Welltower Inc (WELL) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2019 Welltower Earnings Conference Call.

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

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

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

Please go ahead, sir.

Thank you, Zetania.

Good morning, everyone, and thank you for joining us today to discuss Welltower's Second Quarter 2019 Results.

Following the safe harbor, you will hear prepared remarks from Tom DeRosa, Chairman and CEO; Shankh Mitra, Chief Investment Officer; John Goodey, CFO; and myself.

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 assurances that its projected results will be attained.

Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in last night's press release and from time to time in the company's filings with the SEC.

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

And with that, I'll hand the call over to Tom for his remarks in the quarter.

Tom?

Thanks, Tim.

I'm pleased to report our second quarter results to you this morning as they demonstrate that the Welltower platform is delivering on the optimistic outlook and growth plan we presented to investors over 8 months ago at our Investor Day.

Outperformance from our core real estate portfolio across all business lines, most notably led by our U.S. portfolio is driving this growth.

As we reported last evening, FFO per share of $1.05 represents 5% growth over the second quarter of 2018.

Behind this growth is same-store NOI growth of 3.1% in the quarter and 3.3% same-store growth in our senior housing operating portfolio.

These results, once again, demonstrate the resilience of owning the highest-quality senior housing and medical office portfolio in the industry as well as the management team that have the conviction to make a series of tough decisions over the past few years that are clearly benefiting our shareholders today.

With respect to new investments, we had a busy quarter completing $2.4 billion in accretive acquisitions.

This brings the total for the first half of 2019 to $2.7 billion.

Shankh will take you through a deeper dive on the quarter's operations and investment activity, but I wanted to take a moment to call out a few noteworthy items.

First, you've seen us deepen our relationships with names you already know, like Sunrise, Discovery and Summit Medical, demonstrating our commitment to being a reliable, value-added partner.

Next, I'm excited about some new partners who have joined the Welltower team this past quarter.

Balfour Senior Living, run by co-founders Michael Schonbrun and Susan Juroe, develop and manage some of the highest-quality senior living communities I have ever seen.

Mike Joseph, Founder of Clover Management, develops and manages independent living communities that deliver a quality experience to seniors at affordable monthly rents.

I'm also pleased that we significantly expanded our relationship with Greg Roderick of Frontier Management, who has stepped in to take over the management of many of our legacy memory care communities.

Frontier's state-of-the-art operating platform is already generating significant NOI growth from this portfolio.

I'm thrilled to welcome Michael, Susan, Mike and Greg to the Welltower family.

This quarter we also announced a joint venture with the Related Group and Atria.

Like the other operators I mentioned, Related and Atria were motivated to work with Welltower, not for our ability to provide capital, but for Welltower's unique capability set that truly differentiates us from any other REIT engaged in this sector.

I'm also pleased to tell you that much of this growth was financed by the successful sale of our portfolio of senior living assets managed by Benchmark Senior Living.

The proceeds from this $1.8 billion sale have enabled us to bring our leverage levels back to our 2019 target range.

We have a lot to talk about this morning, so I will now hand the mic over to Shankh.

Thank you, Tom, and good morning, everyone.

I'll now review our quarterly operating results, provide additional details on performance, trends and recent investment activity.

We came into this year expecting a slow and steady recovery to take hold in our SHOP segment.

However, I have to admit, for 2 quarters in a row, our SHOP results have exceeded our expectations.

Strong revenue growth of 4.4% was driven by both rate growth and occupancy growth [of 50 basis points] (added by company after the call).

Same-store NOI for the SHOP portfolio is up 3.3% year-over-year, the best fundamentals we have seen in years.

This significant uptrend growth has been broad-based.

Our U.S. portfolio has been the standout performer this quarter with our largest operator such as Sunrise, Belmont, Brandywine, Merrill Gardens, all contributing to the outperformance.

Rate growth of 3.7% has been consistent and broad-based.

The lowest rate growth we have seen is 2.5% with one operator and 5.4% growth being the highest with another operator with central tendencies around mid-to-high 3% range.

On expense side, contract labor and benefits are the main drivers of compensation growth.

This has been especially true in the U.K. as the operators chase occupancy ramp.

Insurance was and will continue to be headwind for the rest of the year throughout the portfolio.

To give you more specific color on product type and market segmentation during the quarter, we have seen significant outperformance in AL versus IL and in major markets versus other markets.

To repeat what we mentioned last quarter, we expect U.K. performance to trend down and Canadian performance to trend up as we get to the end of the year.

Our excitement around strong SHOP results was only matched by significant transactions within the segment.

We welcomed Atria, Balfour and Clover Management to our family in Q2.

We are very excited about the announcement we made in late May to partner with Related and Atria on 1001 Van Ness development in San Francisco.

This triple-A-plus location in the heart of San Francisco is fully entitled and we expect to start construction in Q1 of 2020.

We also welcomed Denver-based Balfour to our family this quarter.

We initiated this relationship with 6 great buildings in the Denver area that have spectacular designs and resident experience.

One of these buildings just opened in May and is already 40% leased.

Hence our initial yield is low on our $308 million investment, but we expect year 2 cap rate to be north of 6%.

Balfour entered into Welltower's next-generation management contract, creating optimal alignment between the partners.

As part of the portfolio purchase, Welltower has received exclusivity on Balfour's future acquisition and development pipeline as well as an option to acquire up to a 34.9% interest in Balfour's management company.

As a part of the agreement, Balfour signed a $1 billion development agreement with Welltower already.

Several development initiatives are under -- currently underway in high barriers to entry East Coast market.

We're committed to grow this platform prudently over next decade.

We're pleased to announce the acquisition of 5 newly developed Sunrise communities in the high barriers to entry market of Washington, D.C, San Francisco and San Diego this quarter.

These openly -- recently opened buildings are 67% leased now and leasing up rapidly.

Our investment of $218 million in the quarter represents a 5.8% yield after year 2. As a result of our 34% ownership in Sunrise, we funded 34% of the development at cost.

Our acquisition of the remaining 66% will bring the total dollars invested to $285 million at a blended stabilized yield of 6.8%.

To continue that theme, we have expanded our relationship with Discovery Senior Living with the acquisition of South Bay development portfolio.

This high-end campus settings have condo-quality finishes and have product offerings, including IL, AL and memory care.

We bought the portfolio at 72% occupancy, excluding the last phase of the alliance town center in Alliance Town Center in Fort Worth, which will open in [Q4] (corrected by company after the call), bringing the total investment to $237 million or $273,000 per unit.

We expect these buildings to stabilize in the year 3 in mid-to-high 6% cap rate range.

Importantly, as part of this transaction, Discovery agreed to manage the existing portfolio that we bought in 2016 as well as the new portfolio in our new incentive-driven management contract and signed an exclusive development agreement of $1 billion.

We are already considering 2 projects under this development contract in Discovery's core footprint of Florida.

Speaking of Discovery's backyard of Florida, we are also under contract to fund 3 newly developed buildings that received certificates of occupancy in Q2 for $92.7 million or $255,000 per unit.

While cap rate of a newly opened buildings in lease-up is a matter of opinion and lies in the eyes of the beholder, what is not debatable is price per unit numbers.

Our buildings are all steel, concrete, [I2] construction and not stick-built construction and represent a significant discount to other Discovery transactions we have seen in the marketplace recently.

We also welcomed Clover Management to our family of operators with $343 million of acquisitions in Q2 with an average age of 4.5 years.

These independent living seniors apartments are for younger seniors and have in excess of 95% [plus] (added by company after the call) occupancy in stable portfolio.

We funded this significant investment activity with the disposition of the Benchmark portfolio in the beginning of July, with gross sale proceeds of $1.8 billion.

As part of this recapitalization, Welltower has fully exited the portfolio realizing a gain on sale in excess of $450 million and is entitled to an additional $50 million in earn out proceeds, subject to certain future hurdles.

We are very pleased with the recap of Benchmark by the strong institutional [private] (added by company after the call) capital partner which agreed to further invest a significant amount of capital in these 19 -year-old communities in Connecticut, Maine and Massachusetts, New Hampshire, Rhode Island and Vermont.

To summarize all the activities above, we bought some newly opened spectacular assets in lease-up and funded it with mature assets.

While the side effect of this capital recycling is a drag on earnings in near term, we believe these transactions as a whole are significantly accretive from a CapEx, growth and hence total return [perspective] (corrected by company after the call).

In addition, I encourage our shareholders to think about these new or expanded relationships, not just in terms of the dollar amount we invested this quarter, but as vehicles of significant future growth of development and acquisitions.

Our aligned operating partner model also comes with another avenue of growth.

Maximizing cash flow in assets we already own.

This is where you get maximum return on invested capital.

Specifically, we transitioned 20 Silverado assets to our partner Frontier Management this quarter.

At 67% occupancy and mid-single-digit margins, we saw tremendous opportunity for improvement in the financial and resident experience in these communities.

Silverado retained 11 assets in their core California market and will operate them under triple net lease.

Moving to our medical office platform, we had a really active quarter.

Same-store NOI was up 2.3%.

We feel our team under Keith and Ryan have created tremendous momentum in the business and positioned the portfolio for 2020 growth.

Our team has been very active, having recently closed nearly 5 million square feet of medical office assets this year.

I'm pleased to report that we had great deal of success in integrating those assets in our business.

We have extended the ground leases and termed out significant tenant credits.

We are also very pleased to inform you that we have entered into a definitive agreement to acquire a 43-acre, 6 building 270,000 square feet medical office campus in Berkeley Heights, New Jersey for $140 million.

This off-market transaction as a part of proposed merger transaction between Summit Medical Group and CITYMD is a testament of how health care delivery is moving to low-cost consumer-friendly settings.

The campus will be master-leased by Summit Medical Group, one of the nation's premier, independent, multidisciplinary medical practices under a new 20-year absolute net lease.

This campus is the largest and most comprehensive of 5 hubs in Summit's 80-location hub-and-spoke model and will bring Welltower's total Summit-leased footprint to over 0.5 million square feet.

We're also pleased to inform you that we have approximately 3 million square feet of additional medical office transactions are at various stages of negotiations at an anticipated blended cap rate of 5.6%.

While it is fun to discuss the transactions that we are consummating, it is equally important for capital allocation discipline to contemplate on the transactions that we decided not to do.

At the risk of sounding like a broken record every quarter, I want to remind you that we're not a cap rate buyer or a seller.

We're focused on total return, which is heavily influenced by CapEx, growth, quality, credit and price per unit.

We have passed on significant transactions, including the ones where we have contractual legal rights on, where the pricing, quality of underlying assets or the collateral did not meet our underwriting standards or we like the asset, but could not get comfortable with the growth rate at the given price.

The backdrop of -- for both the senior housing and medical office transactions have become very vibrant.

Our shareholders should remain confident that we'll not compromise the quality nor will be swayed by our spot cost of capital in a given day.

We remain laser-focused on building new relationships with the best-in-class senior housing operators and health systems, while realizing growth opportunities with these partners one asset at a time.

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

John?

Thank you, Shankh, and good morning, everyone.

It's my pleasure to provide you financial highlights of our second quarter 2019.

As you've just heard from my colleagues, Q2 has been another successful and very active capital allocation quarter for Welltower.

During the quarter, we completed $2.6 billion of gross investments, including $2.4 billion of high-quality acquisitions across 8 separate transactions that have blended yield of 5.4%, making Q2 one of our busiest ever for investments.

We also announced that in July, we sold our Benchmark senior living portfolio for a gross value of $1.8 billion, looking at capital gain in excess of $450 million.

Tim McHugh will be detailing our updated views on acquisitions and dispositions for the full year in a few moments along with revisions to our full year guidance.

During the quarter, we successfully raised $295 million of gross proceeds from common equity issuance via our DRIP and cash settle and forward sale ATM programs at an average price of $80.28 per share, and we saw strong demand for our new commercial paper program.

Welltower continues to enjoy excellent access to a plurality of capital sources to fund our acquisition pipeline and future growth opportunities.

Our Q2 2019 closing balance sheet position remains strong with $269 million of cash and equivalents, $1.1 billion of capacity under our primary unsecured credit facility.

With net debt-to-adjusted EBITDA of 6.33x, our leverage metrics remain strong albeit with some increase over Q1 2019's close.

This increase was temporary caused by the timing of recent cycle acquisitions and dispositions with the closing of the Benchmark transaction, we've already seen leverage return to be in line with 2019 guidance levels.

And as at July 31, our cash and equivalents balance is risen to $340 million and our primary capacity to $1.7 billion.

Moving on to earnings.

Today, we're able to report a normalized second quarter 2019 FFO result of $1.05 per share representing strong growth of 5% over Q2 2018.

Overall, Q2 same-store NOI growth was an encouraging 3.1% for the quarter with all our segments recording solid growth.

Senior housing operations same-store NOI grew by 3.3% in the quarter driven by solid growth in the U.S. and the U.K. Senior housing triple net grew by 3.7%.

Outpatient medical grew by 2.3%, and long-term/post acute grew by 2%.

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

We are increasing our full year total portfolio same-store NOI growth range to 2% to 2.5% from 1.25% to 2.25% previously.

This reflecting the strong performance of our core portfolio.

In addition, we are tightening our expected normalized FFO range to $4.10 to $4.20 per share from $4.10 to $4.25 per share previously, reflecting the change in our 2019 disposition guidance.

As usual, our guidance includes only announced acquisitions and includes all dispositions anticipated in 2019.

Finally, on August 22, 2019, Welltower will pay its 193rd consecutive cash dividend being $0.87.

This represents a current annualized dividend yield of approximately 4.2%.

With that, I'll hand over to Tim for a more detailed walkthrough of our updated guidance.

Tim?

Thank you, John.

I'd like to provide some additional details of change in 2019 outlook provided last night.

Starting first with property level fundamentals.

Our core portfolio has performed above expectations year-to-date, driven by our senior housing operating portfolio.

This has allowed us to increase our total portfolio same-store guidance for the year to a range of 2% to 2.5% from our prior guidance of 1.25% to 2.25%.

With all the moving pieces in the quarter, I wanted to add a bit of color on the same-store and full year guidance.

Our continued focus on improving the quality of our portfolio from both the real estate and operator perspective can result in sequential changes in the same-store pool.

In 2Q, we had a 47-asset sequential change in our senior housing operating same-store pool from the first quarter.

We added 12 properties to the pool, and we also removed 59 properties from the pool.

Comprised of 43 properties that were moved to held for sale during the quarter and 16 properties transitioned from the Silverado Senior living to Frontier Management.

The 59 transition in held for sale assets had remained in the pool for the quarter and for the year, sho same-store would have been 2.8% in the second quarter and full year total portfolio expectations would be approximately 10 basis points lower.

A few other comments regarding subsector growth in the back half of the year.

For our seniors housing operating portfolio, back half guidance anticipates a drag from the insurance premium increases, which Shankh previously mentioned.

For our senior housing triple net portfolio, performance should normalize to approximately 3% in the back half as we anniversary rent resets tied to the stabilization of development properties.

For our health systems portfolio, the ProMedica lease enters the same-store pool in the fourth quarter with a 1.375% annual increaser in year 1 before stepping up to 2.75% annual increasers for the remainder of the lease.

Now turning to our updated acquisition outlook.

Year-to-date, we've acquired $2.7 billion of properties at a 5.5% initial yield, and we invested $232 million in developments with expected stable yields of 7.4%.

Our acquisition spend to date has been fairly evenly split between stable MOB assets at a 5.7% average yield and newly built high-quality senior housing assets, currently in fill-up equating to 5.2% going in yield with expected stable yields of 6.4%.

There are no further acquisitions in our current guidance beyond what has been disclosed to date and $140 million Summit Medical acquisition detailed on earnings release last night.

Moving on to dispositions, close to date and our updated full year outlook.

To the end of the second quarter, we disposed $641 million of properties in loans at a 6.8% yield.

As we disclosed in last night's earning release, we have increased our full year guidance in dispositions to $3.1 billion at a 6.3% yield from our prior guidance of $1.4 billion and a 6.2% yield.

When breaking this down -- when breaking down this incremental $1.7 billion increase in guidance, I want to highlight that 11 of the 48 Benchmark senior living assets sold in July have been previously held for sale.

The subportfolio representing approximately $300 million of our previous $1.4 billion in full year disposition guidance.

This leaves to 2 main drivers of the $1.7 billion of incremental disposition guidance as the remaining $1.4 billion-plus of our proceeds from the July sale of our benchmark senior living portfolio and in under contract legacy LTAC portfolio.

Furthermore, breaking down the $3.1 billion of full year disposition guidance in the sub asset classes, it is comprised of $2.5 billion of senior housing and MOBs at an weighted average cap rate of 5.5% and $600 million of long-term/post acute in the high 9s, which includes $330 million of skilled nursing facilities traded at an average of 8.8% cap rate.

After these sales, as reflected in our Q2 supplement, we now have 8.6% of our in-place NOI in the long-term/post-acute space, representing a 22% decline from our Investor Day.

Approximately 95% of our remaining long-term/post-acute exposure is now concentrated in the lowest cost post-acute settings of skilled nursing.

Lastly, on the balance sheet.

Leverage on a net debt-to-EBITDA basis has remained in line with our target of mid-to-high 5 with Q1 equity funding of our Q2 acquisition activity taking leverage to the sub-5 5x before increasing to above 6x from mid-May to the close of our benchmark disposition in July, which decreased leverage to our target discussed at our Investor day in December.

In summary, stronger than fundamental -- stronger-than-expected fundamentals and a robust acquisition pipeline have validated our initial positive outlook coming into this year.

We continue to take advantage of the constructive capital market backdrop, keep our balance sheet strong and to improve our asset mix to capital recycling.

The short-term impact of this higher-than-expected capital recycling has been a tightening of our 2019 guidance from $4.10 to $4.25 per share to $4.10 to $4.20 per share.

However, we believe the long-term impact of these substantially value-accretive investments.

I'll now hand the call back to Tom before opening up for Q&A.

Thanks, Tim.

If you take a step back from the results we just reported, I hope you see that the quarter was not driven by a bunch of deals, a word that has become a pejorative around here.

Welltower is a value-added platform that can efficiently and effectively address the capital needed to move health and wellness care delivery forward, particularly in view of the aging of the population.

This is generating exciting investment opportunities like the ones we've already announced year-to-date.

As Shankh just told you, we also decided to pass on billions of dollars of other opportunities because while they might have driven short-term results, we believe they would not have delivered long-term sustainable cash flow growth for our shareholders.

Before we open up for questions, I want to take a moment to recognize and say thank you to the tens of thousands of caregivers who work in our senior housing properties every day.

They are truly unsung heroes, who are doing their part to improve the many lives we care for to the benefit of our residents, their families, the overall health care system and our shareholders.

Now Zetania, please open up the line for questions.

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

You obviously had a very busy quarter, and I understand the upfront dilution for the future benefit, could you give more color on the expected growth profile difference between the acquisitions and the assets that you sold?

We had a relative difficulty to hearing you, I think you're asking about the growth profile of the assets that we're acquiring versus what we're selling.

Is that the question?

Yes.

That's right.

Yes.

So if you look at the assets we bought, we bought spectacular assets in great locations, newly built assets that opened 2017, '18 and '19.

Primarily if you look at the average age, they're primarily opened in '18 and '19 on an average basis.

Of course, these assets are now high 60s to low 70s from a leasing perspective.

They're leasing up rapidly.

So obviously, there is going to be significant cash flow growth as we think about the marginal impact on profitability relative to the fixed cost of the community, right?

You still need to have an ED, you still need to have sales staff.

So there is a significant amount of fixed cost in a community.

And as they lease up, you start to break even, at a percentage about 60% and then obviously the margin expands significantly from there.

So there is significant cash flow growth from just leasing up, but the other point is very importantly, these are newly built assets in exceptional submarket in a very high barriers to entry market relative to the markets around them.

So you will see that CapEx mix of these assets versus the assets that we're selling will also be different.

So as you think about the growth profile, I don't want to not only think about the NOI growth, I want to think about cash flow growth, NOI minus CapEx growth, which we think will significantly surpass what we sold.

I guess longer term, once they're stabilized and when you think on a cash flow basis, what is the spread between those new acquisitions versus the dispositions do you think longer term?

Obviously, we think there is a significant difference, right?

I mean that's -- and that goes back to our micro-market analysis, but it's kind of hard to talk about in general terms.

But I can tell you that our internal model suggest that on a stabilized basis on what we're selling versus buying, there is a significant spread.

But it's obviously deal by deal basis and you have to talk about anything specifically on the call.

I'm happy to take it up off-line with you.

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

I wanted to just touch on the pipeline.

It sounds like there is a good amount of activity and I think you referenced 3 million square feet of MOBs, which seems like a big number.

You guys have been pretty active in that space.

I'm just curious if you could shed some additional light on sort of what you see and what's driving the activity?

And then, I think, you also touched -- I think we're more familiar with senior housing vibrance, but if there is anything there to sort of flush out, that would be great too?

Thanks, Jordan.

So I talked about -- specifically about the medical office pipeline because most of my comments are focused on senior housing in the earlier part.

So obviously, our senior housing pipeline is very strong.

We're very bullish on the business.

So obviously, we talked -- if you think about how we grow in that business is we grow with our existing operators and we also grow our family of operators.

So we have significant opportunity for growth through development as well as acquisitions, right?

We're seeing like you see in the Discovery example we mentioned there is a lot of product in the market that has been developed by multi-family operators that we're seeing increasingly coming to the market, we're seeing lots of people have been able to lease up the assets 50%, 60% but not above that.

So bringing in best-in-class operators like Discovery and others to lease it up and create value for our shareholders.

So we're seeing that.

On the other hand, the medical office, we are seeing -- we have seen tremendous activity.

As we talked about, there was air pocket of capital 18 months ago.

And we have been able to negotiate and structure a lot of transactions.

As you know Jorden, real estate transaction takes a lot of time, right?

From beginning to finish, and then you have to go through a ROFR process with the health system, so it takes additional amount of time for medical office because of that.

But the transaction that I talked about is the reflection of what the market was end of sort of last year beginning of first year, and you will see we'll be able to consummate these transactions going forward.

Seems like some of the frothy capital markets in medical office is coming back.

In recent times, some of the transaction we have seen, I want you to know that we're not only focused, obviously, on cap rate, the credit, the lease and the details behind it also price per foot.

That's very important.

We're not willing to buy assets in a location where the price per foot reflects a significant premium to replacement cost.

So we're very, very active on both sides of the house.

However, we'll only do transaction if we think -- if we can make money on a total return basis.

If not, we'll walk away like you have seen us in '17 and early '18.

The other thing I'll add, Jordan, is our pipeline is largely off market.

I think that's the characteristic of what you see us buying.

We are generating these opportunities from our deep relationships in that -- in both the health systems and more broadly the medical office sector.

And the assets you talked about, the 3 million square feet, do you say these are under contract?

Or just LOI, what's the stage?

There are some under contract.

Some are in PSA negotiation.

Okay.

And then just on Silverado.

Can you explain what all went down here?

We -- I think we typically think of Silverado as a best-in-class operator in the space.

What sort of played out there?

And what's left of the relationship?

We typically don't see the transitions back from RIDEA to triple net, but we did obviously in this situation?

Okay.

So I think I'll first address the structure.

I think 3 quarters ago, my prepared remarks were all focused on triple net where I have described how we look at triple net leases and how -- we're not opposed to triple net leases, we actually like triple net leases in certain contracts.

So I want you to understand that we have no bias for one structure or the other.

We are open to any structure between triple-net and RIDEA and obviously including the 2.

Silverado is a fine operator, really great operator in the markets in California that's why stayed, kept the building in California and we've moved the non-California assets to Frontier, which we think will be able to create significant upside to the cash flow.

And more importantly, resident experience in these buildings.

These buildings are not lease-up buildings.

These buildings have been open for a long time, but obviously they are 67% leased and have a margin of, call it, 6.5%, 7%.

So of course, we think there is significant upside for both our shareholders and the residents that Frontier will be able to -- will get to.

And -- so that's sort of the view.

I mean it's just a view of -- senior housing is not a national business, it's a local business.

So you have to think about some operators who are very good in certain regions and not so much in other, vice versa.

So that's all.

There is no more secret than that.

It's just a simple thing.

People are very good in certain footprints.

Is there any -- can you shed any light on what the catalyst for the transition was?

They obviously lost a bunch of properties here.

And I'm kind of curious...

The catalyst is for the transition is very simply, I told you the performance of those assets.

We are very much a performance-oriented organization.

And we thought that Silverado should focus on the core California market, and some other operator, namely Frontier, will be able to drive more performance out of these assets outside California.

And as we mentioned, Jordan, we are already seeing positive results of that transition.

Frontier is doing an excellent job managing these assets for us.

So it was clearly the right decision for Welltower and allows Silverado to focus in its historic core market of California.

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

I guess, Tim, thanks for additional color on the impact of the assets taken out of the SHOP same-store pool.

Is it fair to assume that Silverado was the main drag and Benchmark held up okay?

Or can you just maybe provide some color between those 2 operators?

Yes, Benchmark was a positive contributor, Silverado was not.

So net-net, Tim gave you the impact.

And on the Benchmark sale, can you just discuss a little bit more on the -- how the transaction was originated?

Did you put these assets in the market or the buyer approached you?

Or did your partner approach you on the transaction?

We put 11 of the assets that Tim mentioned that we had in held for sale.

That's the assets we're looking for to sell.

We got significant response from the marketplace.

We got several bids, double-digit number of bids from there.

And 3 of those entities, all of them are highly, highly qualified institutional investor private capital, they approached us and say, "Would you sell the whole portfolio?" And as you heard from Tom that everything we own is for sell at a price.

So we thought it was a good transaction for us, for the private capital who obviously replaced us, as well as Silverado communities and the residents.

So we're -- all in all, it was a win-win-win for everybody involved.

If I could just ask my second question.

ProMedica, looks like the occupancy increased this quarter to 85.6%.

Can you just remind us if you're going to provide EBITDAR coverage?

And also if you could provide maybe some commentary on this theme as Medicare increase for 2020?

It looks like they bifurcated between for profit and non-for profit as far as the increase is [concerned]?

I will start with the coverage and hand it to Mark for commentary on the CMS policy.

We are -- we will add ProMedica to our bolt-on health system coverage and then it will roll into total company coverage when we've owned it for 4 quarters.

So it will come into our fourth quarter coverage.

And then as you mentioned, CMS has increased rate actually with the week after we announced the transaction.

Those rates are going into effect as is the change in payment methodology in fall to PDPM, which I think as many of you know is not going to be incredibly accretive in terms of economics but also not negative at all.

But we're allowed to put ManorCare, genesis and others in that industry to do is the more focused on patient care.

And I think the team at ManorCare and ProMedica continues to feel that, allow them to grow their business and provide more cost-efficient care to the patients they serve.

And John, just to remind you that ManorCare is now in non-for-profit status.

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

Just 2 around senior housing.

So maybe just first on the Benchmark portfolio.

If I just look sort of the run rate NOI last year, given just the number of assets, is it safe to say or is it my calculation correct that the cap rates around 5?

And can you give us some context on Benchmark as it fits in with your data teams sort of how did sort of the capital allocation versus sort of the fundamentals fit in, in your decisions to sell?

Yes.

So, Vikram, we can't specifically give you a cap rate.

I think you found the NOI for all 48 assets.

It's safe to say that you have to think about couple of things, right?

You got the Q1 2018 NOI and you have to think about the growth on that NOI, whatever your assumptions are.

You have to think about -- we talked about that we sold the assets at a very significant gain.

The impact of real estate taxes that will get you to a nominal cap rate.

And then, obviously, that additional CapEx whatever assumptions you have, will get you to more of an economic cash flow view of how we look at it.

So we're not going to get into the details, but you are following the right track.

And needless to say, that we're extremely pleased with the assets.

Obviously, we're not looking to sell the assets.

We got a price that we thought we can't refuse.

So that's one thing.

And second thing is, we can sit here and debate obviously about cap rate.

But I want you to look at the price per unit, that's not debatable.

And that will tell you and you can see what we bought these assets for and that will give you a sense of how we feel about this obviously the price.

We do think, as I said, that the price will obviously -- this transaction is good for us, good for the buyer and good for Benchmark.

So we do think that there is a great story all around.

We also think obviously that the buyer who bought the assets will be able to generate the level of return that we think they have underwritten otherwise would not have signed up for the $50 million earn-out.

So that sort of gives you a sense of the portfolio.

From a -- look, from our perspective, you know that we don't look at markets, we look at micro markets.

And obviously, if you have very detailed granular micro market, you can build that story of submarkets in any great detail that you want to, right?

So we think about these issues deeply.

We do think that this improves the quality of our portfolio.

We also think the buyer who have bought are very sophisticated, very smart buyers, they will also do very well.

It's just not strategic fit for us, doesn't mean these assets are not strategic.

That's fair enough.

And just your comments around per unit makes sense.

So just second question building off of that, Discovery portfolio was sort of intrigued your -- the per unit cost in the kind of 270 range seems to be lower than several deals we've seen kind of in the 350 plus range.

Can you talk -- I know the occupancy is 72% so that's interesting as well.

Can you talk about kind of maybe what differentiates the assets or the kind of the return profile and then also expand a bit upon the billion-dollar development program?

So well, look, I'm just not going to sit here and talk about transactions that other participants in the marketplace have done.

I just pointed out a simple fact that these assets have traded at a significantly lower price, 50%, 60%, 70%, and different transaction, not just one.

Price per unit, as I said, is not debatable, right?

And I also pointed out that these assets are concrete and steel construction, [I2] construction.

So they're not stick-built assets, so there is significant differentiation.

What -- for certain of those transactions, what you might or might not know that we had the contractual right to buy those Discovery assets, and we've passed on it purely because of price, right?

So it is a question of difference.

It doesn't mean some of those transaction are bad, transaction is -- in our opinion, we're just not willing to pay that kind of premium to replacement cost to buy assets in markets that are relatively easier to build.

It doesn't mean it's easy to build, it's just relatively easier to build.

That's all I'm going to say about this topic.

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

Are you there, Mike?

Can you hear me?

Yes.

We hear you, Mike.

Now we hear you.

Hey, sorry about that.

I guess just thinking about all the new development agreements that were announced, when you look at what's been in place before, what's been added, what do you see, if any, I guess the average annual development spend potential over the next 3 to 5 years?

So Mike, these are long-time development agreements, right?

The -- so when I talk about, let's just say, that we have done -- we signed a $1 billion dollar development agreement with Balfour, that's not what's going to happen in the next 3 years, right?

So these are 10-year development agreements.

We are not looking to put X amount of money out.

That's not our focus.

We're trying to find the best micro markets and -- not only where the population and the wealth and the willingness to pay and -- is there, but also what we think is going to happen 5 years from now, 6 years from now when these properties will lease up.

So think about the announcement we made on -- in San Francisco, right?

You will say, we'll start next year.

It will take 2 years to build at least.

And then obviously, these assets will lease up, so you -- this is a 5- to 7-year time horizon.

So we are thinking about where markets are going.

And obviously, we want to grow 1 asset at a time with our partners.

So what we are doing with -- we are finding these growth vehicles and making decisions 1 asset at a time.

Likelihood is our development spend will be robust, but it will be very targeted and very, very focused.

Mike, one thing I wanted to add, which I think is a bit different, is that we are partnering in the development process.

So these operators are looking to us to help them identify those specific micro markets where it makes sense to bring their product offering.

That's a bit different than the historic disconnected relationship between the capital provider and the developer.

The developer is going off developing assets, and then you hope to be able to acquire those assets at some point.

This is really a much more collaborative model that you're not used to seeing.

So these are long-term arrangements.

We are thinking jointly about where it makes sense to bring new products and in which markets.

They actually come from the line of Daniel Bernstein with Capital One.

I actually wanted to get back to the buy versus build question.

I mean if you look at your SHO development, you're up over $500 million.

You're building significant number of relationships on exclusivity on the development side that you announced this quarter.

Should I read that just generally and knowing that somebody approached you for the benchmark portfolio?

But knowing all that, is it better to build versus buy?

Are you seeing advantages to build versus buy in seniors' housing [triple-net] portfolio?

Absolutely not.

Okay.

Dan, absolutely not.

It just purely depends on pricing.

Look at where -- let's take an example that we pointed out in very detail in these press releases, the Discovery we're buying as well as we're building.

We -- obviously, we understand development comes with certain set of risk.

So we need to make better return than we otherwise would in a acquisition.

However, we're very, very conscious of price per unit and price per foot.

And we're seeing pricing in the marketplace that doesn't make any sense to us relative to what we can do on the build.

So that's the decision.

It's not one versus another.

It is a cascade of decisions: do we want to be in this location, who do we want to be in this location with?

And then it's a question of do we buy it?

Do we build it?

Do we buy and -- recently opened buildings?

There's a lot of products that has been built and -- '15, '16, '17, '18 and -- including by a lot of people who are not necessarily from this business, and they might have underestimated how difficult it is to run this community.

This is an operating business, right?

So we are squarely focused on growing our platform with our operating partners one asset at a time.

Okay.

And I guess the other question I had, and maybe we could take this offline afterwards, I just wanted to understand more specifically how the portfolio's, Senior's Housing portfolio has changed from a statistical point, age of the portfolio, demographics, et cetera.

You look at the supplementals, it doesn't seem like the numbers have changed that much.

But again, maybe that's something we can take offline here if you want.

Yes.

Dan, I'll just give a couple of data points for you to think about.

We are squarely focused on several layers of decision-making process, right?

You talked about age of the portfolio, obviously, locations are important.

As we said several times, that markets and submarkets does not tell you the story.

You need to understand what micro markets you are in, what neighborhoods you are in and how those neighborhoods are changing.

Then you can reconstruct the submarkets and the markets back up.

It's not the other way around.

So those change.

So you need to understand that.

The other layer that you need to think about is the operating partner and the alignment of interest with the operating partner.

So that's something we should have a conversation.

Contracts are changing, and they are changing not in our favor.

Contracts are changing for alignment of interest.

We're not trying to do contracts that is just one-sided contract.

We're trying to do where we're aligned, right?

So I want you to understand, there's a series of decision-making: location is one, operator is one, the contract with the operator is another one, all going to that direction of we are in this, from our perspective, to make a great return for our shareholders and to enhance resident experience.

That's where our part.

We're happy to take the question offline and walk you through.

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

We were a bit surprised that the dispositions accelerated again this quarter and putting up over a $3 billion number this year.

We were under the impression that the portfolio was more or less roughly where you wanted it to be.

Was there anything about the benchmark portfolio that did not fit your next-generation health care model?

And how much of the remaining portfolio would you say falls into that category?

Karin, I want to be very specific.

As we said, we're only looking to sell a very small part of that portfolio.

So it's important for you that you focus on the fact we are only looking to sell very small part of the portfolio.

We've got a great price that we can't refuse, so we sold the portfolio.

So as you think about our capital allocators, we have to think about -- the capital allocation process is not just what your short-term cost of capital is relative to your stock or bond price that day.

Everything we sell, whether that's assets or equity, has an IRR that is attached to it, right?

IRR is not even the right word.

It's total return that is attached to it.

So we look at the total return of everything we sell, including equity.

And we look at every asset we own, and we have a forward IRR associated with that asset.

And the difference between the two is the value creation for our shareholders.

So we are not looking to retake what we told you.

We stand by that.

We own majority of the portfolio that we want to own going forward, obviously.

However, we got a price that we couldn't refuse and we acted what we think is the -- in the best interest -- long-term best interest of the shareholder.

We're happy to do that over and over again.

But we're not looking to sell.

It's not part of the portfolio that we want to sell, if that's what you are looking at.

There is not a noncore portfolio that we're sitting at that we want to dispose of at this point in time.

We're past that phase of our life cycle.

Okay.

Fair enough.

My second question is just on SHOP.

Can you update us on how supply is trending in your markets?

Are your data analytics still telling you that it's going to be coming down 23% to 25%-ish?

And anything you can share on how the portfolio has been trending so far in July?

So we talked about at our Investor Day with very specific details that we believe the total ACU, our adjusted competition unit, and yet to open SHOP for our portfolio is down roughly about 20% this year.

And we have not seen much change from there.

Just remember what I described last call is you always see '18 deliveries flow into '19.

And as we get to the end of the year, you will see '19 deliveries will go into '20.

That's just a normal life cycle of development that we see.

But overall, there's not much of a change.

Obviously, you know how the demand and supply pattern is changing from 2020 and onwards.

But -- and it's very favorable on both ends.

But we we're confident that we will be able to deliver growth from our portfolio.

Our portfolio, as we thought, will turn, has turned.

And we'll see what market gives us going forward.

Do you have an early estimate on how much supply will be down next year?

We're not prepared to discuss that yet.

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

I wonder if you could talk a little bit more about that Summit Medical transaction.

Are you characterizing that as an MOB or kind of a health system deal?

And maybe just a genesis of how that deal came about.

Steve, we are categorizing it as an MOB, although it now is part of a broader relationship with Summit.

This is an example of how we've been redirecting our business.

We are engaged very deeply in building relationships with health systems and large multi-specialty physician groups like Summit and looking for ways to help them transition their business models to make them more competitive in the future and improve consumer focus.

So when Summit and CityMD came together, it opened up an opportunity for us to look for ways that we could help facilitate the capital side of that combination.

And so that's where the acquisition of the Berkeley Heights campus came in.

And one of the things we didn't mention is this is probably one of the best large health care sites in the New York region, very affluent area, very high barrier-to-entry market.

I think you and Sheila know it pretty well.

There is -- we're excited that there's the opportunity to help them think through to that campus.

There may be other MOB opportunities on the campus, there may be even opportunities for housing on that campus at some point.

So again, off-market, very strategic opportunities for us and an example of where we're taking the business in the future.

Steve, it's just that marginally, it's sort of -- it's a live merger process is going through right now.

We expect this to close next month or so.

Post that, we're happy to have more conversations about this particular transaction.

But as Tom said, that clearly, you can see that we're talking about the health care is moving to a lower-cost consumer setting, you are seeing the examples of that in many places.

And that changes how these physician groups and the health systems are thinking about sort of an on-campus versus off-campus.

So that's an important thing to think about in relationship.

And the other one to think about is very simply that how we're helping our partners to achieve their strategic objectives.

Obviously, this was a live process, a very important M&A process for them, and both sides is involved in that merger.

And they obviously trusted us that we'll be able to quickly move, execute and be there.

That reliability and their trust is very important.

So post -- at the completion of the merger, we're happy to have more conversations about it.

Okay.

And just the second question is -- if it's too long-winded here for an answer, we can take it off-line.

But you sort of talked about this new management contract with the operators and you're trying to better align kind of their fees in kind of your performance.

I'm just trying to figure out, does this is an any way, shape or form, potentially slows the SHOP growth over time as they had better economics and maybe the upside of the performance of the assets?

Now if you think about it, if we have designed it, we're not going to get into it.

It's our proprietary structure.

So we're not going to get into a call to describe the way how it works.

But definitely, if we have entered into those constructs and we believe we're the only ones to do that, maybe other people are doing it as well, but we think that provides the upside for our shareholders.

As in any operating relationship, you would expect the financial cap partner will be aligned with the capital partners.

If there is significant upside in this property and we would like to share that upside with our operating partner but would -- it also will be a fact on the other side on the downside protection as well.

So I want you to think about this, these are not the structures, which I'm going to happy to walk you through, and there are several versions of those, are not designed to take growth down.

It's quite the opposite.

It is for operator -- it's to incentivize operators to focus on the ops and make sure they understand that running a building exceptionally well can be as profitable as developing the building.

That's where the focus is.

Let's have a longer conversation about this, Steve.

You got -- you and Sheila should come by 1 day and we'll walk you through it in greater detail.

Your next question comes from the line of Nick Yulico with Scotiabank.

I just wanted to go back to the guidance on same store.

Did you talk about what is embedded for senior housing operating and if there was any change there?

And I think there is still some -- and I think if you hit the high end of the old range, there's some deceleration in the back half of the year.

Could you just kind of remind us what's driving that?

Yes.

I'll start with the -- your question on the guidance change.

We don't -- we do not update subsector guidance throughout the year, so we don't -- we didn't change that.

That being said, the SHO part of our total portfolio is, as you know, typically, the most volatile as far as upside, downside.

So it's fair to assume that the biggest piece of that, moving that.

In our comments today, we're talking about how our SHO portfolio has outperformed.

Our expectations are consistent with that.

It's fair to say that, that is what is moving total portfolio up.

And is there some deceleration we should expect in the back half of the year versus first half of the year?

We -- as you know, Nick, we do not run the company for quarter-to-quarter, right?

We feel very good about where pricing is.

You can look at pricing and you can make your own assumptions.

Only thing we would tell you, there are 2 things we wanted to consider.

One is the insurance cost, which is a headwind for back half of the year.

It was a headwind for this quarter as well.

And you have to think about the operating leverage.

And we also told you that as we get towards the end of the year, U.K. should moderate down and Canada should go the other way.

So you put all of those things, you decide what will land.

We clearly are -- we couldn't sit here and tell you what our -- what we want the Q3 or Q4 would be.

We'll see what the market gives us.

But needless to say that if you think about the pricing economics, the occupancy and expenses will get to your number.

We will see where we are in 90 days (inaudible).

Okay.

And just last question on CapEx, and I know you have talked about your focus on looking at CapEx for the portfolio, and it's kind of hard for us to see other than if we look into SHOP, then you have the page on senior housing operating and you gave your recurring CapEx [throughout] the CapEx.

And it looks like the per unit recurring CapEx was up year-over-year in the second quarter.

Can you just talk about kind of what's driving that?

And I know your -- as well your -- I think your guidance for the overall company CapEx went up a little bit.

So just let's take a step back and think about CapEx.

Obviously, CapEx will change as the op portfolio construction is changing, right?

So you're seeing that we're selling a lot of the older assets that will help CapEx.

We also -- I want to remind you that you have 2 very not-repeating item in our CapEx.

One is the vintage CapEx we talked about that is finally getting flushed through the system now.

And the other 4 assets we bought from SNH that we discussed, it's finally -- those moneys being spent right now.

So I just want you to think about sort of CapEx, but in relationship with how the portfolio is changing.

The third piece, as you have to think about CapEx is, we talked about when we announced the Brookdale transition that we think these properties have significant upside and some of them will need to be refreshed.

So that's also flowing through the numbers now.

But there is no question, Nick, as we've talked about, we are extremely focused on CapEx.

We're focused on total return.

CapEx is a very big part of that.

And some of our portfolio decisions are made because of that.

On the other hand, I will tell you on the medical office side, Keith and his team has done a tremendous job on the CapEx side.

And we're starting to see the benefit of that.

So stay tuned.

There's a lot to talk about this topic as we get to 2020 and beyond.

And on the -- as you mentioned the full year outlook, Nick, it's a -- we've sold benchmark.

So we have gotten rid of some Senior Housing operating assets.

But we've also added quite a few.

And then on the transition side, we moved stuff from triple net to SHO that the CapEx obviously flows through our numbers there.

So that's the cause for some of the incremental pick up on the guidance.

And you are referring to the Brookdale transaction, right, the [pickup] percent?

Pegauss and Cogir they are now starting to flow through already.

Yes.

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

Congrats on the various transaction announcements.

So the acquisition of the newly developed Sunrise communities in D.C., San Francisco and San Diego, I think in your prepared remarks, if I heard you right, you characterized these markets as high barriers to entry.

I'm just wondering if you're able to remind us again or just give us a little more color around the nuances that you make these particular markets high barrier to entry from your perspective?

Yes.

So thanks, Steve.

If you think about some of these markets -- I'll give you an example.

First, let's talk about -- Sunrise is a very important example for you to understand how to create value.

So in Sunrise developments, we fund 34% of all developments.

So whatever the yield on cost under development, the 1/3 stays with us, right, and the 2/3 that we have rights on that we bought.

So from an economics perspective, if you -- I gave 2 numbers.

For the 2/3, that stabilized yield, as we talked about, is close to 6%.

But the -- I also said the overall stabilized yield for the 100% of the portfolio is close to 7%.

What's the difference?

It's the 1/3 where the yield on cost obviously is very high.

Now that goes back to why the yield on cost are so high?

If you do the math, you will see there's a big number.

Because these are legacy lands that Sunrise own for a long time, some of these goes back 10 years, 11 years.

And it takes that much time in some of these cases, 5, 6, 7 years, to get through zoning, get through permitting to build these assets.

So these 2 are very well connected.

So obviously, because of our ownership in Sunrise and that's -- and we talked about in other situations that we own up to 35% of different operators, what comes with it is the investment in those assets at a basis.

Now it takes time to build these assets, right, in this high barriers-to-entry market because of zoning and permitting, but what you get to other hand is obviously spectacular assets at a great price, great yield, if that makes sense.

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

I just wanted to understand your Benchmark sale a little bit better outside of the price aspect.

Can you speak up a little bit?

We have difficulty in hearing you?

Sorry about that.

Is that better, Shankh?

That's significantly better.

Excellent.

All right.

So I want to better understand the Benchmark sale outside of price.

Maybe you can contrast the difference in terms of asset and operator quality or growth profile between Benchmark and then some of the new acquisitions that you closed year-to-date.

Yes.

So we're not going to get into an operating quality [cost] in benchmark.

It's a highly reputable operator, so we're not going to get into that.

You know our -- we give you in-place NOI every quarter.

So you can look at those numbers and you can decide what the in-place NOI and the growth has been.

I will only point out to you that what we're buying is newly built buildings at a very specific micro markets.

The decisions that were -- we got into when we bought these assets were not at a portfolio level.

They're asset level 1 asset at a time decisions.

So of course, we think the difference of age and the location, which is not just a question of demographics, but also a question of psychographics and willingness to pay, will have significant better growth.

Not just NOI but also NOI minus CapEx.

All right.

Well, thinking going forward, if you're looking at just newly built buildings in specific micro markets, does that limit your growth profile going forward?

Because it's going to limit the portfolio that you can invest in?

No.

Chad, that's -- we're happy buyer of assets if it is in the right market with the right operator with the right alignment and the right price.

The point is not that we're only focused on new buildings.

The only focus was I was trying to explain the trait of what we bought versus what we sold this quarter.

And Chad, if you think about the history of the REITs acquiring senior living assets, there was a period of time when Health Care REIT bought Benchmark, you were buying a large -- diverse portfolio of assets created by that operator over time.

I think what Shankh is also saying is that as we move forward, we're much more deliberate about which assets we buy.

If there are large, diverse portfolios and the price is right and most of the assets fit our criteria, we might be a large portfolio buyer.

But we're not going to pay up for assets that we really do not believe are critical to our focus going forward.

And I think there was a time when there was a lot of asset gathering in between the senior housing, historic Senior Housing operators and the REITs.

I think the times have changed.

And I think we have a very different approach to acquiring assets today.

But we're as aggressive in finding tremendous opportunities to deploy capital.

I think that should be one of the takeaways from today's call and in our earnings release, is that we are driving a tremendous opportunities to deploy capital in assets we think are sustainable for the long term, not just getting bigger for the sake of getting bigger.

And I think there was a lot of that historically, and a lot of Welltower's been doing is working through that.

So I think you'll see going forward, I think we think we have a much better construct and a much better asset portfolio going forward than we had 4 years ago.

All right, Tom.

But adjacent to your comments, just thinking about what you've invested in this quarter and what you disposed of, is now the right time to take more of a risk in lease up and newer assets rather than stabilized assets?

No.

Chad, that's what I want to mention, that we are more than happy to buy stabilized assets if the price is right, not just from a capital perspective but for a total return perspective and pricing unit perspective.

We're more than happy to do that, right?

It is not a question of are we looking to buy stabilized assets.

So let's take an example of Balfour.

We bought 6 assets.

5 of them are relatively stabilized assets,

1 just opened, right?

And if you think about what happens when a building just opened, you have negative NOI.

That's how the buildings flow through.

That's what brings your cap rate down.

But obviously, you lease up the assets you go the other way.

We're not looking to buy just lease-up assets.

It just happens to be some people have built a lot of senior housing assets in markets were not senior housing operator.

That's not an easy business to be in, right?

And many multifamily developers who did not understand there's an operating model behind the building, which they don't necessarily have to think about when they build multifamily buildings, right?

So we are finding those opportunities to step in with our operating partner, such as exceptional operator, such as Discovery.

One asset at a time.

We're not looking to do a big portfolio.

Now if we find a big portfolio of stabilized assets that we think we have a different view, right?

We have to be have a different view from the seller.

Otherwise, the asset will be priced for perfection, then we're happy to step in, and we do that every day.

It's just we need to have a different view from the seller, either on the revenue side or the cost side.

How do you know -- what is the example of that what we have recently done, CNL?

Look at what happened in CNL, right?

The biggest credit part of the CNL portfolio was Novant.

And that has only 3.5 years left in the lease term and see what we have done since we have taken over.

So we have a different view from the seller or all the other potential buyers when we can step in and create significant operational value.

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

You guys have talked a lot about selling assets with high CapEx needs.

But when's that get factored into pricing?

Or do you think there's an efficiency here?

Every trade has 2 sides, the buyer and the seller, right?

And everybody has their reasons to buy and their reasons to sell.

As I said, we think this particular example -- this particular transaction is an example of win-win-win.

We do think the buyers who have bought these assets will make money.

And how do you know we believe that?

Look at our earn out structure.

We also think this is very good for the assets.

These assets will take reinvestment and then we revitalize, as Tom gives in his comments, in our press release.

So we are not necessarily predicting there's a significant inefficiency here.

We're only telling you that we're extremely happy with the price.

Otherwise, we would not have sold.

And we are not looking to sell, that we are only looking to sell a very small portion of this portfolio, and we got a price we couldn't refuse.

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

I just want to talk about the dispositions a little bit.

And I think you guys did a good job on the first half sales.

Can we talk about the second half sales?

It seems like you have another $1 billion.

And I believe, Tim mentioned, some of that was the LTAC portfolio.

What else is in there?

And did you recently put those in there?

And have you identified buyers for those properties?

So the -- what are the incremental addition to guidance?

It is primarily the Benchmarks.

I mentioned that $300 million of that $1.7 million plus proceeds in benchmark was already in held for sale.

So the $1.7 million increase in disposition $1.4 million plus is benchmark.

And all of the remaining is that an LTAC portfolio I spoke of.

Just to make one -- make sure one thing, Mike, to get to the heart of your question.

We don't put something in held for sale or talk about selling a property or change our guidance unless we have a handshake on the transaction, right?

So of course, we have identified the buyer.

We have negotiated the price.

We have agreed on what the structure should look like.

And that's why the disposition guidance has gone up.

Now if we are loosely thinking about should we sell an asset, obviously, we don't see a disposition guidance on that.

I just want you to understand the process.

So let's -- for an example, let's take the other side of that.

When I talked about the 3 million square feet of medical office -- in a not 1 portfolio, several medical office transactions, that's not what we are -- that's not the pipeline we're discussing with different sellers, do you want to sell, does it work?

That's not the characteristic of a pipeline.

We talked about 3 million square feet because we have agreed on the price.

We have agreed on the structure.

Now we're exchanging documentation, right?

We're going through the PSA, going through all the legal, et cetera.

So both acquisition and disposition, when we talk about pipeline and we talk about disposition guidance, you should assume the economics and the structures have been set and hands have been shaken.

Your final question comes from the line of Richard Anderson with SMBC.

Well, sorry, for keeping you so long.

I was just curious, Tim, I appreciated the color on -- the makeup of the same-store pool.

I'm curious, what amount of assets are not in there now?

I think it was 48 transitioned, and then I know the held for sale, I'm fine with those being out of there, but then there is the Brookdale transitions from a while back.

I'm wondering, when every -- when the same-store pool is kind to be fully loaded with all the transitioned assets.

And at what point do you make the decision to add them back subsequent to these transitions.

Yes.

So we did not -- there are not 48 assets that went through transition.

There are -- Tim specifically mentioned 16 was removed from transition.

The rest, we -- obviously, we sold benchmark with these 48 assets.

To answer your question specifically, only when there's a change of operator, it moved from same store, right?

If there is just a change of construct, it does not change the same store, right?

So these are -- to understand the operating performance of the building doesn't change necessarily because fundamentally behind your systems, you have a triple-net construct or an ride a construct, when it does -- when the management's changing the flats, that's changing its massively disruptive for this property.

That's what the source of our same-store policy.

When do they come back is the question you asked.

When we own the properties at least for 5 quarters so that you are not lapping easy comps, that does not create same store.

So we got to own the properties for 5 quarters in the new construct, the operator -- with the new operator for it to come back to the same store.

That is true for new acquisitions and, therefore, developments that need to be opened for x amount of time on the need to be stabilized for them to get to the same store.

The idea behind all of those is same store is supposed to give you a sense of how an average portfolio on an stabilized basis is doing, right?

All these changes, including that if you move the assets out when you are not doing well, then you put the asset back in, obviously -- presumably, when you stabilize it, that does not give you sense of same store.

Hence, the 5 quarter.

Hopefully that answered your questions.

That's perfect.

And then second question for anyone in the room.

Ventas put out their 5-year outlook on SHOP.

I suspect you look at that and think you can beat it.

But maybe a different angle to the question is, is there an implied ceiling on your ability to move rate up simply because you're dealing with the elderly population and to milk every last $0.01 from that perspective is what somewhat politically incorrect or something like that?

So I'm just wondering if there is some sort of ceiling to same-store growth just because of the nature of the business that you're in?

Yes.

So I'm going to trying to answer that question.

We're not going to get -- specifically get into a 5-year outlook by another participant in the overall space.

We give you our own a 5-year outlook that explains our view of what we think the portfolio is going to be.

You probably have noticed that though the demand drivers are very easy to get to your head wrapped around, right?

And we think the same presentation you talked about has done a fantastic job of doing that.

But you will never hear us talk about if 5-year outlook in a generic basis beyond what we know in our portfolio, right?

Tim talked about on the Investor Day of 5-year outlook of our portfolio and how the lease up and all the construction in progress and everything close together for a cash flow construct.

Why that is the case despite the fact we have so many people whose sole job at Welltower is to do creative analytics.

Why we don't do that?

Because we don't know the supply response.

The demand side is relatively not easy, but it is -- you can wrap your head around it.

I can't tell you sitting here what the supply is going to look like 5 years from now.

I will point out to you, not talking about any specific company, if you look at the history, you will see that Welltower portfolio has outperformed, in general, the broad industry as well as all other participants in the industry who own diversified portfolio.

There is no reason that I will think that the future will be much different in line of -- especially in line of how we have curated this portfolio for -- in the last 4 years.

Let me just speak to your point about affordability.

This is a business that is very high human touch.

And that's why I made the comment about the hundreds of thousands of people that are -- that work in this industry.

It is a very labor-intensive business.

And that explains the cost side of it and why the prices are high.

I think the only way we're going to reduce the cost of a high labor -- high-touch, high-labor component business is through technology.

And that's something we're looking at.

We don't think that it -- broadly you can continue to charge a price that will compensate you for the high cost of delivering this product.

You can in certain markets.

And that comes back to our micro-market approach because like there are people who will always want luxury products, there's always going to be a market of people that want, that demand that high-service model.

That's where we can deliver that.

But I think more broadly, Rich, I think we need to be thinking about how we can lower the cost side of this so we -- the cost of the consumer can be lower because a lot more people are going to need this service in the future.

And your next question comes from the line of Nicholas Joseph with Citi.

It's Michael Bilerman here for Nick.

Tom, I just wanted to ask you about the succession planning and how you and the Board are sort of approaching it.

I remember when you stepped in for George, at the time, you talked about how that was a process that the Board endorsed and that has how things had one.

I'm just curious, what is the tenor today about should you -- I don't know whether you're deciding or not, I recognize you probably still have a long runway.

But how is the Board approaching succession planning?

Would it be another Board member?

Would it be someone internal?

Would you seek to look external?

And just how should we think about the framework now that you're...

Great question, Mike.

And it's something we talked about at the Board a lot.

I think the best answer I have for you is, we have over the last 5 years brought in a next-generation management team at this company.

You've seen -- sometimes we get criticized for changing seats in management roles.

I think we're a company -- and with the support of our Board, we're constantly evaluating what are the skill sets that will be needed to run a business that will be different 5 years from now than it is today.

So being able to recruit a very high-caliber junior team of professionals all the way up to the -- any role is how you ensure good succession planning in a company.

So we've -- you've also seen us move people into different jobs here.

And I think that's another key piece.

I just talked about this last week at our Board meeting.

The idea of that you always -- when you change a job, you need to get a new title really doesn't work.

You -- it works in some cases, but that should not be -- that should be an exception versus the rule.

And we're really looking at lateral promotions.

You saw someone like a Justin Skiver, who was the Senior Vice President of Investments, has been moved to London and moved his family to London.

And he's had a tremendous experience.

He's going to come back to the U.S. But this has really made him a more viable leader in the company because he's had diversity of experience.

And that's something -- and we're happy to talk to you more in-depth about this because it's something that we're proud of.

We're really moving people around the organization and cross-training people.

And that's the best way I know to create a viable succession plan for our company.

So it sounds like a #1 choice would be use your internal talent, get them the right skills, different skills, move them around so that you have a roster of people that you can choose from internally.

And that would be choice #1.

And choice #2 and 3, it will -- it sounds like a Board choice like when you came on, would probably be lower than you getting someone from the outside.

Is that fair?

Yes.

I mean I'd say that we are very focused on having a deep bench here.

So when there is a need for succession that there's a deep pool to select from and which is as least disruptive, I think, for shareholders as possible.

Understand, when I stepped into the role, the Board did not have the confidence that there existed that deep pool inside the company at that time.

If you spoke to our Board today, they have a very different view of the pool that exists inside the company than they did 5 years ago.

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

We appreciate your participation and ask that you disconnect.