Welltower Inc (WELL) 2019 Q3 法說會逐字稿

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

My name is Shelby, and I'll 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 Matt McQueen, General Counsel.

Please go ahead, sir.

Thank you Shelby, and good morning.

As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act.

Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained.

Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.

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

Tom?

Thanks, Matt.

Back at our Investor Day in December of 2018, I laid out a growth plan for 2019.

I'm pleased to say that we have met or exceeded this growth plan year-to-date, and today, we again report strong results, which are enabling us to raise the midpoint of our 2019 FFO guidance.

The optimism that I articulated last December had less to do with NIC data and more to do with a deliberate and often painful, complete restructuring of all aspects of a company formerly known as Healthcare REIT.

We made considered and sometimes tough decisions regarding Genesis, Brookdale, HealthLease and other legacy investments that could best be characterized as last-generation real estate, bad capital structures, misaligned operating agreements, misguided private equity investments or, frankly, simply paying too much for real estate.

It was sometimes painful for our shareholders, but this management team took actions that were in our shareholders' best long-term interests.

While we will never stop optimizing our investment portfolio, the dispositions as well as the acquisitions made in the last 3 years have significantly de-risked the enterprise.

That is why, today, our senior housing assets have positive growth, our long-term care assets have strong lease coverage, and our industry-leading MOB portfolio continues to perform and grow through acquisition and development.

Welltower has unique strategy that fundamentally views our health and wellness care delivery real estate as a platform.

Like all successful platforms, this platform is able to deliver another level of value far beyond the value of the real estate.

This enables synergistic collaborations like CareMore/Anthem, which we recently announced, attracts new senior housing operators this year alone like LCB, Balfour, Frontier, Atria and Clover and has enabled our medical office portfolio to grow by approximately $2 billion this year, and the year is not over.

As we continue to grow, we have strengthened our balance sheet so we can continue to drive shareholder value in a measured way.

Tim McHugh will now take you through a closer look at our third quarter financial performance, but first I need to mention that this is Tim's first official earnings call as Chief Financial Officer.

I've had the pleasure of working side-by-side with Tim over the last 4 years and could not be happier to see him ascend to this leadership role at Welltower, a role we've been grooming him for since we stole him away from RREEF.

Over to you, Tim.

Thank you, Tom.

My comments today will focus on our third quarter results, our balance sheet and updates to our full year 2019 guidance.

Welltower reported normalized FFO of $1.05 per share.

Results were primarily driven by strong fundamental performance in our core portfolio and continued accretive capital deployment, slightly offset by $2 billion of property dispositions, outlined last quarter as part of our guidance adjustment, and $62 million of loan payoffs, yielding 9.4%.

Now let me provide you some details around our major segments.

Starting with senior housing triple-net.

We had another consistent quarter with positive 3.4% year-over-year same-store growth, driven by several development leases with fair market value step-ups.

EBITDARM and EBITDAR coverages were flat and down 0.1x, respectively.

Turning to medical office.

Same-store growth of positive 1.4% in the quarter was below long-term run rate and above our short-term expectations.

We are encouraged by recent leasing velocity as backfilling of vacancies resulted in a 40 basis point sequential increase in occupancy.

Importantly, we expect same-store growth return to trend next quarter as cash rent commences in our newly leased space.

Next, for health systems, which is comprised of our HCR ManorCare joint venture with ProMedica.

This portfolio enters the same-store pool in the fourth quarter.

We reported HCR ManorCare's trailing 12-month rent coverage of 2.15x in the footnote on Page 1 of our supplement this quarter.

The presentation is consistent with ProMedica's latest public presentation of the metric and is trailing 12-month coverage from 6/30/2019.

The coverage includes revenue and expenses under HCR ManorCare's core business lines, including home health and hospice.

This is consistent with how HCR's lease coverage has been presented by other public landlords in the past and, more importantly, ties to how ProMedica itself reports coverage of Welltower's lease to its public stakeholders.

While our reported coverage does not and will not reflect any profitability beyond the cash flow of HCR ManorCare itself, the guarantee in our lease is pari-passu with the senior most claims on its parent company and our joint venture partner, ProMedica.

Turning to long-term post-acute.

Same-store growth was positive 2.5% in the quarter, and both EBITDARM and EBITDAR coverages declined 0.01 times respectively.

Lastly, our senior housing operating segment continued to perform above our expectations, with same-store growth of positive 2.8% in the quarter.

As Tom alluded to, these results are a reflection of our continued focus on improving the quality of our portfolio from both the real estate and operator perspective.

As I noted last quarter, our active approach to portfolio management may result in sequential changes to our same-store pool.

In 3Q, we had an 8-asset sequential change in our senior housing operating same-store pool.

There were 15 assets removed made up of 11 Silverado properties in California that were transitioned to triple-net lease structure and 4 Revera properties in Canada that were removed to held-for-sale and subsequently sold in early October.

If these 15 assets had not been removed from the pool, same-store growth would have been positive 70 basis points higher than what we reported.

Additionally, we added 7 properties to the pool this quarter consisting of 5 acquisition properties, 1 redevelopment and 1 transition property, which all reached their fifth full quarter of operations per our same-store policy.

At quarter end, we had a total of 75 senior housing operating assets classified as transition properties.

These assets began transitioning in the fourth quarter of last year and will start to re-enter the same-store pool in the first quarter of 2020.

46 of the 75 will re-enter the pool by the second quarter of next year and virtually all 75 will be in the pool by the start of the fourth quarter next year.

While the roll-down in rent to EBITDAR has created a short-term dilution over the last 5 quarters, we continue to expect these properties to contribute meaningfully to cash flow growth in the coming years.

Turning to the balance sheet.

We remain disciplined in our capital-raising efforts, taking advantage of historically low yield in the investment-grade debt market.

In August, we came back to the market for the second time this year raising $1.22 billion of debt with over 8 years of duration and a weighted average yield of just 2.87%.

Proceeds from this issuance were used to refinance our 2021 and 2022 maturities.

As a result of this activity, we extended the average maturity and our entire debt stack by 1 full year.

Additionally, we continue to access equity market during the quarter via our DRIP and ATM programs.

We believe that our disciplined approach through these mechanisms provides us with maximum efficiency and flexibility and match funding both our development and our highly visible investment pipeline.

As such, in the quarter and through early October, we issued approximately 4.5 million shares at a weighted average price of $88.54 per share for estimated proceeds of $395 million.

As of today's call, through our forward ATM program, we have sold 6.1 million shares of common stock that have yet to settled, representing $528 million of estimated proceeds.

This methodical approach to capital raising, along with our asset recycling activity, has allowed us to concurrently improve our leverage metrics while further strengthening the quality of our portfolio.

With the closing of the Benchmark Senior Living portfolio this quarter, we ended the quarter with 5.79x net debt to EBITDA, which represents a roughly 0.5 turn reduction from the end of Q2.

We continue to be encouraged by the strong bid for our assets throughout our entire portfolio and continue to view the disposition of noncore assets as the efficient and effective way to capitalize the growing opportunity set we see.

I reinforce that we are more than adequately capitalized through our capital-raising efforts and asset recycling activities to finance all near-term investment and development opportunities.

Lastly, I wanted to address last night's update to full year 2019 guidance.

As indicated in our press release, we are tightening our full year FFO guidance to a range of $4.14 to $4.18 per share from our prior range of $4.10 to $4.20 per share.

With that change, the midpoint of our guidance has been lifted to $4.16 per share, which reflects better-than-expected portfolio performance, particularly from our senior housing operating segment.

Further details regarding our guidance are contained in last night's press release.

And with that, I'll now hand the call over to our Chief Investment Officer, Shankh Mitra.

Thank you, Tim, and good morning, everyone.

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

We are delighted to inform you that every segment of our business has either exceeded or met our expectation this quarter.

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

However, I have to admit, for 3 quarters in a row, our SHOP results have exceeded our own expectations.

Relative to our initial expectations of 0.5% to 2% NOI growth in SHOP for 2019, we have year-to-date delivered a solid 3% NOI growth driven by strong pricing power.

Q3 was no exception, driven by significantly better than expected U.S. results.

Overall, same-store NOI was up 2.8% in Q3, driven by 3% revenue growth and partially offset by 3.1% expense growth.

Though we experienced a slight decrease in occupancy year-over-year, primarily driven by a Canadian portfolio, we are encouraged by overall sequential occupancy growth.

We continue to achieve very strong pricing power, differentiating our extremely well located and diverse portfolio.

While labor cost inflation continues to be challenging with 4.8% year-over-year growth, we're encouraged by 4.4% compensation per occupied room, or COMPOR growth in U.S. Particularly noteworthy was 30 basis points of sequential COMPOR growth, which is the best we have seen in the last 5 years.

Though we have not and will not provide monthly results, in anticipation of questions, I want to point out that we did not experience sequential decline in NOI or occupancy on an intraquarter basis.

Occupancy continued to build through September following normal seasonal patterns.

Our U.K. business continues to perform as expected.

Although same-store portfolio growth moderated, as we discussed last call, our overall U.K. SHOP NOI growth was close to double digit.

Canadian SHOP portfolio is still trying to find a bottom.

This quarter, we have seen -- we have been impacted particularly by new deliveries in Quebec.

We are cautiously optimistic about our Canadian portfolio in 2020 from a growth standpoint.

Our U.S. portfolio shined through all the rhetoric around supply and labor cost inflation with 4.3% NOI growth in the quarter.

We continued to see significant outperformance of assisted living relative to independent living, and the gap widened to a multiyear high.

Top markets had a particularly strong quarter, primarily driven by solid pricing power.

Washington, D.C., Seattle, Chicago, San Diego, all experienced double-digit NOI growth this quarter.

Several of our operating partners contributed to this industry-leading growth, and I want to thank them on behalf of our shareholders.

As we have said repeatedly, we own the best assets in the best markets.

However, the hallmark of our portfolio is our 25 best operating partners.

The strong structural alignment between us and our partners is especially important when the industry fundamentals are not necessarily lifting all the boards.

To paraphrase Warren Buffett, in these times of low tide, you get to know more about other people's swimsuits.

To continue the theme of operating partners, we are delighted to inform you that we have initiated a RIDEA relationship with New England-based highly reputed operator LCB Senior Living.

We bought 1 asset together and transitioned 2 former Brookdale properties to LCB.

We have strong growth plans for this relationship.

As such, we have negotiated -- fully negotiated a RIDEA 3.0 management contract and aligned development contract with LCB.

This is our fifth new RIDEA relationship this year, and we're very excited to welcome Mike Stoler and his team to Welltower family.

In this quarter, we expanded our relationship with SRG by adding 1 asset in the San Francisco Bay area for a pro rata investment of $35 million at a valuation of $360,000 per unit, which is a significant discount to the replacement cost in that market.

While we have seen this kind of per-unit pricing in Florida and Texas, recently by other market participants, we are excited to achieve such remarkable pricing in the San Francisco Bay area.

We are also delighted to inform you that we continue to grow with our existing operating partners such as Frontier and Oakmont.

Subsequent to the quarter end, we have closed on 2 additional SHOP assets with Frontier for $39 million or $197,000 per unit, which is also a significant discount to replacement cost.

As a result of overbuilding in the last few years, we are starting to see more capital deployment opportunities in the memory care segment.

We're also incredibly excited to grow with Oakmont in California.

We signed a definitive agreement to buy 6 newly built Class A properties with approximately $297 million.

The initial cap rate is in the low 5% range on the current NOI as one of these assets just opened in the third quarter of this year.

We expect that yield will grow into the high 5% range as these assets stabilize over the next 18 months.

Oakmont will take 10% of the proceeds in OP units, our Welltower stock, at approximately $91 per share.

We will continue to grow with Oakmont in California markets.

Turning to our post-acute business, we significantly de-risked our enterprise this quarter by divesting a majority of our LTAC exposure.

As part of this process, we sold our Vibra portfolio for $265 million.

We're delighted to inform you that we have effectively managed through the Life Care reorg process and re-tennted the building with 2 operators.

We have lost approximately $2 million of annual rent as a part of the restructuring process, but we have improved coverage and credit that back these assets.

Though income loss and high cap rate sale are dilutive in near term, we have strengthened the quality of overall portfolio by minimizing the exposure to this property type.

These experiences highlight the detailed discussion we've provided on triple-net leases a few quarters ago.

The key to value preservation is to have the right basis or price per unit, credit support and alternative set of operators while keeping the overall exposure to a manageable level.

Both times, we have given rent concessions, in case of Genesis previously and Life Care now, we did not have many or all of these boxes checked.

However, we believe that today, we are in a different position in both senior housing triple-net and skilled nursing space after the many restructurings that we've done through last 3 years that Tom mentioned.

We now have manageable exposure, low basis and/or credit and the ability to turn to our operating platform to protect our shareholders.

This point cannot be overemphasized.

Turning to our health system business, we're pleased with the investment we made last year with our partner ProMedica Health.

Since that time, the regulatory environment has turned more favorable and asset pricing has soared.

We believe the outlook for total return or forward IRR has materially improved in the last 18 months since we announced the transaction.

We have received multiple unsolicited offers for many assets in the last 6 months in that portfolio.

Though we have not -- we have no current desire to sell these assets in size, we are considering 2 specific deals.

One, with 1 transaction for handful of assets in which the buyer has gone hard on their deposit.

These offers represent a valuation in excess of $150,000 per bed versus our combined basis of roughly $57,000 per bed.

The sheer magnitude of this price increase, hopefully, gives you a sense of what we think the total return looks like today versus when we made that investment.

We own real estate at a very low basis with cash flow that has credit support and term.

Speaking of cash flow, when we set the rent for this portfolio, at $143 million versus (inaudible) rent of $474 million, we did this precisely because we did not want to guess when the cash flow will turn around.

Though I will refrain from commenting on other people's opinion on our partner's credit, I want to put things in perspective.

ProMedica has a net debt of approximately $800 million with a revenue of $6.8 billion, with billions of dollars of unencumbered assets on their balance sheet.

One might argue that system's 20% ownership in our JV, along with a reasonable market multiple to the home health and hospice business, the system would be able to pay off all of their outstanding debt.

In the past, we had talked about $75 million or so of synergies when the transaction was announced.

We believe roughly $46 million will be achieved this year.

We are pleased with how the integration has gone so far and continue to anticipate the system will achieve significant synergies above our target.

We continue to believe this rental stream, which is roughly 2x covered at HCR level, will improve as we look forward in the near to medium term.

We also remind you that we have significant structural protection beyond HCR level coverage.

However, instead of rehashing what we have said before, I'm delighted to inform you that our collective business case has only gotten better.

HCR ManorCare leadership is engaged with several not-for-profit health systems to partner with to solve their need in this critical but not easy to execute part of the health care continuum.

We look forward to discussing many of these with you next year.

For our outpatient medical business, same-store NOI growth of 1.4% was ahead of our budget.

Though in-quarter growth remains muted for reasons we described previously, the leasing velocity has been brisk.

Based on this leasing velocity, we believe this segment is prime for growth in 2020.

We remain very active in the capital deployment side in this segment.

In this quarter, we closed 9 Class A assets for $193 million and expanded our relationship with Novant, Summit Medical Group, Baylor Scott & White Health, and TriHealth.

Summit and Novant are 2 prime examples of how we have replicated our relationship business model into medical office sector.

Post quarter end, we have signed a definitive agreement to acquire 18 outpatient assets for $258 million, which will expand our relationship with several systems such as Common Spirit, University of Texas Health, Henry Ford and UPMC.

This portfolio is approximately 98% leased, has remaining weighted average lease term of 8 years.

The portfolio is weighed by -- owned by a private owner, which has directly negotiated the transaction with us instead of going to the market due to our reputation and certainty of close.

This once again shows the power of our platform and how we can create significant value in a competitive industry through executing on completely off-market transactions.

We have a handful of other capital deployment opportunities in a similar off-market fashion that we have been negotiating over last 9 to 12 months.

In Q3, we have funded approximately $141 million of developments and an expected accretive yield of 8.1%.

While we are encouraged by a robust cost and access to capital, we remain disciplined and will deploy capital only if we can do so on a long-term total return basis.

To illustrate this point, year-to-date, we have closed $2.95 billion of acquisitions at a blended 1-year yield of 5.5%.

As described in our last earnings call, we expect many of these newly built assets to stabilize in next 12 to 24 months and consequently that 5.5% will grow above 6%.

In addition, we announced today an additional $594 million of post-quarter acquisitions in a similar mid to high 5% cap rate range.

And as Tom said, the year is not over yet.

At the same time, we have sold $2.675 billion of assets this year at a cap rate of 6.2%, which includes $558 million of high cap rate post-acute transactions, which implies we have sold $2.1 billion of senior housing assets at a cap rate of 5.35%, including Benchmark disposition described last call, which resulted into a $520 million gain.

The operating environment and the market for all of our assets remain incredibly vibrant, and we think thoughtful capital allocation can create significant alpha for our shareholders.

We are focused on building new relationships with the best-in-class senior housing operators and health systems while realizing growth opportunities with these partners 1 asset at a time.

With that, back to you, Tom.

Thanks, Shankh.

Before we open up the line for questions, I wanted to say that when I stepped into this role in 2014, the company was known as the seniors housing relationship REIT.

Admittedly, it took me a bit of time to realize that many of those relationships were very one-sided based on paying the most for an operator's real estate with few rights, and they were clearly not in favor of Welltower and its shareholders.

That is not who we are today.

Welltower's platform, people, real estate and healthcare knowledge, great operating partners, data and technology, access to capital and other capabilities provide us with a competitive advantage to drive growth from our current asset base as well as create new investment opportunities.

We are optimistic about our future.

Now Shelby, please open up the line for questions.

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

Just first question around ProMedica.

You mentioned the coverage of 2.15 as not necessarily comparable with the 1.8 that you originally outlined in the transaction.

Assuming you can't give the comparable number, could you give us a sense of what the original cash flow that you were underwritten or the decline in cash flow, which I think was about 10%?

How is that cash flow trending today?

Vikram, thank you for your question.

As we said that our desire -- we want to respect our partners' desire to keep 1 metric that is consistent across both platforms.

I'm happy to give you the cash flow that we have underwritten.

We usually don't talk about our underwriting models on the call.

But for once, I will give you that and, hopefully, this will stop this constant conversation on ProMedica, which, hopefully, you guys understand.

We believe that a significant assets more than its liabilities is debt.

As how we think about the credit.

But anyway, going back to your specific question, in 2018, if you look at the normalized EBITDAR from the continued operation, which effectively is what we bought and what we own, the total EBITDAR was 316.156 -- I'm giving you numbers up to 3 decimal point, $316.156 million.

So far this year, ProMedica has achieved $230.1 million of EBITDAR, and we believe we expect they will achieve at least $300 million of EBITDAR.

You can calculate the difference, you can calculate the decline and come to your own conclusion, but that's how much I'm going to say about our underwriting model.

Hopefully, that answers your question.

Yes.

That's helpful.

And just as a follow-up, not necessarily related, but on senior housing, pretty strong results in the U.S. again for the second quarter, and you outlined the pricing power.

Just to give us a sense of kind of how widespread the performance was, you have a lot of different operating partners, what was the range of REVPOR growth across your operators?

And if you can even give the sense of the range of NOI growth, that will just be helpful to get a broader industry trend.

Yes.

So, Vikram, I'm not going to get into too much details on operated-by-operator.

It's not a quarter-to-quarter 90-day business, but if you look at the pricing range, majority of the operators -- we have couple of operators in the 1% range, but majority of the operators are between 2.5% and 4.5% range, but couple of large operators have clocked 5.5% rate growth in U.S., which is remarkable.

Your next question comes from Steve Sakwa of Evercore.

Tim, I was just wondering if you could provide a little bit more detail on the 75 assets that are in transition within senior housing.

I know in the Investor Day, you sort of outlined a $29 million kind of maybe upside from the assets in transition, but I think that pool has changed since December.

So can you just help us frame out sort of the size of that drag this year and just maybe how we can think about that improving moving forward?

Thanks, Steve.

So you're correct, at the Investor Day, we outlined a transition bucket, mainly that point just being Brookdale.

So in addition to that, we transitioned a number of assets from Silverado to Frontier in the second quarter of this year.

That number from $29 million has incrementally grown.

With that, we will update that year-end as we give 2020 guidance.

I'm looking across the portfolio, but it's fair to say that year-to-date, they've had a negative impact on our FFO.

But as I said in my comments prior to or at the beginning of the call, we remain very confident, particularly with some of the early results from Frontier, that these assets will be very accretive to our 2020 cash flow and beyond.

Okay.

And as, I guess, a follow-up, maybe Shankh or Tom, can you maybe just talk about sort of the information flow that you get from your operators on a kind of daily, weekly, monthly basis and maybe how that's changed over time?

So Steve, as you know that we have a significant focus on data and data flow and then analytics on top of the data flow.

That's sort of what the core of this organization is, along with our focus on health care knowledge and how that sort of impacts the physical real estate and the setting around it.

So we have a tremendous, obviously, focus.

We have real-time information on how things are flowing.

I mean -- when I say real-time, I mean weekly view of occupancy, NOI, expenses, how sort of that's flowing, and we're in a constant dialogue with our operators and how we act on it with our asset managers, with our investment people, with our data analytics people.

It is a very collaborative process between us and our operators, and we continue to refine and improve on that process every day.

Steve, the thing I would add to that is really fundamental to the way we run this business is to have boots on the ground in the significant markets.

So we have a very strong team based on the West Coast.

We have a strong team in New York.

We have a strong team in Toledo.

We have a strong team in Toronto.

We have a strong team in London.

By having boots on the ground, we are not only just looking at spreadsheets, but we are in the buildings, we are at the operators' offices, we are all over the -- this portfolio because we are trying to, as much as we can, anticipate opportunities or anticipate problems and try and work with the operator to mitigate those issues or expand upon on the opportunities.

And that's just a unique aspect of how we run this business.

I don't think you can sit in an office on one side of the country and have any idea about what's going on in a portfolio that's in the West Coast.

And it's the same thing with our medical office business.

Keith, we have 14 offices?

14.

14 offices around the U.S., and we lever those offices.

I think you're going to start to see even more leverage between the folks that are located in those 14 offices, even interacting with our folks who are on the senior housing side.

So again, I can't stress enough that if you're going to be in a business like this and take the risk, to get the opportunities that are there in the senior housing space, you have to have boots on the ground, and you have to have the physical presence.

Your next question comes from Jonathan Hughes of Raymond James.

First off, congrats, Tim, on the new role and, John, on his other opportunity.

Just going to SHOP, when do you expect a negative supply impact in Québec to bottom and stop weighing on occupancy?

Jonathan, I'm not going to get into this call and be very specific about what's happening in Québec and what that's going to -- sort of will be behind us.

As I said that we're cautiously optimistic that our Canadian portfolio will return to growth next year, but we'll see how that plays out.

There's a lot of new competition, a lot of new buildings in Québec.

Some of our buildings that have performed for 15 years consistently through that whole time and looks great, have great product to sell, but has been impacted just -- the market needs to get absorbed, and when it does, like any other market, a great market over a period of time, it will come back.

But overall, as a portfolio, which we manage, and we have a fantastic team in Canada, and with a remarkably strong leadership there, we think that we will expect the portfolio will return to growth, hopefully, next year.

Okay.

That's helpful.

And then just one more for me at a bit higher level.

How have discussions with prospective SHOP operators gone since rollout of RIDEA 3.0?

I know you signed 5 new operators this year, but have some prospective operators that they don't want to be subject to potentially losing their properties like one of your West Coast operators this past summer.

Just any color you can share there would be great.

So, Jonathan, if you think about it, as you can see that we have plenty of strong operating partners to do business with and many of them or probably all of them are attracted to our platform because of our strong capabilities, both on our data side as well as on our healthcare capabilities.

And if you look at who these people are and you will see the list of capital partners they work with, they have absolutely no issues with getting money into their buildings.

That's not the issue.

They have come to us for the specific capabilities that we have that you will not find in any other place.

Having said that, if an operator doesn't want to take the bet on themselves and doesn't have the confidence to do so from an operating capability perspective, then I guess, that's a very good tool to figure out in the very front end who you should not do business with.

We have plenty of people to do business with.

And at the end of the day, that tool will help us and is helping us from an adverse selection perspective, if you will.

The next generation of senior housing operators, those who see the model changing in the future want to be with Welltower.

That is who we see requesting meetings.

I think that if you're just interested in monetizing your real estate, you're not -- we don't want you and you don't want us because we're going to be all over you, and we're going to make your life miserable.

So -- but those who see that there is another iteration in this business that the senior housing business of the past and, in some cases, the current, is not the senior housing business of the future.

The people that see -- that are aligned with us about where we're headed, where the future is going to be for this asset class want to work with Welltower.

Your next question comes from Nick Yulico of Scotiabank.

First question on senior housing operating segment.

I realize it's not the same pool this year as it was a year ago for the total portfolio, but you had occupancy down 90 basis points in the total portfolio.

Same-store was better, down 40 basis points.

Can you just explain what is driving some of that difference?

What you're saying on total portfolio is the transition assets, Nick, and that sort of Tom -- Tim talked about, how we think those transition assets will play out.

And they are going through that particular phase.

So there's not much to add other than the fact that when you change an operator as you know and I know and everybody in this business knows that you have a significant disruption at the building level.

We only change -- we only keep assets out of the pool when there is a change of operator, not when there is a change of structure, such as triple-net assets become RIDEA.

So that's what you're seeing.

Nick, I would just add that the Benchmark portfolio that we sold during the quarter is in all prior quarters and that was an above 90% occupied portfolio.

So that brought up prior quarter's occupancy relative to current.

And obviously, as you know, that is a very significant portfolio, so that will drag your overall occupancy to up significantly.

Okay.

And then, Shankh, you talked about the $150,000 per bed offer for some of the ProMedica assets.

Was that for the assisted living assets?

No.

That was for skilled nursing assets.

Okay.

Great.

And then just one last question.

You do have from reading the master lease you have this investment-grade covenant in your lease with ProMedica.

Essentially it's that ProMedica cannot be rated less than investment grade by 2 ratings agencies.

You now have 1 that has gotten closer to noninvestment grade not yet there.

I guess I'm just wondering if you could just remind us why you have that provision in the lease.

And if there is a scenario where you've got those downgrades over the next year or so, how would that work in forcing the provisions of the lease?

Nick, let me answer that.

First of all, we really cannot comment about the opinion of the rating agencies.

But credit rating agencies are there to assess credit risk.

So with respect to our joint venture, the first point is we own real estate at a low basis with good lease coverage, and you've heard us say that throughout the call this morning.

The JV provides us with rights that enhance our credit risk, and you've heard us talk about that.

And behind that stands a large, nonprofit health system that has $6.8 billion in revenue who is the leading health system in Northwest Ohio.

They have $800 million in net debt, and they've got $1.5 billion in cash on the balance sheet.

So we feel good about the position that we're in, and I think we've given a lot of metrics that support why we feel good about this investment.

And I'll just add, Nick, if you think about it, that's our option, that's not an automatic trigger and also our partner has cure rights, right?

So this is not -- I don't want you to think this is like algorithmic trade that they get to a level for whatever reason and then it's an automatic sort of action on our side.

So that's not how the real world works.

So it's an option that we kept to protect our shareholders.

However, as we told you that we think we know how to assess credit risk.

And we feel comfortable that -- where our assets are.

And as I said, I cannot overemphasize we feel the total return or IRR of that investment, as it stands today, is significantly higher than when we underwrote that.

So hopefully, that sort of gives you an answer, but ProMedica does have cure rights.

But one other saying, I just want to add, Nick, essentially, we have the right to bring them to the table.

As Shankh said, it's not a gun pointed at their head.

This -- there is a structure around this investment that brings us to the table to work together to solve whatever bumps in the road may occur over a very long period investment.

Historically, REITs sit in positions where the operator can show them the hand and where you have no ability to sit down at a table and work out a rational solution.

I mean we have no idea what the world is going to look like in 10 years or 15 years or in 20 years, but if you have a construct that aligns both the operator with the capital provider and allows you to sit down and make rational business decisions, I think that puts us in such an advantageous position.

So again, we feel very good about this investment.

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

So I just wanted to follow up on the overall same-store portfolio guidance and basically just compare where you are year-to-date.

Now I know you don't give segment level updates, but you are raising the guidance for the full year.

And so my question is in the context of that.

Your same-store SHOP or show -- same-store performance for the year, I think you said, Shankh, was 3% on a year-to-date basis.

I'm looking at your triple-net performance, over the course of the year, senior housing triple-net portfolio 4%; in 1Q, 3.7%, 3.4%, very good performance, but also markedly above 3%.

So now I've got 70% of your same-store portfolio coming in at 3% or better year-to-date.

How do we get to the 2.5%?

Jordan, we're not going to give you quarter-to-quarter guidance.

This is not a 90-day basis, as we have said several times.

All I will tell you, you can come to mathematically any amount of -- any number of conclusions you want to, but as we said, we feel very good about the year.

We thought we have a pretty good handle on the business to unlock the businesses better than what we thought, both in our medical office business as well as our senior housing operating business, right?

And we think next year is going to be a good year.

But it is -- I'm just not going to get into, right now, on this call, what next year looks like, if that's what you're trying to...

No, no, no, I don't even mean about next year.

I'm really just, I guess, what I'm commenting on Shankh, I don't want you miss my point.

Tim said that the MOB business is going to accelerate from 3Q to 4Q...

You're talking about fourth quarter?

Yes.

Yes, I'm just talking about fourth quarter, and your guidance updated for the year is basically inferring that 4Q same-store is going to be very low.

And as I said, Jordan, you can infer what you want to infer, we're not going to get into quarter-to-quarter numbers, but we'll tell you we want you to think about this business beyond 90 days.

There's seasonality of revenue, and there's seasonality of expenses, right?

And those seasonalities don't come together.

So as you think about that -- just think about the business, and Tim will explain you the numbers.

But just think about the business, you will get to the right answer.

If you look at any 90 days, good or bad, you may get to the wrong conclusion.

Tim?

I just wanted to add, Jordan, that part of -- there'll be an addition of our health system bucket to the same-store pool in the fourth quarter as well.

If you remember that, lease was 1.375% for the first year.

So that caused a bit of mix change in the pool going into 4Q.

Okay.

And then just a follow-up.

The strength that you guys saw in the Brandywine portfolio, sequentially in year-over-year to your, to your point, Shankh, I know this was a portfolio you called out, I think, a few quarters ago, struggling with sort of some occupancy issues post flu and then some operating or personnel issues.

Can you maybe just speak to the significant upswing that it saw sequentially and year-over-year just anecdotally?

So Jordan, if you -- you remember the first part right, which is we've talked about the flu in the New York area, particularly Long Island and Northern New Jersey.

Brandywine has a very stable leadership, and it has -- we have never mentioned that it is a personal issue.

Brandywine had a capital structure, sort of reorganization that was needed, and we thought the much better aligned relationship with RIDEA 3.0 management contract with significant skin in the game from Brandywine.

Brandywine is one of the best senior housing operators that's out there.

It has beautiful real estate, as we said, that it is the best real estate we have from an NOI per door perspective.

And Brandywine leadership is really committed to perform and that's what you're seeing in the marketplace today and in our numbers.

So I don't have much to add.

I don't want you to think that our numbers were just driven by Brandywine.

Several of our operators, 6, to be specific, has driven massive outperformance.

Brandywine is obviously one of them, and we're extremely delighted how much focus that Brandywine leadership team has put to drive performance.

And we think there is a significant additional upside to that portfolio, which is one of our best real estate we own with one of our best operators in the business.

Lastly, can you maybe just comment on sort of what the acquisition or investment pipeline looks like?

For you guys, obviously, you've had a pretty busy year so far, but it seems like you've got your sights on some other stuff.

Just interested in sort of what the flavor looks like that's coming down the pipe.

Jordan, we're seeing real opportunities, both in the senior housing space as well as in the medical office space.

So I would just say, stay tuned.

Your next question comes from John Kim of BMO Capital Market.

Shankh, you mentioned on your prepared remarks the sale of the Vibra LTAC portfolio.

Can you discuss what the cap rate was on the sale?

And also how much LTAC NOI you'll have remaining?

So I want you to think about that as a 10% range, double-digit cap rate.

And Tim, how much is our LTAC remaining?

We'll roughly $18 million run rate LTAC or some non-SNF post-acute rent going forward.

Which includes LTACs and ours right?

Yes.

Is your intention to sell the remaining soon or hold it?

It's hard to say.

John, as you know that we are a seller of every asset at a price, we feel that now the portfolio operator and the credit has stabilized.

We've taken pain.

As I mentioned, that we have given, obviously, $2 million of rent concession, but technically, a in concession but lower rent in a new contract versus the old construct.

We feel pretty decent about it, but every asset that we own is for sale at a price.

So we'll see how that plays out.

Okay.

Similar question.

On your total SHOP portfolio, approximately 78% of your revenue is in the same-store pool, and that's due to transitions and assets held for sale.

Is this figure roughly a good run rate going forward?

Or do you see it potentially rising, so that same-store pulling captures more of the total SHOP?

Yes, John, it's Tim.

We -- I gave some of this color in the call, but we expect the transition portfolio, which is 75 assets for virtually all of it to be in the same-store pOOl by the fourth quarter of next year.

And actually, it's 46 of the 75 assets to be in the pool about the second quarter.

So you should see when we give -- Steve asked a question earlier just around updating our outlook that we gave at our Investor Day last year around the Brookdale transitions and correctly pointed out that, that pool has grown from when we gave that initial color.

And you should expect that when we give our guidance next quarter, we'll give color around how those 75 assets will impact the pool as they enter throughout the year.

But we expect to be back to where we've been historically, which is kind of 90% plus of our same-store pool to be captured in that.

Your next question comes from Nick Joseph of Citi.

It's Michael Bilerman with Nick.

Tim, maybe sticking with same store, I think most people know that you have a different definition in your SEC 10-Qs and Ks than you do in the supplemental.

And I wanted to know whether you are going to give any thought to providing a road map either in the supplemental or in the 10-Q about the differentials in terms of getting from point A to point B. And I recognize that your supplemental is pro rata ownership, constant currency, which reflects more of your economics but there is a difference between how long the assets are in your pool longer in the Q and then quicker in the sup.

And so I'm wondering if you're able to provide that reconciliation for investors so they can understand the impacts of each of the differences between your SEC Qs and Ks in your supplemental.

Yes.

So thank you, Michael.

I think the way Nick has been doing great work on this, and I've been talking to them quarter-to-quarter.

You're correct to point out, given our -- both our international ownership and the fact that virtually every one of our senior housing relationships has a joint venture component to it.

There's a big difference between that fully consolidated number and the pro rata number, and our attempt with the supplement is to give the absolute best reflection of the economic impact or performance of these assets to Welltower at our share.

Two notes just on kind of how that's evolving.

One is, we're adding the disclosure, you'll see in our Q when we file it of both our year-to-date and 5-quarter pool.

So we'll have a pool in the Q, it'll closer reflect from just a -- from an asset perspective, our supplement pool, and that's largely in response to feedback we've gotten from yourself and others just on tying these closer.

And my comments earlier on the transition, that should also help kind of tie these pools together over the next year, they should come together.

But absolutely, we'll continue to work to disclose that information, to get that to Nick in a quarterly basis.

And if needed to be, we absolutely can kind of walk that from one or the other.

Again, we think that gap closes, and a lot of it is temporary over the last years, we've been pretty active on the asset management front.

Great.

And then, Tom, at the beginning of the call, you talked about how you've dramatically changed your senior housing portfolio and gotten out of Genesis and Brookdale and Health Lease and bad cap structures or misguided operating agreements or misguided private equity, and I think you also mentioned, just where you paid -- where you -- or at least Health Care REIT had paid too much for real estate.

You came into the CEO seat in April early 2014.

You had been on the Board for 10 years prior to that.

So I sort of wanted to get inside your head about those 10 years being on the Board and, I guess, getting information and approving a lot of those deals as a Board member.

How much information you were given to then come in and sort of restructure everything after the fact?

Yes, good question.

A Board -- sitting on a Board, you're only as good as the information that is either publicly disclosed or provided to you by the management team.

And there is -- the role of a director, Michael, is not to run the company, it is there to protect the shareholder, and your principal responsibility is corporate governance and to make sure that the right systems are in place at the company to protect the shareholder.

It's very different when you cross the line to be part of management.

And you see things very differently.

And I don't think you'd get a very different answer from anyone who transitioned from a Board seat to an operating role.

And as I said earlier, it took some time to figure that out.

And at the same time, I had a different view of what this business, this company should be, and I did not see us as an asset aggregator.

And that was the strategy beforehand.

When I asked the management team, what business are we in?

They said we do deals.

And when you do deals, some of your deals are going to be good, and I don't want to say that some of the deals weren't good, but many of them were not good.

And again, the information you get as a director is different than the information you see in sometimes, not in all cases, I'm not saying that about every company.

But I will tell you, I saw different things once I was inside the company, you have a very different look.

And a company structured as a Health Care REIT, for example, should not be making private equity investments, that is not our business.

And when you are paying, when you are seeing yourself as doing deals, and your strategy is to show up at auctions and win the deal, you can wind up paying too much.

And you don't have the opportunity to insert the kind of rights that we know are important to a sustainable business model.

So yes, the view from the Board room, in this case, was very different from the view once I was sitting in the seat.

I guess, has that changed with your Board today in terms of the information you're providing them?

Or more so the questions that they're asking of you?

Because I would assume sitting in the Board room for 10 years before you were CEO, you could have questioned all of these things and asked for more information to be able to understand what the company was doing.

Again, it's always only as good as the information you're provided beyond the publicly available information.

And does my Board ask difficult questions?

Do they put high hurdles to achieve?

Yes, they do because I work at their pleasure.

They can hire me.

They have the right to hire me, and they have the right to fire me.

So the Board has turned over quite significantly here.

We have a board whose skill sets represent the many verticals that are important from a corporate governance standpoint to sit on the board of a company like Welltower.

So there are people that represent the health care industry.

There are people that represent the real estate industry.

There are people that represent the insurance industry.

These are all verticals that allow them to provide a level of oversight and guidance from a Board table, but they are not here to run the company.

Directors do not run the business nor should they.

Your next question comes from Rich Anderson of SMBC.

So Tom, I appreciate you're not in a position to -- or have an interest in commenting on other people's opinions.

But with regard to the Moody's recent downgrade, the language is quite, let's call it, interesting.

And I have a comment.

My comment is, there are some complexities associated with the structure with ProMedica, namely the JV and how that's all situated into the economics of the transaction.

Is there an interpretation issue potentially when you juxtaposed Moody's to the other 2 rating agencies that is impacting this viewpoint?

Or is that something you don't also want to comment on?

Yes.

It's hard for me to comment on that, Rich.

But I'd say that we may not agree with interpretations on some of the intricacies of the joint venture structure.

So it's -- again, it's difficult to be in a position.

They also rate our company.

So it's difficult to be in -- to really start critiquing too much here.

I'd prefer not to do that.

Shankh, do you want to add anything to that?

I'll just add, you can have different opinions on what things are, right?

And how you calculate them.

So I'll give you an example, if I were to calculate cash margin of a place I would do a place like ProMedica, this is my opinion, not necessarily that is the right opinion.

It's just a different opinion.

I would only do 80% of the rent, not 100% of the rent because ProMedica pays only 80% of the rent.

And for cash margin, I will do cash rent, not the GAAP rent, which you know, can be significantly different given the 15-year lease with the 2.75% escalator, right?

So that will be a massive difference of what your cash margin will look like if you just make those 2 differences.

Is that a difference opinion, difference of interpretation?

I'll leave that to your opinion.

But from our perspective, as we said, we feel very good about the investment.

We think that return prospects have gotten better.

The regulatory prospects have gotten better.

And to put things in perspective, this is an organization, which is an extremely important organization for this part of the country at $6.8 billion of revenue and $800 million of net debt.

I hope that puts things in perspective.

Okay, great.

And then the second unrelated follow-up.

When you talked about the asset sales that you've done in the past.

And I know that you guys are -- and meetings that we've had together, aligning yourselves with your operators more increasingly at the NOI level so that they're also incentivized to control costs.

To what degree would you be willing to part ways with real estate that you love but otherwise the operator has an unwillingness to kind of go this way and to sort of have a stake in the game in terms of the cost side of the equation?

Have you sold assets simply because -- not because you didn't like the real estate, but because you didn't like the unwillingness of the operator to kind of go your way?

All right.

So let me answer that.

Because we've sold portfolios associated with operator relationships, you should assume there's been real estate inside those portfolios that we would have otherwise love to hold on to, but that was not an option.

So in those portfolio sales -- but I will answer the other question that if we had an operator with real estate that we loved, who was not willing to align with us around a construct, as we've described, and only saw us as someone who could pay the most for their real estate, it's very likely we would part ways.

We would not be afraid to part ways because generally in markets around the country that are the attractive markets, we have more than one operator.

And so people might have thought we were exiting New England when we exited Benchmark.

But actually, what we did is we aligned ourselves with a premium operator who is in the right markets in New England, and we're hoping that we're going to have a growing business with LCB.

We see them as the premium operator in the market and who is also much more Boston centric.

So that's an example.

Sometimes, we are really -- it's not a black and white decision.

And sometimes, we are giving up good real estate, and we're not afraid to give up good real estate, obviously, at a price too.

If we can sell, there's a hot market for high-quality senior housing assets today.

And if they're not strategic for us, we pretty likely can redeploy that capital with a more strategic operator in a more strategic construct.

I'll just add one thing, Rich, to a pretty comprehensive answer Tom gave you.

I don't want you to think that this is some sort of a -- these construct are only favorable to Welltower.

There's a reason that we say "alignment" 1,000 times, it helps our operators to make significantly more money than they otherwise do from other capital partners.

There's no one in this business, at least to my knowledge, who pays more to their operators than Welltower.

All we are trying to do is very simply we rise together, we fall together, our operators who perform have a significant opportunity to economically gain significantly more than what a standard operating agreement would be.

And thus, that helps them to get better people and that obviously produce better results.

So it's a circular reference, if you will, but it's a virtuous cycle.

And not everybody will agree to that, but I don't want you to think some sort of this connotation, as I hear this question, it feels like we just sort of have something that's only favorable to Welltower shareholders, and it's sort of something against our operating partners.

That cannot be further from the truth.

Alignment is not a one-sided relationship whether that's to the operator or to the capital partner.

It is very simply that you rise together and you fall together, and many of our operators are confident in their ability to run this business over long term, are more than happy to do that.

And they can get paid significantly more, they are getting paid significantly more.

And the leadership of this organization are hiring the best people to deploy that capital and attract the best talent into their organization.

Hopefully, that sort of gives you a sense of how we do it.

We cut it so many ways.

We have talked to you so that this flows through -- the economic flows through the very bottom of these communities, not just the leadership of these operating partners, but also people who are providing the services who are customers are seeing on a daily basis.

Yes, okay.

I got it.

I wasn't implying that, it was a one-way street.

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

Can you guys provide some specifics about how your SHOP operators are outperforming their competitive set?

I mean I'm not sure what exactly that means.

You can -- you probably have your own view of what the market is doing and whether that's rates or NOI or revenue or -- and then you compare our results to that.

I'm not exactly sure I understand.

I guess, I'm trying to gauge how much is supply an easier comp versus other factors at play.

Lucas, one of the things I think we got in front of a while ago was labor cost.

This is something we have been talking with our operators about for now years.

And I often think senior housing results are often too associated with NIC data and the supply issues.

I actually think not enough attention is focused on the operating expense side.

And I would say, again, I can't speak to our competitive set.

I can speak to our operators, I think we are on top of operating expenses, including labor cost.

What's happened in senior housing is many operators have taken higher and higher acuity residents in which they are not really staffed to manage that has led to often shorter length of stays and higher expenses because the operators need to hire more people, sometimes contract labors to manage that census, and that's something we are very on top of.

So again, I can't speak for folks that are not in the Welltower portfolio other than the elements that we've spoken to like location and operator quality.

I think the expense side is something we've just been focused on a long time, and I think that answers some of that.

I'll just add, Lukas, if you have been at our Investor Day, we have shared with you what's our sense in our data analytics presentation.

What's your view of our adjusted competition unit and yet-to-open shock, it looks like, which is cumulative impact of supply over the years.

And obviously, we got this less impact this year than last year, but also the results you are seeing is a result of hard work of our operators and our people who are working with the operators.

We're partners.

And the alignment is important because we come together on the table not as the operator against capital or capital against operator, but just true partners to solve problems.

Tom alluded to that, when we discuss ProMedica, it's no different in our business in senior housing business, in medical office business, and that's why probably you are seeing, but there's just no doubt that we have -- we feel like we have the best assets in the best market and the best operating platform that helps you to create more value than the sum of the individual assets would.

Great.

That's really helpful.

And I know it's really small but can you talk about the 4.6% cap rate on the SHOP acquisitions.

Are those unstabilized or just really high-quality?

Can -- any color there...

They are unstabilized.

Both of the senior housing operating assets that we bought, particularly talked about, whether it's LCB or it's with SRG, they are unstabilized properties in the turnaround situation.

So it is very difficult to talk about cap rates when you don't have a lot of cash flow to cap, which is why we specifically talked about, and we think it's the best way to look at it for unstabilized properties to look from the perspective of price per unit.

As I said, you can sort of convince yourself what a cap rate is, whether it's stabilized, nonstabilized future, today, next year.

What you can't is price per unit, and that's the way to look at.

And we believe in all of those cases.

We have bought these assets at a significant discount to replacement cost.

Your next question comes from Michael Carroll of RBC Capital.

Shankh, thanks for your comments earlier about the senior housing operating environment.

Can you probably add some color on what's the overall competitive set?

Are operators being more competitive on price in some of your markets in an effort to gain share?

Or is that something that you're not seeing within your portfolio?

Of course, Michael, thank you for your question.

If we were to see that, Mike, then we would not be talking about close to 3.5% pricing increase, right?

So we are not seeing that.

Is there a difference, different market?

Yes.

We talked about how our U.S. major markets had a remarkably strong quarter, that would translate, obviously, some of the smaller market hasn't done so well.

And that's what you want a portfolio for.

You can go back and look at 4 quarters or 5 quarters ago, I talked about the difference between the large market and the small markets were surprisingly not wide enough.

Different times and different portfolio, different parts of the portfolio work.

But as you know, our portfolio is very much weighted towards this large, high barriers to entry markets, and they're performing very well.

We have strong pricing power.

I don't want you to think that we have a favorite sort of a statistic in a week.

And today that's pricing tomorrow that's occupancy, the day after that is labor cost, we're trying to optimize all those three variables: pricing, occupancy and labor cost.

And as Tom alluded to, sometimes, it's easy to understand the dynamic between pricing and occupancy, but not so much between those 2 versus the labor cost, and we're trying to optimize the 3, and hopefully we agree that so far we have been successful.

Yes.

And then I think you made in your prepared remarks, comment that you had really strong growth in what D.C., Seattle, Chicago, San Diego due to strong pricing power.

Can you talk a little bit or add some color on that?

Where does that pricing power come from?

Is that on your ability to push rate on your existing residents?

Is it pushing or gaining better spreads on new residents.

I guess, where is the pricing power coming from?

In those specific markets, I specifically talked about close to double-digit growth.

That comes from existing residents, new resident and obviously controlling expenses as far as you can.

So specifically, those markets, you had all the levers playing out.

But generally speaking, to get to an average close to 3.5% pricing, you got to do both.

You got to put street pricing as well as existing residents as well.

And just to remind you, Michael, the reason you don't see our most -- just (inaudible) half of our portfolio is in January 1, and half of our portfolio is in sort of when you have the -- sort of that anniversary that's when we send pricing.

And this is a constant conversation.

Our operators are very focused on it, and they're getting results.

Your next question comes from Chad Vanacore of Stifel.

This is Tao for Chad.

So my first question is a follow-up on senior housing.

So Shankh, you mentioned SHOP occupancy actually expanded intra-quarter.

What is the magnitude of the pickup you see at a quarter-end?

And also, this quarter, you broke 3 quarter streak on year-on-year occupancy gain.

So understanding one data point is not a trend.

Do you see a return to year-on-year growth for the same-store pool in Q4?

(technical difficulty)

because it's a really good number to talk about.

But since it's a precedent, I don't want to talk about monthly performance.

It is very difficult for us to even talk about 90-day performance, I think I say that on a -- like a broken record.

I don't want to start the precedents talking about a monthly number.

But as I can tell you, we have seen the normal seasonality play out and we have built occupancy through the month of September.

Having said that, just remember we're not trying to build occupancy, we're trying to drive bottom line results, which is a function of pricing, occupancy and labor cost, primarily.

Third quarter, up by 1.4%.

Are there any seasonal trends that you're seeing with the increase in the expenses this quarter?

Can you hear us?

Yes, we can.

Can you repeat the question again?

I think there's something happened to the phone system.

Can you repeat the question again?

Your MOB same-store NOI grew 1.4% this quarter, kind of accelerating from the prior quarters?

Are there anything seasonal with the sequential change in expenses?

What happened is if you -- you have to look at the occupancy to get the answers.

We had a lot of leasing.

And what happened is that you are in a free rent burn off situations period.

And as Tim mentioned, specifically, if you go back to his part of the script, you'll see that we expect as that cash rent that's coming in we'll start -- we'll return to the normalized growth in this business.

So there is nothing specific other than obviously you have the -- when you have a lot of leasing, and you have to give the time to the tenants to build out their space, that's sort of flowing through the numbers but not the cash in.

So that's sort of what you're seeing.

And you can see that in the sequential occupancy growth.

That's helpful.

Just lastly, quickly.

Could you remind us again the size and timing of the 2 potential ProMedica deals you just talked about?

No, I wouldn't.

As we said, real estate transactions take a long time, right?

I sort of indicated to you where we are.

And as things play out -- obviously, I said that one of these transactions the deposits are hard at this point.

They will play out -- unfortunately, real estate transaction is painfully slow, because it takes a lot to do it.

We have a lot of extraordinary professionals who are doing it, and we'll tell you -- we'll give you the update when they close.

But we are excited about it.

Just know that every asset we have is on sale at a price.

And we are interested in that particular price at this specific time.

Your next question comes from Joshua Dennerlein of Bank of America.

Just curious to learn more about your CareMore health partnerships, how did that come about?

What are your goals of the partnership?

And is this something you can expand across your portfolio?

Good question.

It comes back to a view that there's another level of value that can be delivered in the types of settings that are built to manage the needs of frail to demented seniors.

So let's start there.

Me personally and other members of the team have spent a lot of time meeting with players across the health care continuum, including payers.

So this has been an evolutionary process to work with one particular payer that has a clinical enterprise associated with it, who agreed that our settings could enable them to deliver services to our population that would be mutually beneficial both to Welltower as well as the payer.

So this has been a process.

We are already expanding this model across our portfolio.

And I'll ask Mark Shaver, who joined us now almost 2 years ago from Johns Hopkins, whose -- he and his team have been on the ground working not only with CareMore, but also with our senior housing operators here.

Mark.

Thanks, Tom.

So as we announced publicly, about 2 months ago, we integrated CareMore and Anthem's I-SNP plan into our L.A. and Orange County seniors housing communities with Belmont Village and SRG, and that continues to go well.

And as Tom has mentioned many times, we continue to want to make our sites of care more consequential and linked to care delivery.

So that pilot's up and running.

Two months in, a lot of good progress.

Starting in 2020, we're expanding to 2 other major metro markets in the Southwest and adding and growing our operator pool to 4 in this specific partnership.

This is one of several strategies we have to work with payers and provider-sponsored plans, which are the health-system enabled health plans.

So more to come here but very good progress early on.

And at the end of the day, from our perspective, it makes the real estate more valuable.

Your next question comes from Steven Valiquette, Barclays.

Great.

So I was originally going to ask a high-level question around 2020.

But I think based on one of Shankh's answers earlier, I think I'll hold off on that.

But maybe just to shift gears here a little bit.

I don't think anybody touched on this really in detail yet, but one of your major peers last week talked about some major differences in performance in assisted living versus independent living properties.

That peer last week suggests that they're seeing pressure in Al from new supply, but that their IL portfolio was still doing okay.

Last quarter, you guys mentioned Welltower was experiencing the opposite, with significant outperformance in AL versus IL, it's really doing.

Question is, first just to confirm that you guys saw that same trend in Q3 that occurred in Q2.

I'm assuming so, but more importantly, just any additional color you can provide on your better performance in AL versus IL.

Thank you, Steve.

We are, I mentioned that in my prepared remarks.

We are seeing significant outperformance of AL and memory care segment relative to IL.

And that gap has reached a multiyear high this quarter.

Again, this is not a quarter-to-quarter business.

I don't want you to take some portion of that statistic from one quarter and think about the others in a different quarter, but that's a consistent trend we have seen, I believe I mentioned that for the last 4 quarters.

So -- and we saw that gap continued in favor of our assisted living portfolio.

Your next question from Michael Mueller of JPMorgan.

Looks like you have about $600 million of SHOP development underway.

Can you talk about what you -- what sort of time frame you underwrite for the properties to stabilize in?

And has that changed over the past couple of years?

Steve -- Mike, it just hasn't changed from an underwriting or from the yield perspective, timing hasn't changed much.

We have a lot of assets in that pool, and we believe that you will see majority of them will get delivered between 2020 and 2021.

And Tim has walked you through what that cash flow impact is on our Investor Day, so you can look at the slides and look at the impact.

I can tell you that the other aspect of the development platform is about 750,000 square feet of medical office.

That's 8 assets, and all but one will get delivered between now and end of next year, as obviously all of those assets are leased, so you'll get also from a run rate perspective, 2020 -- second half of 2020 and going into 2021 you will get good growth there as well.

So you will have the deliveries of senior housing assets when they get delivered.

Obviously, you're going through the lease up that's dilutive to the nature, just how the business works because if you have lease-up losses.

On the other hand, medical office, they are leased, and they'll get delivered, and you kind of figure out how those interact with each other.

And 2020 is obviously chunkier, it was about $800 million of deliveries.

If we're thinking out over the next 3 years to 5 years or so.

I mean what are you thinking about for an average annual pace of development investment?

Yes, Michael, we've been averaging kind of $300 million in deliveries over the past 4 or 5 years.

As the enterprise has grown, we have a little bit more capacity on the balance sheet side to support development as a complement to our normal acquisition activity.

So I think what you're seeing now is that probably move towards more of a $500 million annual delivery pace.

Next year, you're correct to point out, it's a little more front weighted, but you should expect that to normalize more than $500 million range.

Your next question comes from Daniel Bernstein of Capital One.

I know you had a very good performance this quarter in your particular portfolio, but from an industry perspective, I want to just think about if you're seeing any additional pressures from rate or occupancy out there, in particular, if you look at the merchant builders or 2 or 3 years into a lease up, they're probably not able to refinance, they're at the end of that lifeline of the construction loan.

Are you seeing any additional industry pressures from those merchant builders?

And maybe are those the opportunities that you're seeing on the acquisition side as well?

Thanks, Dan.

We are.

We can only speak for our portfolio.

It's hard to speak about the industry in general.

We are always extremely focused on our portfolio and kind of that's the answer you would expect from us given how far our knowledge sort of goes.

And we are not seeing significant pressure from any one of these industry participants that you mentioned.

In general, I would say that some of the earlier overdevelopment that we have seen, I mentioned a couple of quarters ago that we're seeing emergence of opportunities in Texas.

That's sort of one of the first places that had the overbuilding.

I mentioned this quarter, you are starting to see that in the memory care segment.

So obviously, you are picking up that point.

But remember, we're very focused on something very simple.

Is this an asset that is well built, has great bones?

Can we get a great operator to run it to create long-term future value?

And is that at the right basis, right?

We're much -- we're not focused on what the initial cap rate looks like, we're focused on what the right base is and long-term returns looks like.

We're starting to see opportunities but it's too early to talk about how big?

When that can transpire?

So stay tuned.

Your next question comes from Tayo Okusanya of Mizuho.

Tim, congratulations on the new role.

Very well earned.

Thanks, Tayo.

Yes.

Just a couple of questions for me.

I wanted to go back to ProMedica for a quick second.

We're now just maybe 4 weeks post the implementation of PDPM.

I'm just wondering if they are giving you guys any feedback around how that's going and probably again, some longer-term thoughts around PDPM.

Shankh, given your comments that you guys are definitely feeling better about your investment case partly due to some of the regulatory changes.

A couple of -- I'll tell you, first is, we're feeling better about investment case because the terminal value of what we thought the investment would support purely from a price per bed perspective has gone significantly higher.

And I have talked about the case, about valuation or exit multiple, right?

So that -- then if you think about even if everything else is same, I gave detailed view on what the cash flow might or might not look like relative to underwriting to Vikram.

But just if you think about the sheer magnitude of change on valuation will change a massive increase in the IRR.

Having said that, on PDPM, you are correct that we are obviously very close with our partners.

We talk in a very regular basis.

So I do have a view on how the team talk -- thinking about it, but it's too early to comment.

Let's just say that they feel pretty optimistic that it will add to the cash flow as we move forward.

Just overall, just remember what I said that we had $316.156 million EBITDAR for 2018.

So far we have achieved $230.1 million.

You know in skilled nursing business, seasonally, fourth quarter is a strong quarter.

On top of that, you have the rate increase this year, and you have PDPM, which is obviously sort of a variable we think that will land on the positive side, but we'll talk about that more next quarter's call.

Hopefully that was helpful.

That's helpful.

And then on the SHOP side, I think you gave very good commentary around (inaudible) of Canada.

I'm just trying to understand the U.K., in particular, the big change in the SHOP same-store NOI between Q2 and Q3, specifically what was going on there, where it's just a very tough comp versus the 3Q '18.

So Tayo, if you look back last couple of quarters' earnings call, I have talked about that in detail so I don't want to repeat that.

But I do think that our U.K. portfolio is doing well.

So it is -- obviously, same store is what same store is, we can't change what the definition is.

And just because the rest of the -- out of same-store portfolio is doing better, we can't put it in same store, right?

But if you look at the overall U.K. SHOP portfolio, it's actually up close to double digit.

But the pool that we have is up 1.8% or so that we reported.

I mean it is what it is.

That's just a number, you've got to take the goods and the bads.

But we are -- we feel optimistic about the business.

Okay, great.

And then one more if you'll indulge me.

Just taking a look at your Triple-Net portfolio, you gave a nice stratification of all the rent coverage.

And I'm just looking across all the names where you have less than 1x coverage.

And I think in 1Q that total sum was about 4.7% according to the sub, and at the Q3, that number is 6.1%.

Just curious if that's just 1 or 2 tenants that are doing incrementally worse on the Triple-Net side?

Or what's kind of driven that increase?

And how do we kind of think about that just in regards to managing those leases?

Yes.

Very good question.

How you think about managing those leases?

If you go back 4 quarters ago, I had a long conversation on this earnings call about how we think about that.

I added significantly more color commentary this quarter in my prepared remarks that you need to have the right basis, right structure, more importantly, the right follow on operators.

We feel a lot of these assets have significant opportunity of cash flow upside.

With existing operator or with a different operator we do not anticipate any significant changes as we sit right here.

But if there's an opportunity to maximize the asset values and cash flow, we will do that.

You have seen us doing that in last 3 years, we'll not go back from there.

However, as we stand -- sit right today, right here, we do not see a significant change.

We'll see how things change.

Just so you know, we have a very large group of professionals who do this day in and day out.

And every one of our assets as an alternative operator and an alternative to an alternative operator, right?

We -- and that's how we set it up, we're not waiting for someday we'll get some call and then we'll act to it.

The game plan, the business plan is built around all of the assets, including the assets you mentioned.

And if there needs to be, we'll execute.

And hopefully that you believe that we have executed so far well.

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

Just had a follow-up.

I think you guys talked about last quarter the 3 million square feet of MOBs under negotiation, it looks like you closed some.

Is there -- can you sort of speak to that?

Jordan, we closed or we announced post-quarter activity of just exactly 1 million square feet so far of the 3. And as Tom said, the year is not over yet, so stay tuned.

Okay.

So that stuff's still in the -- under negotiation, essentially or mostly?

Yes, they are.

And that pipeline has expanded.

We have a lot to talk about that in the next few months.

Okay, more MOB.

And then...

Not necessarily.

This is just -- your question was MOB.

So we talked about MOBs.

We're not -- as Tom said in an answer to a question, we feel great about both our senior housing business as well as our medical office business, and there are opportunities to grow with our existing relationship whether that's on the MOB side or with our senior housing side, we're optimistic on both of our businesses, not necessarily just more MOB.

No, no.

And I'm not trying to pin you down.

It just sounds like you said you closed on $1 million of the $3 million, it sounded like you still have a couple of million left in the pipeline or more.

Or more.

Right, right.

Okay.

And then on ProMedica.

Is there something helpful on a property-level metric basis that you can offer up to us that sort of give us a little bit of a better indication on the four wall EBITDAR coverage or just property operating level metrics.

I mean you're now giving occupancy, but we really -- I think we only have a few quarters of it from you, but is there anything else you can offer up?

We will only offer you what our partner is willing to offer to the marketplace.

Needless to say that I understand your questions because majority of the investments that you have seen in the Triple-Net side with operators that have no credit or who have seen significantly worse credit.

As I pointed out that our view that our partner has significant credit, and I hope you understand that, that lease is -- sits at the top of the capital structure and not on a sort of SPE vehicle.

So I do understand the question, but we want to be respectful to our operating partner and their desire to, obviously, have consistent numbers and messages out there.

However, we gave you enough, hopefully, on the cash flow side, which tells you how it's -- sort of how things are going relative to what we thought.

What's the denominator in the 2.15?

Is it your 144 of rent or is it the 100%?

It's our rent.

It's the senior obligation in the...

It's 144?

Yes.

Your final question comes from Nick Joseph from Citi.

Just for the ProMedica asset sales that have gone hard.

How many beds are in that portfolio?

I'm not going to get into that, Nick.

Investors and analysts are not the only people who listen to these calls.

I only want to talk about a transaction.

When they're ready to talk about, given all the noise around ProMedica, I wanted to mention this to give you a sense of how we're thinking about the total return of that portfolio is.

But we're not going to talk about a transaction between 2 parties, what's supposed to be.

At this stage, and the conversation is supposed to be private.

So I only difficulty partner.

I disclose -- how much I was allowed to disclose by my partner.

Okay.

And that was at 150 a bed.

That's what the market is today.

If you look at what -- we have sold our Genesis assets that are about significantly higher than what we bought our ManorCare assets.

If you look at where markets are trading, overall, we are seeing somewhere between 120 and 180 per bed.

It's what we're seeing in the marketplace.

We'll look at it after that not just these assets but that's what we're seeing overall, that's where the business has gone.

There are no other questions in queue.

Thank you for dialing into the Welltower Earnings Conference Call.

We appreciate your participation and ask that you disconnect.