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. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the call over to Matthew McQueen, General Counsel. Please go ahead, sir.
Thank you, Shelby, 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 obtained. 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. 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. 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 three 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 a 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. 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 four 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 REIT.
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%. 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. EBITDAR and EBITDAR coverages were flat and down 0.1 times respectively. Turning to medical office. Same-store growth of positive 1.4% in the quarter was below long-term run rate, 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. We expect same-store growth to return to trend next quarter as cash rent commences in our newly leased space. 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 2.15 times in the footnote on page one 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 a reported coverage does not and will not reflect any profitability beyond the cash flow of HCR ManorCare itself, the guarantee on 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 EBITDAR and EBITDAR coverages declined 0.01 times respectively. Lastly, our senior housing operating segment continued to perform above our expectations. The 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 eight-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 a triple net lease structure, and four Revera properties in Canada that were removed 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 77 properties to the pool this quarter, consisting of five acquisition properties, one redevelopment, and one transition property, which all reached their fifth full quarter of operations for 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 reenter the same-store pool in the first quarter of 2020. 46 of the 75 will reenter 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 EBITDA has created short-term dilution over the past five 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 yields 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 eight 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 in our entire debt stack by one full year. We continue to access the 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 in match funding both our development and our highly visible investment pipeline. 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 settle, 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 5.79 times net debt to EBITDA, which represents a roughly half-term 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 non-core assets as the efficient and effective way to capitalize the growing opportunities set we see.
I would 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 want 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-$4.18 per share from our prior range of $4.10-$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. 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're delighted to inform you that every segment of our business has either exceeded or met our expectations this quarter. We came into this year expecting a slow and steady recovery to take hold in our senior housing operating or SHOP segment. I have to admit, for three quarters in a row, our SHOP results have exceeded our own expectations. Relative to our initial expectations of 0.5%-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 our Canadian portfolio, we're 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 compo growth in U.S. Particularly noteworthy was 30 basis points of sequential compo growth, which is the best we have seen in the last five 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 intra-quarter 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 been impacted particularly by new deliveries in Quebec. We're 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 continue to see significant outperformance of assisted living relative to independent living, and the gap widened to a multi-year 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. 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're delighted to inform you that we have initiated a RIDEA relationship with New England-based, highly reputed operator, LCB Senior Living. We bought one asset together and transitioned two former Brookdale properties to LCB. We have strong growth plans for this relationship. We have fully negotiated a RIDEA 3.0 management contract and aligned development contract with LCB.
This is our fifth new RIDEA relationship this year. We're very excited to welcome Mike Stoller and his team to Welltower family. In this quarter, we expanded our relationship with SRG by adding one 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're 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 two 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 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 six 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 the 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 or 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 are delighted to inform you that we have effectively managed through the LifeCare reorg process and re-tenanted the buildings with two operators. We have lost approximately $2 million of annual rent as a part of the restructuring process, 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. This experience highlights the detailed discussion we 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 concession, in case of Genesis previously and LTAC now, we did not have many or all of these boxes checked. However, we believe that today we're in a different position in both senior housing triple net and skilled nursing space after the many restructurings that we have done in the last three 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 six months in that portfolio. Though we have no current desire to sell these assets in size, we are considering two specific deals. One, with one transaction for a 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 great support and term. Speaking of cash flow, when we set the rent for this portfolio at $143 million versus pre-org 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 have 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 two times 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. Instead of rehashing what we have said before, I'm delighted to inform you that our collective business case has only gotten better. HCR managed care 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 healthcare continuum.
We look forward to discussing many of this with you next year. 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 primed 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, and TriHealth. Summit and Novant are two 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 CommonSpirit, University of Texas Health, Henry Ford, and UPMC. This portfolio is approximately 98% leased, has remaining weighted average lease term of eight years. The portfolio is 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 the last nine to 12 months. In Q3, we have funded approximately $141 million of development 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 close to $2.95 billion of acquisition at a blended one-year yield of 5.5%. As described in our last earnings call, we expect many of these newly built assets to stabilize in the next 12 to 24 months. Consequently, that 5.5% will grow above 6%. In addition, we announced today an additional $594 million of post-quarter acquisition in a similar mid to high 5% cap rate range. 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, 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 one 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. Shelby, please open up the line for questions.
Ladies and gentlemen, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. To withdraw a question, press the pound key. Please limit your questions to one question and a related follow-up so that all callers may ask their questions. You may reenter the queue by pressing star 1 again. Your first question comes from Vikram Malhotra of Morgan Stanley.
Thanks for taking the question, guys. Congrats on the strong results. Just first question around ProMedica. You mentioned the coverage of 2.15 is 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 had 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, we want to respect our partner's desire to keep one 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. 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 as significant assets more than its liabilities is debt and how we think about the credit. Anyway, going back to your specific question. In 2018, if you look at the normalized EBITDA from the continued operation, which is effectively is what we bought and what we own, the total EBITDA was $316.156. I'm giving you numbers up to three decimal point, $316.156 million.
Far this year, ProMedica has achieved $230.1 million of EBITDA, and we expect they will achieve at least $300 million of EBITDA. You can calculate the difference, you can calculate the decline and come to your own conclusion. That's how much I'm going to say about our underwriting model. Hopefully that answers your question.
That's helpful. Just then 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, and you have a lot of different operating partners, what was the range of RevPAR growth across your operators? If you can even give us a sense of the range of NOI growth, that'll just be helpful to get a broader industry trend.
Vikram, I'm not going to get into too much details on operator by operator. It's not a quarter-to-quarter 90-day business. If you look at the pricing range, majority of the operators, we have a couple of operators in the 1% range, but majority of the operators are between 2.5%-4.5% range with a couple of large operators have clocked 5.5% rate growth in U.S., which is remarkable.
Okay. Thank you.
Your next question comes from Steve Sakwa of Evercore.
Thanks. Good morning. 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 it, a $29 million kind of maybe upside from the assets in transition, but I think that pool has changed since December. 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?
Yeah. Thanks, Steve. You're correct. At the Investor Day, we outlined the transition bucket, mainly at that point just being Brookdale. 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 has incrementally grown with that. We will update that at year-end as we give 2020 guidance when looking across the portfolio. It's fair to say that year-to-date, they've had a negative impact on our FFO. 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. 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?
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 healthcare knowledge, and how that sort of impacts the physical real estate and the setting around it. We have a tremendous, obviously, focus. We have real-time information on how things are flowing. When I say real time, I mean, we have a weekly view of occupancy, NOI expenses, how sort of that's flowing, and we're in a constant dialogue with our operators on 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. 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 this portfolio because we're 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 the opportunities. 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. It's the same thing with our medical office business. Keith, we have 14 offices?
14, yeah.
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. 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. You have to have a physical presence.
That's a good color. Thanks.
Thanks.
Your next question comes from Jonathan Hughes of Raymond James.
Hey, good morning. First off, congrats to Tim on the new role and John on his other opportunity. Just going to SHOP, when do you expect the negative supply impact in Quebec to bottom and stop weighing on occupancy?
Well, Jonathan, I'm not going to get into this call and be very specific about what's happening in Quebec and what that's going to 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 Quebec. Some of our buildings that have performed for 15 years, consistently, and through that whole time and looks great, have great product to sell, but has been impacted. The market needs to get absorbed, and when it does, like any other market, it's a great market, over a period of time, it will come back.
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. Just one more from me, at a bit higher level. How have discussions with prospective SHOP operators gone since rollout of RIDEA 3.0? I know you've signed up five new operators this year, have some prospective operators said 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.
Jonathan, if you think about it, as you can see that we have plenty of strong operating partners to do business with, 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. If you look at who these people are, and you will see their list of capital partners they have worked 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, 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. 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 are aligned with us about where we're headed, where the future's going to be for this asset class, want to work with Welltower.
That's great. Thanks for the color.
Thank you.
Your next question comes from Nicholas Yulico, Scotiabank.
Thanks. First question on the 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 were saying on total portfolio is the transition assets, Nick, and that's what Tim talked about, how we think those transition assets will play out. They are going through that particular phase. 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 keep assets out of the pool when there is a change of operator, not when there's a change of structure, such as triple net assets become RIDEA. 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 above 90% occupied portfolio. That brought up prior quarters occupancy relative to current.
Obviously, as you know, that is a very significant portfolio, so that will drag your overall occupancy up significantly.
Okay, thanks. Then, Shankh 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. Just one last question. 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 two ratings agencies. You now have one that has gotten closer to non-investment grade, not yet there. I guess I'm just wondering, can you just remind us why you have that provision in the lease? If there is a scenario where you got those downgrades over the next year or so, how would that work in enforcing the provisions of the lease?
Nick, let me answer that. First of all, we really cannot comment about the opinion of the rating agencies. Credit rating agencies are there to assess credit risk. 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. 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. 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.
I'll just add, Nick, if you think about it, that's our option. That's not an automatic trigger. Also, our partner has a cure right. 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. That's not how the real world works. 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 underwent that. Hopefully, that sort of gives you an answer. ProMedica does have cure rights.
One other thing 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. 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. We have no idea what the world is going to look like in 10 years or 15 years or in 20 years.
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. Again, we feel very good about this investment.
All right. Thanks, Tom.
Thank you.
Your next question comes from Jordan Sadler of KeyBanc Capital Markets.
Good morning.
Jordan.
I just wanted to follow up on the overall same-store portfolio guidance, and basically just compare it where you are year to date. I know you don't give segment-level updates, but you are raising the guidance for the full year. 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, the senior housing triple-net portfolio, 4% in 1Q, 3.7%, 3.4%. Very good performance. Also markedly above 3%. Now you'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 business, as we have said several times. All I will tell you can come to mathematically any number of conclusion 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. Turns out the business is better than what we thought, both in our medical office business as well as our senior housing operating business. We think next year is going to be a good year. I'm just not going to get into right now on this call what next year looks like. If that's what you're getting at.
No, I don't even mean about next year. Well, I guess what I'm commenting on, Shankh, I don't want you to miss my point. Tim said that the MOB business is going to accelerate from 3Q to 4Q.
You're talking about fourth quarter?
Yeah, I'm just talking about fourth quarter.
Sure.
your guidance updated for the year is basically inferring that 4Q same-store is going to be very low.
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. Those seasonalities don't come together. As you think about that, just think about the business. 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're going to get to the wrong conclusion. Tim?
I just wanted to add, Jordan, that 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.
That caused a bit of mix change in the pool going into 4Q.
Okay. Just a follow-up. The strength that you guys saw in the Brandywine portfolio sequentially and year-over-year, 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?
Jordan, you remember the first part right, which is we talked about the flu in the New York area, particularly Long Island and Northern New Jersey. Brandywine has a very stable leadership, and we have never mentioned that it's a personal issue. Brandywine had a capital structure sort of reorganization that was needed, and we thought the much better aligned relationship with the RIDEA 3.0 management contract with significant skin in the game from Brandywine. Brandywine is one of the best senior housing operators that are 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. Brandywine leadership is really committed to perform, and that's what you're seeing in the marketplace today and in our numbers. 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, six to be specific, have driven massive outperformance. Brandywine is obviously one of them, and we're extremely delighted how much focus the Brandywine leadership team has put to drive performance, and we think there is significant additional upside to that portfolio, which is one of our best real estate we own with one of our best operator in the business.
Lastly, can you maybe just comment on sort of what the acquisition or investment pipeline looks like for you guys? You've had a pretty busy year so far, but it seems like you've got your sights on some other stuff. 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. I would just say stay tuned.
Thank you.
Your next question comes from John Kim of BMO Capital Markets.
Thank you. 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 have remaining?
I want you to think about that as a 10%-range double-digit cap rate. Tim, how much is our LTAC remaining?
We'll have roughly $18 million of run rate LTAC or so non-SNF post-acute rent going forward.
Which includes LTACs and IRFs, right?
Yes.
Okay. Thank you.
Is your intention to sell the remaining soon, or are you going to hold them?
It's hard to say, John, as you know, that we're a seller of every asset at a price. We feel that now the portfolio operator and the credit have stabilized. We've taken pain, as I mentioned, that we have given obviously $2 million of rent concession, not technically a rent concession, but lower rent in the new contract versus the old contract. We feel pretty decent about it. Every asset that we own is for sale at a price. We'll see how that plays out.
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 pool encompasses more of the total SHOP?
John, Tim. 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 46 of those 75 assets to be in the pool by the second quarter. You should see 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. 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 it throughout the year.
We expect to be back to where we've been historically, which is kind of 90% plus of our same store pool will be captured in that.
That's helpful. Thank you.
Your next question comes from Nick Joseph of Citi.
Hey, it's Michael Mueller with Nick. Tim, maybe sticking with same-store, I think most people know that you have a different definition in your SEC 10Qs and Ks than you do in the supplemental. I wanted to know whether you are going to give any thought to providing a roadmap, either in the supplemental or in the 10Q, about the differentials in terms of getting from point A to point B. I recognize that your supplemental is pro rata ownership, constant currency, which reflects more of your economics. There is a difference between how long the assets are in your pool, longer in the Q and quicker in the sup. 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 and your supplemental.
Yep. Thank you, Michael. I think the way Nick has been doing great work on this, and I've been talking to him quarter to quarter. You're correct to point out, given 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. Our intent 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 are adding the disclosure, you'll see in our queue when we file it, of both our year-to-date and five-quarter pool. We'll have a pool in the queue that'll closer reflect, from an asset perspective, our supplement pool.
That's largely in response to feedback we've gotten from yourself and others just on tying these closer. My comments earlier on the transition, that should also help kind of tie these pools together over the next year. They should come together. Absolutely, we'll continue to work to disclose that information, to get that to Nick on a quarterly basis. If need be, we absolutely can kind of walk that from one to the other. Again, we think that gap closes and a lot of it's temporary. Over the last year, we've been pretty active on the asset management front.
Great. Tom, at the beginning of the call, you talked about how you've dramatically changed your senior housing portfolio and gotten a lot out of Genesis and Brookdale and HealthLease and bad cap structures or misguided operating agreements or misguided private equity. 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 or early 2014. You had been on the board for 10 years prior to that. 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.
Yeah. Good question. 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. 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. I don't think you'd get a very different answer from anyone who transitioned from a board seat to an operating role. As I said earlier, it took some time to figure that out.
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. That was the strategy beforehand. When I asked the management team, "What business are we in?" They said, "We do deals." When you do deals, some of your deals are going to be good. I don't want to say that some of the deals weren't good, but many of them were not good. Again, the information you get as a director is different than the information you see sometimes. Not in all cases. I'm not saying that about every company. I will tell you, I saw different things once I was inside the company. You have a very different look. A company structured as a healthcare REIT, for example, should not be making private equity investments.
That is not our business.
I guess it.
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. Yes, the view from the boardroom, 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? I would assume sitting in the boardroom 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 only as good as the information you're provided beyond the publicly available information. Does my board ask difficult questions? Do they put high hurdles to achieve? Yes, they do, because I work at their pleasure. They have the right to hire me, and they have the right to fire me. 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. They're people that represent the healthcare industry, they're people that represent the real estate industry, they're 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.
Yep. Helpful color. Thanks, guys.
Your next question comes from Richard Anderson of SMBC.
Hey, thanks. Good morning. Hey, Tom, I appreciate you're not in a position to or have any interest in commenting on other people's opinions. With regard to the Moody's recent downgrade, the language is quite, let's call it interesting. I have a comment, and my comment is, there's 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 juxtapose Moody's to the other two rating agencies, that is impacting this viewpoint, or is that something you don't also want to comment on?
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. Again, it's difficult to be in a position. They also rate our company.
Right.
It's difficult 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. I'll give you an example. If I were to calculate cash margin of a place, 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. For cash margin, I would do cash rent, not the gap rent, which you know can be significantly different given it's a 15-year lease with a 2.75% escalator, right? That will be a massive difference of what your cash margin will look like if you just make those two differences. Is that a difference of opinion, difference of interpretation?
I leave that to your opinion. From our perspective, as we said, we feel very good about the investment. We think the return prospects have gotten better, the regulatory prospects have gotten better. 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. 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, in 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 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. 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've otherwise loved to hold onto, but that was not an option. 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 attractive markets, we have more than one operator. People might have thought we were exiting New England when we exited Benchmark.
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's also much more Boston centric. That's an example. It's not a black and white decision.
Sure.
Sometimes we are giving up good real estate. 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. 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 construct is only favorable to Welltower.
Right.
There's a reason that we say the 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. Thus, that helps them to get better people, and that obviously produce better results. It's a circular reference, if you will, but it's a virtuous cycle.
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 farther 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. Many of our operators who are confident in their ability to run this business over long term are more than happy to do that. 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.
Now 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 our customers are seeing on a daily basis.
Yep. Okay. I got it. I wasn't implying that it was a one-way street, but I appreciate the color. Thanks.
Thanks, Rich.
Your next question comes from Lukas Hartwich of Green Street Advisors.
Thanks. Good morning. Can you guys provide some specifics about how your SHOP operators are outperforming their competitive set?
I'm not sure what exactly that means. You probably have your own view of what the market is doing, and whether that's rates or NOI or revenue. 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 supply comp versus other factors at play.
You know, Lukas, 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. 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. 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 costs. 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 laborers, to manage that census.
That's something we are very on top of. Again, 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 Invest Day, we have shared with you what's our sense in our data analytics presentation, what's our view of our adjusted competition unit and year two open shops looks like, which is the cumulative impact of supply over the years. Obviously, we got 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. The alignment is important because we come together on the table, not as the operator against capital or capital against operator, but as true partner to solve problems. As Tom alluded to that when we discussed ProMedica, it's no different in our business, in senior housing business, in medical office business, and that's why probably you are seeing.
There's just no doubt that 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. 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? Any color would be helpful.
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 a turnaround situation. 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, non-stabilized, future, today, next year. What you can't is price per unit, and that's the way to look at. We believe in all of those cases, we have bought these assets at a significant discount to replacement cost.
Great. Thank you.
Your next question comes from Michael Carroll of RBC Capital.
Yeah. Thanks. 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, we would not be talking about close to 3.5% pricing increase, right? We are not seeing that. Is there a difference, different markets? 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 four quarters or five 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. As you know, our portfolio is very much weighted towards this large, high barriers to entry market, 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. 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. As Tom alluded to, sometimes it's easy to understand the dynamic between pricing and occupancy, but not so much between those two versus the labor cost. We're trying to optimize the three, and hopefully you agree that so far we have been successful.
Yeah. 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. In specifically those markets, you had all the levers playing out. Generally speaking, to get to an average close to a 3.5% pricing, you got to do both. You got to push street pricing as well as existing residents as well. To remind you, Michael, the reason you don't see almost Thumb rule, half of our portfolio is in January 1st and half of our portfolio is in sort of when you have that anniversary, that's when we send pricing. This is a constant conversation. Our operators are very focused on it, and they're getting results.
Okay, great. Thank you.
Your next question comes from Chad Vanacore of Stifel.
Hi, good morning. This is Tom for Chad. My first question is a follow-up on senior housing. Shankh, you mentioned that SHOP occupancy actually expanded intra- quarter. What is the magnitude of the pickup you see at the quarter end? This quarter, you broke three-quarter streak on year-on-year occupancy gain. Understanding one data point is not a trend, do you see a return to year-on-year growth for the same store pool in four Q?
Guidance to this business, it's a really good number to talk about, but that sets 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 broken record. I don't want to start the precedence of talking about a monthly number. 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.
In third quarter, up by 1.4%. Are there any seasonal trends that you're seeing with the increase in expenses this quarter?
Can you hear us?
Yes, we can.
Can you repeat the question again? I think that something happened to the phone system. Can you repeat that question again?
Sure. 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 you have to look at the occupancy to get the answers. We had a lot of leasing, what happened is you are in a free rent burn-off situations period. As Tim mentioned, specifically, if you go back to his part of the script, you will see that we expect as that cash rent starts coming in, we'll return to the normalized growth in this business. There's nothing specific other than obviously when you have a lot of leasing, and you have to give the time to the tenants to build out the space. That's sort of flowing through the numbers, but not the cash rent. That's sort of what you're seeing. 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 two 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. As things play out, obviously I said that one of those 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 give you the update when they close. 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.
Great. That's it for me. Thank you.
Your next question comes from Joshua Dennerlein of Bank of America.
Hey, good morning, guys. Just curious to learn more about your CareMore Health partnership? How did that come about? What are your goals with 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. Let's start there. Me personally and other members of the team have spent a lot of time meeting with players across the healthcare continuum, including payers. 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. 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 two years ago from Johns Hopkins.
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. As we announced publicly about two 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. As Tom has mentioned many times, we continue to want to make our sites of care more consequential and linked to care delivery. That pilot's up and running two months in, a lot of good progress. Starting in 2020, we're expanding to two other major metro markets in the Southwest and adding and growing our operator pool to four 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. More to come here, but very good progress early on.
At the end of the day, from our perspective, it makes the real estate more valuable.
Awesome. Thanks. That's it for me.
Thanks.
Your next question comes from Steven Valiquette of Barclays.
Great. Thanks. Good morning, everyone. 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. 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 suggested 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. Really, the question is first just to confirm that you guys saw that same trend in 3Q that occurred in 2Q.
I'm assuming so, but more importantly, just any additional color you can provide on your better performance in AL versus IL. Thanks.
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, that gap has reached a multi-year high this quarter. Again, this is not a quarter-to-quarter business. I don't want you to take some portion of the statistic from one quarter and think about the others in a different quarter. That's a consistent trend we have seen. I believe I mentioned that for last four quarters. We saw that gap continued in favor of our assisted living portfolio.
Okay. All right, great. Thanks.
Your next question comes from Michael Mueller of JPMorgan.
Yeah, hi. Looks like you have about $600 million of SHOP development underway. Can you talk about what sort of timeframe 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. 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 sq ft of medical office. That's eight assets, and all but one will get delivered between now and end of next year as obviously all of those assets are leased. You will get also, from a run rate perspective, second half of 2020 and going into 2021, you will get good growth there as well.
You will have the deliveries of senior housing assets. When they get delivered, obviously, you are 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. Mike, Ashley.
Got it. 2020 is obviously a chunky year with about $800 million in deliveries. If we're thinking out over the next three years to five years or so, what are you thinking about for an average annual pace of development investment?
Michael, we've been averaging $300 million in deliveries over the past four or five 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. 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 in the $500 million range.
Okay, great. That was it. Thank you.
Your next question comes from Daniel Bernstein of Capital One.
Hey, good morning. 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 who are two or three years into a lease-up, they're probably not able to refinance toward the end of that Y fund and 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 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 that's the answer you would expect from us given how far our knowledge sort of goes. 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.
Right
had the overbuilding. I mentioned this quarter, you're starting to see that in the memory care segment. Obviously you are picking up that point. 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? Is that at the right basis, right? We're not focused on what the initial cap rate looks like. We're focused on what the right basis and long-term returns looks like. We're starting to see opportunities. It's too early to talk about how big, when that can transpire, so stay tuned.
Okay. That's all I had. Thank you.
Thank you.
Your next question comes from Tayo Okusanya of Mizuho.
Hi, yes.
Welcome back.
Thank you very much, guys. It's good to be back. Tim, congratulations on the new role. Very well earned.
Thanks, Tayo.
Yes. Just a couple of questions from me. I wanted to go back to ProMedica for a quick second. We're now just maybe four 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.
I'll tell you. First is we're feeling better about the 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.
Yep
talked about the case about valuation or exit multiple, right?
That's when you think about even if everything else is same, I give 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.
Yep
a massive increase in 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. I do have a view on how the team thinking about it. It's too early to comment. Let's just say that they feel pretty optimistic that it will add to their cash flow as we move forward. Just overall, just remember what I said, that we had $316.156 million of 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. We'll talk about that more next quarter's call. Hopefully, that helps helpful.
That's helpful. On the SHOP side, I think you gave very good commentary around Canada. I'm just trying to understand the U.K. in particular, the big change in the SHOP same-store NOI between two Q and three Q. Specifically, what was going on there, whether it's just a very soft comp versus three Q 2018.
Yeah. Tayo, if you look back last couple of quarters earnings call, I have talked about that in detail, I don't want to repeat that. I do think that our U.K. portfolio is doing well. It is obviously same story as what same story is. We can't change what the definition is. Just because the rest of the out of same-store portfolio is doing better, we can't put it in same-store. Right. If you look at the overall U.K. SHOP portfolio, it's actually up close to double-digit. The pool that we have is up 1.8% or so that we reported. It is what it is. It's just the numbers. You got to take the goods and the bads.
Gotcha.
We feel optimistic about the business.
Okay, great. One more, if you'll indulge me. Just taking a look at your triple net portfolio, you give a nice stratification of all the rent coverage. I'm just looking across all the names where you have less than one times coverage. I think in 1Q, that total sum was about 4.7%, according to the sub. As of 3Q, that number is 6.1%. Just curious if that's just one or two 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?
Yeah. Very good question. How you think about managing those leases. If you go back four 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 on 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. If there's an opportunity to maximize asset values and cash flow, we will do that. You have seen us doing that in last three years. We'll not go back from there. However, as we 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 has an alternative operator and an alternative to an alternative operator. Right? 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 their assets, including the assets you mentioned. If there needs to be, we'll execute, and hopefully that you believe that we have executed so far well.
Great. That's helpful. Thank you.
Thank you.
Your next question comes from Jordan Sadler of KeyBanc Capital Markets.
Yeah, just had a follow-up. I think you guys talked about last quarter, the 3 million sq ft of MOBs under negotiation. It looks like you closed some. Can you sort of speak to that?
Jordan, we closed or we announced post-quarter activity of just exactly 1 million sq ft so far of the three. As Tom said, the year is not over yet. Stay tuned.
Okay. That stuff's still under negotiation, essentially. Mostly.
Yes, they are, and that pipeline has expanded. We have a lot to talk about that in next few months.
Okay, more MOB. The other question-
Not necessarily. This is just your question was MOB. We talked about MOB. 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. 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. I'm not trying to pin you down. It just sound like you said, yeah, you closed on $1 million of the $3 million. It sounded like you still have a couple million USD left in the pipeline or more.
Or more.
Right. Okay. 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? You're now giving occupancy, I think we only have a few quarters of it from you. 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 we've seen significantly worse credit, as I pointed out that our view that our partner has significant credit, and I hope you understand that the lease sits at the top of the capital structure and not on a sort of a SPE vehicle. 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 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 national structure.
The 144?
Yes.
Okay. Thank you, guys.
Thank you.
Your final question comes from Nick Joseph from Citi.
Thanks. 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 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. We're not going to talk about a transaction between two parties, at this stage in the conversation, it's supposed to be private. I only disclose how much I was allowed to disclose by my partner.
Okay. That was at its $150 a bed?
That's what the market is today. If you look at what we have sold our Genesis assets, they're about significantly higher than what we bought our ManorCare assets. If you look at what markets are trading, overall, we're seeing somewhere between $120 and $180 per bed is what we're seeing the marketplace well located at.
Okay.
Not just these assets.
The $150 was assets-
that's what this asset-
For this transaction.
We're seeing overall, that's where the business has gone.
Okay. Thank you.
Thanks, Nick.
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