.

We -- and we fund a portion of our capital stock through mezzanine, second mortgage, participating mortgage.

You can think about any structural provisions that is available that we use.

Then we get a ROFO and a ROFR and a participation that's defined on the front end.

So we're very careful about our basis.

We're very careful about our IRR that we achieved.

But more importantly, as I said, that it's out of option and not an obligation.

So obviously, we would hope when we deploy the capital, we have the cost of capital.

If not, we wouldn't.

So that sort of gives a sense of how we think about it.

But there's high visibility tied out to that number.

This is a number that we know where those opportunities are.

So yes, that's a very good point.

I should've mentioned that.

So Tayo, I can sit down with you and walk you through building-by-building what those opportunities are.

They are not unidentified opportunities.

That's a very good point, Tom.

Okay, excellent.

One more, if you would indulge me.

Just I was taking a look at the SHOP.

And then results of properties under construction on the shop side for your top 3 markets, L.A., New York and Boston, it feels like there are a couple more properties under construction now.

So on a quarter-over-quarter basis, just, again, what's your viewpoint in regards to supply?

Is that kind of shifting back to primary markets?

Is it still really more of an issue of secondary markets at this point in the cycle?

So Tayo, we do give you those stats because that's what you guys have asked for, and we continue to give those stats.

Well, our view of supply, as it relates to our own portfolio, is very granular, much granular.

We've shown you some of those facts in our Investor Day, which we see supply is an SEU or adjusted competition unit.

And our view is competition or our portfolio will be lower in 2019 than in 2018.

But that we'll see.

Obviously, things fall off from '18 to '19 there, but also things grow from '19 to '20.

We're encouraged by what we are seeing.

Particularly as you recall, I mentioned in our assisted living segment, which is a very large portion of our U.S. business, we have seen 120 basis points of occupancy increase.

That is one of the best uptick we have seen in years.

Hopefully, that's helpful.

Your next question comes from Jonathan Hughes with Raymond James.

Kind of a higher-level question, maybe for Tom or Shankh.

But in the last recessions, obviously, we didn't have the SHOP or RIDEA structure, at least not in such a meaningful way as today.

So how do you expect SHOP to perform in a recessionary environment since you're not protected by the lease payments, but are instead exposed to free market supply demand fundamentals?

I'm not saying that the broader macro picture's going, but I'm just trying to understand your views there and how that business should perform or not in a recessionary environment.

Yes.

So you're asking for something that we have absolutely no upside even when predicting what might happen.

I would just mention it to you that, as you know, our seniors housing portfolio, particularly SHOP portfolio, is very much geared towards the assisted living business, which is an need-driven business, right?

So if you look at the assisted living data over those time frames, you will see the business stage, large -- a couple hundred basis points of occupancy, but the rate growth remains resilient.

And expense growth is obviously helpful in that kind of environment.

I'm not going to venture a guess of exactly how things are going to play out.

I will also mention to you that it depends on when you go into a certain environment, what is the supply, more importantly what the demand side looks like.

So it's a complicated answer than you would like, but I would like to point out, when you think of our portfolio, seniors housing is a very broad term.

When you think about our portfolio, I think, as you know, it's very much that particular portfolio in the right year basis is very much a need-driven product.

Yes, okay.

That's helpful.

And then I'll just chime in with one more.

But looking at the capital stack you have, $720 million of preferred sitting on the balance sheet at a 6.5% coupon that I believe are redeemable.

Any plans to call those and maybe refi with debt or pay down with common equity embedded in 2019 guidance?

So thanks, Jonathan.

On the -- so the preferreds you're referring to, you're right, they're convertible and are actually convertible at our rates above $73.54.

So we've been trading above that for some time, and there's a trigger on that if the stock stays where it's at or above that it will hit in the near future.

I think the way you should think about that is that the way we manage our balance sheet is always to continue to position it in a better long-term position.

And we'll be in a unique position if those demands are a convertible to not only further equitize the balance sheet, but do it in a cash flow accretive way.

So I don't want to speak to where the stock price may or may not be in the coming weeks, but you should think about making the right long-term decision from a balance sheet perspective on this.

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

Can you guys offer a bit of granularity on the $1.4 billion of sales that are in guidance, the 6.2%?

I think the Genesis sales are $252 million at a 9% cap.

So I'm just kind of -- if you could to help us get to the other residual amount and maybe what's the effect...

Sorry, Jordan.

Your last part of your question got cut off.

Sorry.

The residual amount there would be helpful, whatever's in that basket.

Yes.

So, so far today, you're correct that the Genesis transaction flows in those $252 million, and we had another $16 million of transactions closed year-to-date.

So we've closed on $268 million of dispositions at a little less than a 9% cash cap.

So the remaining, call it, $1.1 billion should be spread out through the remainder of the year.

So think about it kind of being a midyear from here as far as timing.

Can you tell us what it is?

Yes.

The remaining assets are a mix of medical office buildings and seniors housing.

And I would think of that being -- so if you think about the blended cap rate overall, it's either mainly $1.1 billion that's being done at a much lower cap rate than what's been sold.

And it's more in the category of what we talked about in the recent past, which is outside of opportunistic continued kind of calling it the portfolio and some of the higher yielding sectors.

There's not much of that left.

So when we think about capital recycling going forward, it's really lower cap rate, noncore assets in our business that are higher quality, that there's institutional demand for.

They're not necessarily part of the company's long-term strategy, and that's going to be reflected in the cap rate.

But I think it kind of goes...

Mathematically, it seems almost sub-5% based on what you sold Genesis.

Yes, yes, correct.

Your math is correct on the blended cap rate of what's remaining.

So I think you'll be -- from a quality perspective, from a sales cap rate perspective, it will fit again in that bucket of higher quality assets just don't fit into our -- necessarily our long-term strategy.

So we're not definitely disputing your math.

We can only tell you that the demand for health care assets, both in seniors housing and medical office, is extremely robust.

It's clearly seniors housing.

We have seen medical office have cap rates, has come up from the troughs of 2017.

But in seniors housing, there's an absolute bidding frenzy from institutional investors.

Everybody people are seeing where the demand growth card is going, and there's a huge demand for those assets.

So we obviously like to recycle our portfolio and our balance sheet over a period of time.

So that's what we're doing.

I will just add to that, Jordan.

This is -- kind of goes back to Vikram's question from earlier.

But your -- the math kind of on our dispositions throughout the year adds the part of that the acceleration of earnings into the year.

So your math is correct in this being accretive sales in the back half.

And that puts us, I think -- Vikram, we're thinking at the run rate slightly during the year would be towards the higher end of what our guidance is out there.

But throughout the year, we'll have a lower number at the start and partially due to some resales currently beginning of the year.

Okay.

And then just a couple of quick clarifications.

So looking at your seniors housing triple net rent expired last quarter, there was $40-million-ish expiring in the rest of '18, and there was 0 in '19.

And now it looks like -- I'm curious.

What happened to that?

I don't know if that was Brandywine or something else.

But now it looks like there's about $28 million that's set to mature in 2019, and it's expected to be converted in addition to seniors housing operating.

So just can you confirm that's Brandywine?

No, John, it's the Brookdale transition.

That is still happening.

A lot of those -- California, a lot of local assets are in California.

And those -- obviously, the licensing transfer takes time.

So those are happening right now.

There has not been any additional triple net to write the conversion other than Brandywine and Brookdale that we have talked about through the years last year.

And the other clarification is for the show guidance for 2019.

All transition assets are in the guidance, Brandywine and Brookdale?

Well, Brandywine is because it is not a change of operators.

Brookdale assets are not because it is a change of operator.

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

Shankh, I want to see if you can provide some additional color of the $3 billion on pre-development pipeline.

Are these with new and/or existing relationships?

And could you provide a breakout between MOB and seniors housing assets?

Yes.

I mentioned 7 relationships.

3 are in MOBs.

4 are in seniors housing.

All but 1 is a new relationship.

1 is an existing relationship.

Okay.

And I'm sorry if I missed this from Tayo's questions, but is it safe to assume that you guys can break ground on these projects over the next 1 to 2 years?

Or should we think about this more of a longer term-type pipeline?

No, we have broken ground already on the largest project we mentioned, which is the Pappas Properties.

I also said that these are not just development, they are under-construction projects as well.

So obviously, they are coming up.

And obviously, at the right point in the life cycle, we'll execute on those opportunities.

But they are, as I said, as you can look at, it is very typical for this company to have this kind of arrangement.

That's why we have always executed a relationship investment strategy with our operator.

So there's nothing new that I'm telling you, but we're very encouraged that 6 of the 7 new relationships with highly reputable developers and operating partners, and a very interesting part of that trend, which is a change, as I mentioned on my script, out of those 7, 4 has reached out to us instead of us reaching out to them.

And so that sort of gives you a sense of how we compete in the marketplace today.

It's shifting.

I had mentioned, and in answer to Tayo's question, that there is tremendous visibility here.

Now anything can happen in the development world, lots of reasons why things would be delayed.

But I can't understand -- underscore more that we know where these opportunities are.

And the timing of them is not something that we're going to predict for you, but let's just say this is not 10 years out in the future.

These are things that we are actively engaged in right now.

Great.

And I guess, last question, and it seems like a pretty attractive pipeline.

Should we assume that the company's focus on developments will increase from this point forward?

And are you seeing more opportunities out there?

I guess, it was highlighted by the $3 billion of deals you kind of just highlighted.

I think what Shankh said is that we are engaged with some of the most successful developers in the U.S. today.

And they're presenting us with many attractive opportunities that are very strategic for us because these are opportunities with some of the nation's leading health systems.

And I think you've gotten a little flavor for that if you look at what we've done in -- what was announced in 2018 and some of the projects, for example, with Providence St.

Joseph's Health System, the projects that we talked about today with Atrium, a very highly rated system in North Carolina, these should give you an indication of where a significant amount of growth will happen to Welltower.

We're not going to give you any more granularity about that other than we've showed you, with real examples, of what we're doing.

And we've articulated a $3 billion pipeline.

You should assume a big percentage of it is more of that.

Your next question comes from the line of Lukas Hartwich with Green Street Advisors.

So for shop, the U.K. portfolio has put up 2 quarters of high single-digit NOI growth.

Can you provide some color and the drivers there?

It's driven by significant occupancy ramp in the U.K.

Okay.

And then I think in your comments, Shankh, you mentioned that you're working on something like $600 million of seniors housing acquisitions.

Can you provide more color on the quality market mix versus the current portfolio?

I think, Lukas, you might have misheard.

I think we -- I said that we have announced $725 million worth of seniors housing portfolio across 3 operating partners.

And these assets are new assets, young assets, 4.5 years of age, and there's nothing else I have to add to that except that we think that we did this transaction at very attractive returns of 6.6% cap rate.

The question of quality is hard to answer.

Quality, to us, is what is strategically relevant to our long-term plan.

We are selling -- you've seen us sell assets that many people think are high quality.

We talked about where cap rates are in this space.

These are high-quality assets to some people, but they may not be strategic to us.

So it's hard to answer that question.

When you see us deploying capital in seniors housing going forward, understand it's in markets and in the types of assets that are relevant to the broader Welltower strategy, which is connecting seniors housing more broadly in the health and what is increasingly becoming a wellness continuum.

That's what we're driving here.

So that's what we think of this quality.

Because we sell something.

It doesn't mean it's low-quality and we're getting good prices for because to some buyers, they're great assets.

It's just they don't fit necessarily our long strategic plan.

I hope that's helpful.

Your next question comes from the line of Steven Valiquette with Barclays.

So the main question I wanted to ask was just touched on a couple of minutes ago, but just to kind of ask kind of the same subject anyway.

Really, it's a follow-up on the overall pipeline.

In the U.S. market right now, we're actually seeing real-time that many hospitals and health systems are actually posting stronger-than-expected earnings results exiting 2018 and in 2019.

To the way, that should give health systems more confidence to pull the trigger on acquisitions, whether it's in post-acute or other types of assets.

So again, you kind of touched on this a little bit.

But as we think about your pipeline of opportunities with health systems, yes, I'm curious if you're getting that same sense the pipeline could actually be accelerating a little bit on ProMedica Medicare-type deals as we think about Welltower's opportunities with health systems, works in pipeline and accelerating in other asset types with health systems, just given there -- what seems to be strengthening balance sheets.

Yes.

Good questions, Steve.

Let me take some of that, and maybe Mark Shaver will have some comments on this because he spends a lot of time with the health systems, as do I. One of the comments I'll make is that as health systems start to see a future for their business models that's different from the very focused acute care model, that drove so much of their real estate investment in the past, I think that opens up opportunities for partners like Welltower.

So I would say, what you see particularly from the non-profit health systems, there's little bit of a mixed bag in terms of performance because some of them are very well positioned to face the great new world, where data, new technologies and an ambulatory focus will have a big impact on profitability.

Those that are attached to an acute care, inpatient, bedded hospital model will struggle.

Not to say that there aren't markets where there's an undersupply of acute care, but on balance, there's a lot of outmoded acute care beds that sit in all of these health systems that are well past their useful life.

So when they look at capital going forward, many of them are now seeing that a partnership with Welltower helps them accelerate the transition that they need to undertake.

Mark, do you want to make any comments?

Yes, Tom.

Steve, thanks for the question.

It's Mark Shaver.

I would maybe add 2 points.

I think with health systems, we're going to continue to see 2 very important trends that we're positioned well to help with.

One is they're going to continue to need to right size their clinical delivery systems.

This is a lot of what Tom said, continue to move away from the acute care, maybe some specialty care environments in the in-patient care setting and build out their ambulatory outpatient and other sites of care footprints.

So we continue to be very active in those dialogues.

And I think while their balance sheets maybe strengthening a bit, the ability for them to fund that clinical growth on their own is going to continue to be challenged.

That's a great opportunity for us.

And then the second piece, which is really where I think your question was starting, there's going to continue to be vertical integration in -- with health system partners just like you see across the health spectrum.

And so that's going to create these ProMedica-type transactions, where they're looking to grow additional margin businesses.

And again, I think we're very well positioned to support that.

Steve, I'll just -- one last comment.

Majority of the pipeline today, if we look at the health system though, it is on what you understand as traditional outpatient ambulatory care and medical office segment.

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

This is Seth Canetto on for Chad.

My first question, on the increased disposition guidance going from $800 million to $1.4 billion, what changed since December that led you guys to increase this so significantly?

Yes.

Seth, it's Tim here.

We're always in talks, as Shankh mentioned, as part of his prepared remarks, and as we're consistently saying, with the interested parties and their assets.

And you shouldn't think of discussions between now and December having then something change.

But things firm up, and I think that's important.

We're comfortable putting it into guidance now than it would've been back in December.

All right.

And then just looking at the triple-net seniors housing portfolio, it does look like you have about 2% of your portfolio under 1x coverage.

So do we still think about any triple-net to RIDEA conversions going forward?

So well, I think if you look at last quarter's earnings call, you will see that I've gone through significant details about how to think about that segment.

So I'm not going to repeat that.

I mentioned -- think I answered that question before that you're not going to see something of material size.

But we -- just have to say it, is that we don't think about is the triple-net better than RIDEA or RIDEA better than triple-net?

That's not how do we do this business.

We think about alignment of interest with our operators.

If it is a right alignment, we will dictate RIDEA assets into triple-net, if it is the right alignment to do the other way, we're going to do that.

But just to answer your question very specifically, please go back and read the transcript from last call, you'll see there's a major discussion about that topic.

I don't want to waste everybody's time to get into that, but we do not expect anything of size change from triple-net to RIDEA as of today.

All right.

And just on the segment guidance for 2019, the outpatient medical guidance, looked like it declined 25 basis points at the midpoint versus 2018.

Can you just give more color what drove that decrease year-over-year?

Yes, absolutely.

This is also something we talked about in detail in our Investor Day.

We have a couple of leases rolling this year that will have downtime.

We underwrite -- always underwrite downtime.

And that's what you're seeing, sort of gets caught in that calendar side.

We're very, very excited about that business, as Keith was taking over the business and is making lots of change.

So starting towards the end of this year into next year, you will see the fruits of those efforts that Keith is putting in and bringing and hiring a lot of really good talent there and also empowering a lot of our existing talents.

So we're very excited about the business.

What you're seeing, the 25 basis points, is just a function of 2 lease roll that we described in our Investor Day.

(Operator Instructions) The next question comes from Michael Mueller with JPMorgan.

Two questions.

First, what do you see as being your average annual development spend over the next 5 years, given how the pipeline's ramping up?

And then second, for the $1.4 billion disposition target, should we think of that as that's what you want to sell this year?

So if you're active on -- more active on the acquisition side, we should be thinking of equity for incremental funding?

Or can we see that disposition number scale up more?

First is I'm not going to venture a guess on what the average development spend will be.

It is basically assumed it will be higher than where it is.

It's a question of risk reward, as you know, that we -- for example, in the medical office segment, we only put shovel in the ground when it's close to 100% leased.

We don't go and build a building if we have, say, half of that as a commitment.

So that sort of gives you a cushion to answer to what -- the question you asked is it's probably going to be higher, but it is a function of a lot of other factors.

The second answer is as we think about the ramp-up of the acquisition portfolio, you should also think that the equitization of those assets will come from both common equity as well as the assets we own.

Tom talked about how we think about asset disposition.

We have lots of very high-quality assets that has a significant bid in the marketplace today.

And we will continue to recycle capital.

The most important point that you are not going to see, the dilutive capital rate that we have seen before.

And so whether it's from common equity, it's from the assets we own, we do think that we will pay prudently, manage the balance sheet.

And then, Mike, I want to make one comment.

So I think you should expect that developments will accelerate in this next cycle because of the fact that they're -- we're bringing forth a new asset class that didn't exist.

I mean, a lot of the urban seniors housing models, like that we've announced on 56th Street, which by the way was capped off just last week, right, Mercedes?

And what we announced on 85th in Broadway, these are -- this is a product that's never been delivered.

I think what health care real estate offers investors is the opportunity to invest in a next-generation class of real estate that they've not seen before.

It's going to take a lot of capital.

That's what we're positioned to do.

I don't know how you do that if you're not investing with Welltower.

And Shankh's comments about all these incoming calls now, a lot of it has to do that.

We met with an institution who realized they would be much better off investing with us than trying to compete against us because there are just -- and you've heard us talk a lot about our data analytics capabilities.

No one can compete with that.

So there you go.

And your final question comes from the line of Eric Fleming with SunTrust.

Just want to ask a question on how you guys are looking at potential Medicare Advantage opportunities.

I know Sunrise talked about their MA plan.

And in your Investor Day, you've got the ProMedica relationship.

When do you think you can get -- start getting any contribution?

And what do you think the total market opportunity is for the MA plans?

Eric, this is Mark Shaver.

I think Medicare Advantage continues to grow as a trend in the country.

It's about 35% adoption nationally in MA plans.

The larger plans for straightforward Medicare are really looking at the earlier younger population, the middle 60s to early 70s of population.

A lot of the residents within our communities are older and more frail.

And some of the more specialized programs, the institutional programs really, which is what Sunrise and some of the others are playing, is actually a much smaller percentage adoption of that, nationally.

We're talking about less than 100,000 individuals across the country in those plans.

So we're very active in those conversations with some of the major payers.

And there's, as Tom says often, early days with regards to MA and the adoption.

But we're very active, and we think there's going to be an important role in partnering with payers on this front.

We think they will actually be developed in products by the payers that will address the need of the population that will likely enter the assisted living sector, again, generally, a wealthier population.

Historically, we don't think of MA as a product that was geared towards some of those paying $8,500 a month for seniors housing.

But I think that's going to change in the future.

And as Mark said, we have a lot of discussions with the major payers.

You just heard that a very senior executive from UnitedHealthcare came on our board.

We just announced today as well as Dr. Karen DeSalvo, who was with the largest payer in the world, CMS -- and is the largest payer in the U.S., CMS.

So we've got a lot of good knowledge and experience of both inside the company and sitting on our board.

And with no further questions, we thank you for dialing into the Welltower earnings conference call.

We appreciate your participation and ask that you please disconnect.