Good morning, ladies and gentlemen, and welcome to the Second Quarter 2019 Welltower Earnings Conference Call. My name is Zitania, and I will 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. As a reminder, this conference is being recorded for replay purposes.
Now I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments. Please go ahead, sir.
Thank you, Zitania. Good morning, everyone, and thank you for joining us today to discuss Welltower's Q2 2019 results. Following the Safe Harbor, you'll hear prepared remarks from Tom DeRosa, Chairman and CEO Shankh Mitra, Chief Investment Officer John Goody, CFO and myself. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward looking statements in the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results projecting any forward looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained.
Factors and risks that could cause actual results to differ materially from those in the forward looking statements are detailed in last night's press release and from time to time in the company's filing with the SEC. If you did not receive a copy of the press release, you may access it via the company's website atwelltower.com. And with that, I'll hand the call over to Tom for his remarks in the quarter. Tom? Thanks, Tim.
I'm pleased to report our 2nd quarter results to you this morning as they demonstrate that optimistic outlook and growth plan we presented to investors over 8 months ago at our Investor Day. Outperformance from our core real estate portfolio across all business lines, most notably led by our U. S. Portfolio, is driving this growth. As we reported last evening, FFO per share of $1.05 represents 5% growth over the Q2 of 2018.
Behind this growth is same store NOI growth of 3.1% in the quarter and 3.3% same store growth in our senior housing operating portfolio. These results once again demonstrate the resilience of owning the highest quality senior housing and medical office portfolio in the industry, as well as a management team that has the conviction to make a series of tough decisions over the past few years that are clearly benefiting our shareholders today. With respect to new investments, we had a busy quarter, completing $2,400,000,000 in accretive acquisitions. This brings the total for the first half of twenty nineteen to $2,700,000,000 Shankh will take you through a deeper dive on the quarter's operations and investment activity, but I wanted to take a moment to call out a few noteworthy items. First, you have seen us deepen our relationships with names you already know like Sunrise, Discovery and Summit Medical, demonstrating our commitment to being a reliable, value added partner.
Next, I'm excited about some new partners who have joined the Welltower team this past quarter. Vowel for Senior Living, run by co founders Michael Schoengren and Susan Juro, develop and manage some of the highest quality senior living communities I have ever seen. Mike Joseph, co founder of Clover Management, develops and manages independent living communities that deliver a quality experience to seniors with affordable monthly rents. I'm also pleased that we significantly expanded our relationship with Greg Roderick of Frontier Management, who has stepped in to take over the management of many of our legacy memory care communities. Frontier's state of the art operating platform is already generating significant NOI growth from this portfolio.
I'm thrilled to welcome Michael, Susan, Mike and Greg to the Welltower family. This quarter, we also announced a joint venture with the related group and Atria. Like the other operators I mentioned, Related and Atria were motivated to work with Welltower not for our ability to provide capital, but for Welltower's unique capability set that truly differentiates us from any other REIT engaged in this sector. I'm also pleased to tell you that much of this growth was financed by the successful sale of our portfolio of senior living assets managed by Benchmark Senior Living. The proceeds from this $1,800,000,000 sale have enabled us to bring our leverage levels back to our 2019 target range.
We have a lot to talk about this morning.
So I will now
hand the mic over to Shankh.
Thank you, Tom, and good morning, everyone. I'll now review our quarterly operating results, provide additional details on performance, trends and recent investment activity. We came into this year expecting a slow and steady recovery to take hold in our SHOP segment. However, I have to admit, for 2 quarters in a row, our shop results have exceeded our expectations. Strong revenue growth of 4.4% was driven by both rate growth and occupancy growth.
Same store NOI for the SHOP portfolio is up 3.3% year over year, the best fundamentals we have seen in years. The significant above trend growth has been broad based. Our U. S. Portfolio has been a standout performer this quarter with our largest operator such as Sunrise, Belmont, Brandywine, Mel Gardens, all contributing to the outperformance.
Rate growth of 3.7% has been consistent and broad based. The lowest rate growth we have seen is 2.5% with 1 operator and 5.4% growth being the highest with another operator with central tendencies around mid to high 3% range. On expense side, contract labor and benefits are the main drivers of compensation growth. This has been especially true in the U. K.
As the operators chase occupancy ramp. Insurance was and will continue to be a headwind for the rest of the year throughout the portfolio. To give you more specific color on product type and market segmentation during the quarter, we have seen significant outperformance in AAL versus IL and in major markets versus other markets. To repeat what we mentioned last quarter, we expect U. K.
Performance to trend down and Canadian performance to trend up as we get to the end of the year. Our excitement around strong shop results was only matched by significant transactions within the segment. We welcome Atria, Balfour and Clover Management to our family in Q2. We are excited about the announcement we made in late May to partner with Related Anatre on 1,001 Band Nails Development in San Francisco. This AAA plus location in the heart of San Francisco is fully entitled and we expect to start construction in Q1 of 2020.
We also welcomed Denver based Balfour to our family this quarter. We initiated this relationship with 6 great buildings in the Denver area that have spectacular design and residence experience. 1 of these buildings just opened in May and is already 40% leased. Hence, our initial yield is low on our $308,000,000 investment, but we expect year 2 cap rate to be north of 6%. Balfour entered into Worldheart's next generation management contract, creating optimal alignment between the partners.
As part of the portfolio purchase, Voltower has received exclusivity on Balfour's future acquisition and development pipeline as well as an option to acquire up to a 34.9% interest in Balfour's Management Company. As a part of the agreement, Balfour signed $1,000,000,000 of development agreement with Welltower already. Several development initiatives are under currently underway in high barriers to entry East Coast markets. We're committed to grow this platform prudently over next decade. We are pleased to announce the acquisition of 5 newly developed Sunrise communities in the high barriers to entry markets of Washington, D.
C, San Francisco and San Diego this quarter. These recently opened buildings are 67% leased now and leasing up rapidly. Our investments of $218,000,000 in the quarter represents a 5.8% yield after year 2. As a result of our 34% ownership in Sunrise, we funded 34% of the development at cost. Our acquisition of the remaining 66% will bring the total dollars invested to $285,000,000 at a blended stabilized deal of 6.8%.
To continue that theme, we have expanded our relationship with Discovery Senior Living with the acquisition of South Bay Development Portfolio. This high end campus settings have condo quality finishes and have product offerings including IL, AL and Memory Care. We bought the portfolio at 72% occupancy, excluding the last phase of the Alliance Town Center in Fort Worth, which will open in Q2, bringing the total investment to $237,000,000 or $273,000 per unit. We expect these billings to stabilize in year 3 in mid to high 6% cap rate range. Importantly, as part of this transaction, Discovery agreed to manage the existing portfolio that we bought in 2016 as well as the new portfolio in our new incentive driven management contract and signed an exclusive development agreement of $1,000,000,000 We are already considering 2 projects under this development contract in Discovery's core footprint of Florida.
Speaking of Discovery's Backyard of Florida, we're also under contract to fund 3 newly developed buildings that received certificates of occupancy in Q2 for $92,700,000 or $255,000 per unit. While cap rate of a newly opened building in lease up is a matter of opinion and lies in the eyes of the beholder, what is not debatable is price per unit numbers. Our buildings are all steel, concrete, IT construction and not steel construction and represent a significant discount to other discovery transaction we have seen in the marketplace recently. We also welcome Clover Management to our family of operators with $343,000,000 of acquisition in Q2 with an average area of 4.5 years. These independent living seniors apartments are for younger seniors and have in excess of 95% occupancy in stable portfolio.
We funded this significant investment activity with the disposition of the benchmark portfolio in the beginning of July with gross sale proceeds of $1,800,000,000 Once as part of this recapitalization, Welltower has fully exited the portfolio, realizing a gain on sale in excess of $450,000,000 and is entitled to an additional $50,000,000 earn out proceeds subject to certain future hurdles. We're very pleased with the recap of Benchmark by the strong institutional capital partner, which agreed to further invest a significant amount of capital in this 19 year old communities in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and While the side effect of this capital recycling is a drag on earnings in near term, we believe this transaction as a whole are significantly accretive from a CapEx, growth and hence total return in medium to long term. In addition, I encourage our shareholders to think about this new or expanded relationship not just in terms of the dollar amount we invested this quarter, but as vehicles of significant future growth of development and acquisitions. Our aligned operating partner model also comes with another avenue of growth, maximizing cash flow and assets we already own. This is why you get maximum return on invested capital.
Specifically, we transitioned 20 Silverado assets to our partner Frontier Management this quarter At 67% occupancy and mid single digit margins, we saw tremendous opportunity for improvement in the financial and resident experience in this community. Silverado retained 11 assets in the core California market and we operate them under a triple net lease. Moving to our medical office platform, we had a really active quarter. Same store NOI was up 2.3%. We feel our team under Keith and Ryan have created tremendous momentum in the business and positioned the portfolio for 2020 growth.
Our team has been very active having recently closed nearly 5,000,000 square feet of medical office assets this year. I'm pleased to report that we had great deal of success in integrating those assets in our business. We have extended the ground leases and timed out significant tenant credits. We are also very pleased to inform you that we have entered into a definitive agreement to acquire a 43 Acres, 6 Building, 270,000 Square Feet Medical Office Campus in Bakken Heights, New Jersey for $140,000,000 This off market transaction as a part of a proposed merger transaction between Summit Medical Group and CTMD is a testament of how healthcare delivery is moving to low cost consumer friendly settings. The campus will be master leased by Summit Medical Group, one of the nation's premier independent multidisciplinary medical practice under its new 20 year absolute net lease.
This campus is the largest and most comprehensive of 5 hubs in Summit's 80 location hub and spoke model and will bring World Tower's total Summit leased footprint to over 500,000 square feet. We're also pleased to inform you that we have approximately 3,000,000 square feet of additional medical office transactions are at various stages of negotiations at an anticipated blended CapEx of 5.6%. While it is fun to discuss the transactions that we are consummating, it is equally important for capital allocation discipline to contemplate on the transaction that we decided not to do. At the risk of sounding like a broken record every quarter, I want to remind you that we're not a cap rate buyer or seller. We're focused on total return, which is heavily influenced by CapEx, growth, quality, credit and price per unit.
We have cast on significant transactions, including the ones where we have contractual legal rights on, where the pricing, quality of underwriting assets or the collateral did not meet our underwriting standards or we like the asset, but could not get comfortable with the growth rate at a given price. The backdrop of for both senior housing and medical office transactions have become very vibrant. Our shareholders should remain confident that we'll not compromise the quality nor will be swayed by our spot cost of capital in a given day. We remain laser focused on building new relationships with the best in class senior housing operators and health systems, while realizing growth opportunities with these partners one asset at a time. With that, I'll pass it to John Goody, our CFO.
John?
Thank you, Shankh, and good morning, everyone. It's my pleasure to provide you with the financial highlights of our Q2 2019. As you've just heard from my colleagues, Q2 has been another successful and very active capital allocation quarter for Welltower. During the quarter, we completed $2,600,000,000 of growth investments, including $2,400,000,000 of high quality acquisitions across 8 separate transactions at a blended yield of 5.4%, making Q2 one of our biggest ever for investments. We also announced that in July, we sold our benchmark senior living portfolio for a gross value of $1,800,000,000 working a capital gain in excess of $450,000,000 Tim McHugh will be detailing our updated views on acquisitions and for the full year in a few moments, along with revisions to our full year guidance.
During the quarter, we successfully raised $295,000,000 of gross proceeds from common equity issuance via our GLP and cash settled and forward sale ATM programs at an average price of $80.28 per share, and we saw strong demand for our new commercial paper program. Welltower continues to enjoy excellent access to a plurality of capital sources to fund our acquisition pipeline and future growth opportunities. Our Q2 2019 closing balance sheet position remains strong with $269,000,000 of cash and equivalents and $1,100,000,000 of capacity under our primary unsecured credit facility. With net debt to adjusted EBITDA of 6.33 times, our leverage metrics remain strong, albeit with some increase over Q1 twenty nineteen's close. This increase was temporary caused by the timing of recent sizable acquisitions and dispositions.
With the closing of the Benchmark transaction, we have already seen leverage return to be in line with 2019 guidance levels. And as at July 31, our cash and equivalents balance has risen to $340,000,000 and our primary capacity to $1,700,000,000 Moving on to earnings. Today, we're able to report a normalized Q2 2019 FFO result of $1.05 per share, representing strong growth of 5% over Q2 2018. Our overall Q2 same store NOI growth was an encouraging 3.1% for the quarter with all our segments recording solid growth. Senior Housing operations, same store NOI grew by 3.3% in the quarter, driven by solid growth in the U.
S. And the UK. Senior Housing triple net grew by 3.7 percent, outpatient medical grew by 2.3% and long term post acute grew by 2%. I'd now like to turn to our guidance for the full year 2019. We are increasing our full year total portfolio sensible NOI growth range to 2% to 2.5% from 1.25% to 2.25% previously.
This is reflecting the strong performance of our core portfolio. In addition, we are tightening our expected normalized FFO range to $4.10 to $4.20 per share from $4.25 per share previously, reflecting the change in our 2019 disposition guidance. As usual, our guidance includes only announced acquisitions and includes all dispositions anticipated in 2019. Finally, on August 22, 2019, Welltower will pay its 193rd consecutive cash dividend being $0.87 This represents a current annualized dividend yield of approximately 4.2%. With that, I'll hand over to Tim for a more detailed walk through of our updated guidance.
Tim?
Thank you, John. I'd like to provide some additional details to change in 2019 outlook provided last May. Starting first with property level fundamentals. Our core portfolio has performed above expectations year to date, driven by our senior housing operating portfolio. This has allowed us to increase our total portfolio same store guidance for the year to a range of 2% to 2.5% from our prior guidance of 1.25% to 2.25%.
With all the moving pieces in the quarter, I wanted to add a bit of color on the same store and full year guidance. Our continued focus on improving the quality of our portfolio from both the real estate and operator perspective can result in sequential changes in the same store pool. In 2Q, we had a 47 asset sequential change in our senior housing operating same store pool from the Q1. We added 12 properties to the pool and we also removed 59 properties from the pool, comprised of 43 properties that were moved to held for sale during the quarter and 16 properties transitioned from Silverado Senior Living to Frontier Management. If the 59 transition and held for sale assets had remained in the pool for the quarter and for the year, show same store would have been 2.8% in the Q2 and full year total portfolio expectations will be approximately 10 basis points lower.
A few other comments regarding subsector growth in the back half of the year. For our senior housing operating portfolio, back half guidance anticipates a drag from the insurance premium increases, which Sean previously mentioned. For our senior housing triple net portfolio, performance should normalize to approximately 3% in the back half as we anniversary rent resets tied to the stabilization of development properties. For our health systems portfolio, the ProMedica lease enters the same store pool in the 4th quarter with a 1.375 percent annual increase during year 1 before stepping up to 2.75% annual increase during the remainder of the lease. Now turning to our updated acquisition outlook.
Year to date, we've acquired $2,700,000,000 of properties at a 5.5% initial yield and we invested $232,000,000 in developments with expected stable yields of 7.4%. Our acquisition spend to date has been fairly evenly split between stable MOB assets at a 5.7 average yield, MOB assets at a 5.7 average yield and newly built high quality senior housing assets currently in fill up equating to a 5.2% going in yield with expected stable yields of 6.4%. There are no further acquisitions in our current guidance beyond what has closed to date and the $140,000,000 Summit Medical acquisition detailed in our earnings release last night. Moving on to dispositions, closed to date and our updated full year outlook. To the end of the Q2, we have disposed of $641,000,000 of properties and loans at a 6.8 percent yield.
As we disclosed in last night's earnings release, we have increased our full year guidance and dispositions to $3,100,000,000 at a 6.3% yield from our prior guidance of $1,400,000,000 at a 6.2 percent yield. When breaking down this incremental $1,700,000,000 increase in guidance, I want to highlight that 11 of the 48 benchmark senior living assets sold in July had been previously held for sale. The sub portfolio represented approximately $300,000,000 of our previous $1,400,000,000 in full year disposition guidance. This leaves the 2 main drivers of the $1,700,000,000 of incremental disposition guidance as the remaining $1,400,000,000 plus of our proceeds from the July sale of our Benchmark Senior Living portfolio and an under contract legacy LSAT portfolio. Furthermore, breaking down the $3,100,000,000 of full year disposition guidance into sub asset classes, it is comprised of $2,500,000,000 of senior housing and MOB and a weighted average cap rate of 5.5% and $600,000,000 of long term post acute in the high-9s, which includes $330,000,000 of skilled nursing facilities traded at an average of 8.8% cap rate.
After these sales, as reflected in our Q2 our 2Q supplement, we now have 8.6% of our in place NOI in the long term post acute space, representing a 22% decline from our investor debt. Approximately 95% of our remaining long term post acute exposure is now concentrated in the lowest cost post acute setting of skilled nursing. Lastly, on the balance sheet. Leverage on a net debt to EBITDA basis has remained in line with our target of mid to high 5 with Q1 equity funding of our Q2 acquisition activity taking leverage to sub 5 times, 5 times before increasing to above 6 times from mid May to the close of our benchmark disposition in July, which decreased leverage to our target discussed at our Investor Day in December. In summary, stronger than fundamental stronger than expected fundamentals and a robust acquisition pipeline have validated our initial positive outlook coming into this year.
We continue to take advantage of the constructive capital market backdrop, keep our balance sheet strong and to improve our asset mix through capital recycling. The short term impact of this higher than expected capital recycling has been a tightening of our 2019 guidance from $4.10 to $4.25 per share to $4.10 to $4.20 per share. However, we believe the long term impact of this substantially value accretive investment. I'll now hand the call back to Tom before opening up for Q and A.
Thanks, Tim. If you take a step back from the results we just reported, I hope you see that the quarter was not driven by a bunch of deals, a word that has become a pejorative around here. Welltower
is a
value added platform that can efficiently and effectively address the capital needed to move health and wellness care delivery forward, particularly in view of the aging of the population. This is generating exciting investment opportunities like the ones we've already announced year to date. As Shankh just told you, we also decided to pass on 1,000,000,000 of dollars of other opportunities because while they might have driven short term results, we believe they would not have delivered long term sustainable cash flow growth for our shareholders. Before we open up for questions, I want to take a moment to recognize and say thank you to the tens of thousands of caregivers who work in our senior housing properties every day. They are truly unsung heroes who are doing their part to improve the many lives we care for to the benefit of our residents, their families, the overall health care system and our shareholders.
Now, Zatinya, please open up the line for questions.
Your first question comes from the line of Nicholas Joseph with Citi.
Thanks. Obviously, it's a very busy quarter and I understand you can see upfront solution for the future benefit. Could you give more color on the expected growth profile difference between the acquisitions and the asset sales growth?
We had a relative difficulty hearing you. I think you're asking about the growth profile of the assets that we're acquiring versus what we're selling. Is that the question?
Yes, that's right.
Yes. So if you look at the assets we bought, we bought spectacular assets in great locations, newly built assets that opened 2017, 2018 2019. Primarily, if you look at the average ages, they primarily open in 2018 2019 on an average basis. Of course, these assets are now high 60s to low 70s. From a leasing perspective, they're leasing up rapidly.
So obviously, there's going to be significant cash flow growth as you think about the marginal impact on profitability relative to the fixed cost of the community, right? You still need to have an ED, you still need to have sales stuff. So there's a significant amount of fixed cost in the community. And as they lease up, you start to breakeven at a percentage above 60% and then obviously, the margin expands significantly from there. So there is significant cash flow growth from just leasing up.
But the other point is very importantly, these are newly built assets in exceptional submarkets in a very high risk to entry market relative to the markets around them. So you will see that CapEx mix of these assets versus assets that we're selling will also be different. So as you think about the growth profile, I don't want you to not only think about the NOI growth, I want you to think about cash flow growth, NOI minus CapEx growth, which we think will significantly surpass what we felt.
Thought. I guess longer term, once they're stabilized and when you think on a cash flow basis, what is the spread between those new acquisitions versus the dispositions do you think longer term?
Obviously, we think there is a significant difference, right? I mean that's and that goes back to our micro market analysis, but it's kind of hard to talk about in generic terms. But I can tell you that our internal model suggests that on a stabilized basis on what we are selling versus buying, there's a significant spread. But it's obviously deal by deal basis and you have to talk about anything specifically on the call. I'm happy to take it offline with you.
That's it. Thank you.
Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.
Thanks. Good morning.
Hi, John.
Good morning. I wanted to just touch on the pipeline. It sounds like there's a good amount of activity and I think you referenced 3,000,000 square feet of MOBs, which seems like a big number. You guys have been pretty active in that space. I'm just curious if you could shed some additional light on sort of what you're seeing, what's driving the activity.
And then I think you also touched I think we're more familiar with the senior housing Vibrance. But if there's anything there to sort of flesh out, that'd be great, too.
Thanks, Sean. So I talked about specifically about the medical office pipeline because most of my comments are focused on senior housing in the earlier part. So obviously, our senior housing pipeline is very strong. We're very bullish on the business. So obviously, if you think about how we grow in that business is we grow with our existing operators, and we also grow our family of operators.
So we have significant opportunity for growth through development as well as acquisitions, right? We are seeing like you see in the discovery example we mentioned, there's a lot of product in the market that has been developed by multifamily operators that we're seeing increasingly coming to the market. We're seeing lots of people have been able to lease up the access 50%, 60%, but not above that. So bringing in best in class operators like Discovery and others to lease it up and create value for our shareholders. So we're seeing that.
On the other hand, the medical office, we are seeing tremendous activity. As we talked about, there was an air pocket of capital 18 months ago, and we have been able to negotiate and structure a lot of transactions. As you know, Jordan, real estate transaction takes a lot of time, right, from beginning to finish. And then you have to go through a ROFA process with the health system. So it takes additional amount of time for medical office because of that.
But the transaction that I talked about is a reflection of what the market was end of sort of last year, beginning of 1st year, and you will see we'll be able to consummate these transactions going forward. Seems like some of the frothy capital markets in medical office is coming back. In recent times, some of the transactions we have seen, I wanted to know that we're not only focused obviously on cap rate, the credit, the lease and the details behind it also price per foot. That's very important. We're not willing to buy assets in a location where the price therefore reflects a significant premium to replacement cost.
So we're very, very active on both sides of the house. However, we'll only do transaction if we can, if we can make money on a total return basis. If not, we'll walk away like you have seen us in 2017 early 2018.
The other thing I'll add, Jorn, is our pipeline is largely off market. I think that's a characteristic of what you see us buying. We are generating these opportunities from our deep relationships in that in both the health systems and more broadly, the medical office sector. And the assets you talked about,
the 3,000,000 square feet, did you say those are under contract or just LOI? What's the stage?
There are some under contract, some are in PSA negotiation.
Okay. And then just on Silverado, can you explain what all went down there? I think we typically think of Silverado as a best in class operator in the space? What sort of played out there? And what's left of the relationship?
We typically don't see the transitions back from RDNA to triple net, but we did obviously in this situation.
Okay. So I think I'll first address the structure. I think 3 quarters ago, my prepared remarks are all focused on triple net. I've described how we look at triple net leases and how we don't we're not opposed to triple net leases. We actually like triple net leases in certain constructs.
So I want you to understand that we have no bias for one structure or the other. We are open to any structure between triple net and RIDEA and obviously, including the 2. Simvado is a fine operator, really great operator in that market in California. That's why we stayed, keep the building in California. And we've removed the non California assets to Frontier, which we think we'll be able to create significant upside to the cash flow.
And more importantly, resident experience in this building, these buildings are not lease up buildings. These buildings have been open for a long time, but obviously, they are 67% East and have a margin of, call it, 6.5%, 7%. So of course, we think there's significant upside for both our shareholders and our residents that Frontier will be able to get to. And so that's sort of the view. I mean, it's just a view of senior housing is not a national business.
It's a local business. So you have to think about some operators are very good in certain regions and not so much in other vice versa. So that's all there is no more secret than that. It's just a very simple thing. No.
So what they include inside of their footprint.
Is there any can you shed any light on what the catalyst for the transition was? Obviously, you lost a bunch of properties here that I'm kind of
The catalyst for the transition is very simply, I told you, the performance of this asset. We are very much of a performance oriented organization, and we thought that Synvato should focus on their core California market and some other operator, namely Frontier, will be able to drive more performance out of those assets outside California.
And as we mentioned, Jordan, we're already seeing positive results of that transition. Frontier is doing an excellent job managing these assets for us. So it was clearly the right decision for Welltower and allows Silverado to focus in its historic core market of California. Okay. Thank you, guys.
Your next question comes from the line of John Kim with BMO Capital Markets.
Thank you. I guess, Tim, thanks for the additional color on the impact of the assets taken out of the stock transfer pool. Is it fair to assume that Silverado was the main drag and Benchmark held up okay? Or can you just maybe provide some color between those 2 operators?
Yes. Benchmark was a positive contributor. Silverado was not. So net net to give you the impact.
And on the benchmark sale, can you just discuss a little bit more on how the transaction was originated?
Did you put these assets on
the market? Did the buyer approach you? Or did your partner approach you on the transaction?
We put 11 of the assets that we mentioned that we had in house for sale. That's the assets we're looking for to sell. We got significant response from the marketplace. We got several bids, double digit number of bids from there. And 3 of those entities, all of them are highly, highly qualified institutional investor, private capital.
They're Prostar since would you sell the whole portfolio? And as you hear from Tom that everything we own is for sale at a price. So we thought it was a good transaction for us, for the private capital who obviously replaced us as well as the enviro communities and the residents. So all in all, it was a win win win for everybody involved. If I
could just ask for my second question. ProMedica looks like occupancy increased this quarter to 85.6%. Can you just remind us if you're going to provide EBITDA coverage? And also if you could provide maybe some commentary on the CMS Medicare increase for 2020? It looks like they bifurcated between for profit and non for profit as far as the increase in Smiths.
Yes. I'll start with the coverage and hand to Mark for a commentary on the CMS policy. We are we will add ProMedica to our built on the health system coverage and then it will roll into total company coverage, let me go in for 4 quarters. So it will come into our 4th quarter coverage.
And then as you mentioned, CMS increased rates, actually the week after we announced the transaction, those rates are going into effect as is the change in payment methodology in the fall through PDPM, which I think as many of you know, is not going to be incredibly accretive in terms of economics, but also not negative at all. But what will allow both ManorCare, Genesis and others in that industry to do is be more focused on patient care. And I think the team at ManorCare and ProMedica continue to feel that allow them to grow their business and provide more cost efficient care to the patients they serve. And John, just to remind you that ManorCare is now in a non for profit status.
Great. I just wanted that clarity. Thank you.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Thanks for taking the question. Just 2 around senior housing. So maybe just first on the benchmark portfolio. If I just look at sort of the run rate NOI last year, given the number of assets, is it safe to say or is it my calculation correct that the cap rates are on the 5? And can you give us some context on Benchmark as it fits in with your data team?
Sort of how did sort of the capital allocation versus sort of the fundamentals fit in, in your decision to sell?
Yes. So Vikram, we can't specifically give you a cap rate. I think you found the NOI for all 48 assets. It's safe to say that you have to think about couple of things, right? You got the Q1, 2018 NOI and you have to think about the growth on that NOI, whatever your assumptions are.
You have to think about we talked about that we sold assets at a very significant gain, the impact of relative taxes that will get you to a nominal cap rate. And then obviously, the additional CapEx, whatever assumptions you have, will get you to more of an economic capital or cash flow view of how we look at it. So we're not going to get into the details, but you are following the right track. And needless to say that we're extremely pleased with the assets. Obviously, we're not looking to sell the assets.
We got a price that we thought we can't refuse. So that's one thing. And second thing is we can sit here and debate obviously about cap rate. But I want you to look at the price per unit. That's not debatable.
And that will tell you and you can see what we bought these assets for. And that will give you a sense of how we feel about this, obviously, the price. We do think, as I said, that the price will obviously this transaction is good for us, good for the buyer and good for Benchmark. So we do think that there's a great story all around. We also think, obviously, that the buyer who bought the assets will be able to generate the levered return that we think they have underwritten.
Otherwise we would not have signed up for the $50,000,000 earnout. So that sort of gives you our sense of the portfolio. From a look, from our perspective, you know that we don't look at markets. We look at micro markets. And obviously, if you have very detailed granular micro market, you can build that story of submarkets in any great details that you want to, right?
So we think about these issues deeply. We do think that this improves the quality of our portfolio. We also think the buyer who have bought these as very sophisticated, very smart buyers. They'll also do very well. It's just not a strategic fit for us.
It doesn't mean these assets are not strategic.
That's fair enough. And just your comments around per unit makes sense. So just second question, building off of that, the Discovery portfolio was sort of intrigued your the per unit cost in this kind of $270,000,000 range seems to be lower than several deals we've seen kind of in the 3 50 plus range. Can you talk I know the occupancy is 72%, so that's interesting as well. Can you talk about kind of maybe what differentiates the assets or the kind of the return profile and then also expand a bit upon the $1,000,000,000 development program?
So look, I'm just not going to sit here and talk about transactions that other participants in the marketplace have done. I just wanted a simple facts that these assets are traded at a significantly lower price, 50%, 60%, 70% and different transaction, not just one. Price per unit, as I said, is not debatable, right? And I also pointed out that these assets are concrete and steel construction, I2 construction. So they are not big build assets, so there is significant differentiation.
What for certain of those transactions, what you might or might not know that we had the contractual right to buy those discovery assets, and we passed on it purely because of price, right? So it is a question of difference, doesn't mean some of those transactions are bad transactions. It's in our opinion, we're just not willing to pay that kind of premium to replacement costs to buy assets in markets that are relatively easier to build. Doesn't mean it's easy to build, just relatively easier to build. That's all I'm going to say about this stuff.
Okay, great. Thanks.
Your next question comes from the line of Michael Mueller with JPMorgan.
You there, Mike?
Can you hear me? Yes, we hear you, Mike. Now we hear you. Hey, sorry about that. I guess just thinking about all the new development agreements that were announced, when you look at what's been in place before, what's being added, what do you see as the, I guess, the average annual development spend potential over the next 3 to 5 years?
So Mike, these are long term development agreements, right? So when I talk about, let's just say that we have done we signed a $1,000,000,000 development agreement with Balfour. That's not what's going to happen in the next 3 years, right? So these are 10 year development agreements. We are not looking to put X amount of money out.
That's not our focus. We're trying to find the best micro market and not only with the population and the wealth and the willingness to pay is there, but also what we think is going to happen 5 years from now, 6 years from now when these properties will lease up. So think about the announcement we made in San Francisco, right? It will say we'll start next year. It will take 2 years to build at least.
And then obviously, these assets will lease up. So you this is a 5 to 7 year time horizon. So we are thinking about where markets are going. And obviously, we want to grow one asset at a time with our partners. So what we are doing is we are finding these growth vehicles and making decisions one asset at a time.
Likelihood is our development spend will be robust, but it will be very targeted and very, very focused.
Mike, one thing I wanted to add, which I think is a bit different, is that we're partnering in the development process. So these operators are looking to us to help them identify those specific micro markets where it makes sense to bring their product offering. That's a bit different than the historic disconnected relationship between the capital provider and the developer. The developer is going off, developing assets, and then you hope to be able to acquire those assets at some point. This is really a much more collaborative model that you're not used to seeing.
So these are long term arrangements. We are thinking jointly about where it makes sense to bring new product and in which markets.
Your next question comes from the line of Daniel Bernstein with Capital One.
Hi, good morning. Good morning.
I actually wanted to go back to the buy versus build question. I mean, if look at your show development, you're up over $500,000,000 You're building significant number of relationships on exclusivity on the development side that you announced this quarter. Should I read that just generally? And knowing that somebody approached you for the benchmark portfolio, but knowing all that, is it better to build versus buy? Are you seeing advantages to build versus buy in seniors housing?
Absolutely not. In the portfolio? Okay.
Dan, absolutely not. It just purely depends on pricing. Look at where let's take an example that we pointed out in very detail in this press release is the discovery we're buying as well as we're building. We obviously, we understand development comes with certain set of risk. So we need to make better return than we otherwise would in an acquisition.
However, we're very, very conscious of price per unit and price of food. And we're seeing pricing in the marketplace that doesn't make any sense to us relative to what we can do on the build. So that's a decision. It's not one versus another. It is a cascade of decisions.
Do we want to be in this location? Who do we want to be in this location with? And then it's a question of do we buy it? Do we build it? Do we buy a recently opened building?
There's a lot of product that has been built and 2015, 2016, 2017, 2018 and including by a lot of people who are not necessarily from this business. And they might have underestimated how difficult it is to run this community. This is an operating business, right? So we are squarely focused on growing our platform with our operating partners one asset at a time.
Okay. And I guess the other question I had, and maybe we could take this offline afterwards. I just wanted to understand more specifically how the portfolio, senior housing portfolio has changed from a statistical point, age of the portfolio, demographics, etcetera. You look at the supplementals, it doesn't seem like the numbers have changed that much. But again, maybe that's something we can take offline if you want.
Yes, Dan, I'll just give you a couple of data points for you to think about. We are squarely focused on several layers of decision making process, right? You talked about area of the portfolio. Obviously, locations are important. As we said several times, that markets and submarkets does not tell you the story.
You need to understand what micro markets you are in, what neighborhoods you are in and how those neighborhoods are changing. Then you can reconstruct the submarkets and the markets back up. It's not the other way around. So those change. So you need to understand that.
The other layer that you need to think about is the operating partner and the alignment of interest with the operating partner. So that's something we should have a conversation. Contracts are changing and they're changing not in our favor. Contracts are changing for alignment of interest. We're not trying to do contracts that is just one-sided contract.
We're trying to do where we're aligned, right? So I want you to understand there's a fees of decision making, location is 1, operator is 1, the contract with operator is another one, all going to the direction of we are in this from our perspective to make a great return for our shareholders and to enhance resident experience. That's what we're for. We're happy to take the question offline and walk you through.
Yes. That would be great. Thanks,
Your next question comes from the line of Karin Ford with MUFG Securities.
Hi, good morning. We were a bit surprised that the dispositions accelerated again this quarter and putting up over a $3,000,000,000 number this year. We were under the impression that the portfolio was more or less roughly where you wanted it to be. Was there anything about the benchmark portfolio that did not fit your next generation healthcare model? And how much of the remaining portfolio would you say falls into that category?
Ken, I want to be very specific. As we said, we're only looking to sell a very small part of that portfolio. So it's important for you that you focus on the fact we're only looking to sell very small part of the portfolio. We got a great price that we couldn't refuse, so we sold the portfolio. So as you think about our capital allocators, we have to think about the capital allocation process is not just what your short term cost of capital is relative to your stock or bond price that day.
Everything we sell, whether that's assets or equity, has an IRR that is attached to it, right? IRR is not even the right word. It's total return that is attached to it. So we look at the total return of everything we sell, including equity. And we look at every asset we own and we have a forward IRR associated with that asset.
And the difference between the two is the value creation for our shareholders. So we are not looking to retake what we told you. We stand by that. We own majority of the portfolio that we want to own going forward, obviously. However, we've got a price that we couldn't refuse, and we acted what we think is the in the best interest, a long term best interest of the shareholder.
We're happy to do that over and over again. But we're not looking to sell. It's not part of the portfolio that we want to sell, if that's what you are looking at. There is not a non portfolio that we're sitting at that we want to dispose of at this point in time. We'll have that phase up our life cycle.
Okay. Fair enough. My second question is just on SHOP. Can you update us on how supply is trending in your markets? Are your data analytics still telling you that it's going to be coming down 23% to 25% -ish?
And anything you can share on how the portfolio has been trending so far in July?
So we talked about on our Investor Day with very specific details that we believe that total ACU, our adjusted competition unit and Yatrupe and Sha for our portfolio is down roughly about 20% this year. And we have not seen much change from there. Just remember what I described last call is you always see 2018 deliveries flow into 2019. And as we get to the end of the year, you will see 2019 deliveries will go into 2020. That's just a normal life cycle of developments that we see.
But overall, there's not much of a change. Obviously, you know how the demand and supply pattern is changing from 2020 and onwards, but and it's very favorable on both ends. But we're confident that we will be able to deliver growth from our portfolio. Our portfolio, as we thought, will turn has turned and we'll see what market keeps us going forward.
Do you have an early estimate on how much supply will be down next year?
We're not prepared to discuss that yet.
Okay. Thank you. Your next question comes from the line of Steve Sakwa with Evercore ISI.
Thanks. Good morning. I wonder if you could just talk a little bit more about that Summit Medical transaction. Are you characterizing that as an MOB or kind of a health system deal? And maybe just the genesis of how that deal came about.
Steve, we are categorizing it as an MLP, although it now is part of a broader relationship with Summit. This is an example of how we've been redirecting our business. We are engaged very deeply in building relationships with health systems and large multi specialty physician groups like Summit and looking for ways to help them transition their business models to make them more competitive in the future and improve consumer focus. So when Summit and CitiMD came together, it opened up an opportunity for us to look for ways that we could help facilitate the capital side of that combination. And so that's where the acquisition of the Berkeley Heights Campus came in.
And one of the things we didn't mention is this is probably one of the best, large healthcare sites in the New York region, very affluent area, very high barrier to entry market. I think you and Sheila know it pretty well. There's we're excited that there's the opportunity to help them think through that campus. There may be other MOB opportunities on the campus. There may be even opportunities for housing on that campus at some point.
So again, off market, very strategic opportunity for us, an example of where we're taking the business in the future.
Steve, it's that margin is in sort of the live margin process is going through right now. We expect this to close in next month or so. Post that, we're happy to have more conversations about this particular transaction. But as Tom said, that clearly you can see that we're talking about health care is moving to a lower cost consumer setting. You're seeing the examples of that in many places, and that changes how the physician groups and the health systems are thinking about sort of an on campus versus off campus.
So that's an important thing to think about in relationship. And the other one to think about is very simply that how we're helping our partners to achieve their strategic objectives. Obviously, this was a light process, a very important M and A process for them and both parties involved in that merger and they obviously trusted us that we'll be able to quickly move, execute and be there. That reliability and the trust is very important. So post the completion of the margin, we'll have to have more conversations about it.
Okay. And just second question, if it's too long winded here for an answer, we can take it offline. But you sort of talked about this new management contract with the operators and trying to better align kind of their fees and kind of your performance. I'm just trying to figure out, does this in any way, shape or form potentially slow the shop growth over time as they had better economics and maybe upside of the performance of the assets?
If you think about it, if we have designed it, we're not going to get into it. It's a proprietary structure. We're not going to get into a call to describe the world, how it works. But definitely, if we have entered into those construct and we believe we're the only ones who do that and maybe other people are doing it as well. But we think that provides upside for our shareholders.
As in any operating relationship, you would expect the financial cap partner will be aligned with the capital partners. If there's significant upside in this property and we would like to share that upside with our operating partner, but it also will be a fact on the other side on the downside protection as well. So I want you to think about this. These are not the structures, which I'm happy to walk you through and there's several versions of those, are not designed to take growth down. It's quite the opposite.
It is for operators to incentivize operators to focus on the ops and make sure they understand that running a building exceptionally well can be as profitable as developing the building. That's what the focus is.
Let's have a longer conversation about this, Steve. You got you and Sheila should come by one day, and we'll walk you through it in greater detail.
Sounds good. Thanks.
Your next question comes from the line of Nick Yulico with Scotiabank.
Thanks. I just wanted to go
back to the guidance on same store. Did you talk about what is embedded for senior housing operating and if there was any change there? And I think there is still some even if you hit the high end of the old range, there's some deceleration in the back half of the year. If you could just kind of remind us what's driving that?
I'll start with the your question on the guidance change. We don't we do not update subsector guidance throughout the year. So we don't we didn't change that. That being said, the show part of our total portfolio is, as you know, typically, the most volatile as far as upside, downside. So it's fair to assume that the biggest piece of that moving that in our comments today talking about how our show portfolio has outperformed, our expectations are consistent with that.
It's fair to say that, that is what is moving total portfolio up.
And is there some deceleration we should expect in the back half of the year versus first half of the year?
We as you know, Nick, we do not run the company for quarter to quarter, right? We feel very good about where pricing is. You can look at pricing and you can make your own assumptions. Only thing we would tell you, there are 2 things we want you to consider. One is the insurance cost, which is a headwind for back half of the year.
It was a headwind for this quarter as well. And you have to think about the operating leverage. And we also told you that as we get towards the end of the year, UK should monitor it down and Canada should go the other way. So you put all of those things, you decide where it will land. Clearly, we couldn't sit here and tell you what our what we want the Q3 or Q4 will be.
We'll see what the market gives us. But needless to say that if you think about the pricing economics, the occupancy and expenses, we'll get to your number. We'll see where we are in 90 days.
Okay. And just last question on CapEx. I know you have talked about your focus on looking at CapEx for the portfolio. And it's kind of hard for us to see that other than if we look in the sub and you have the page on senior housing operating and you gave your recurring CapEx, your other CapEx and it looks like the per unit recurring CapEx was up year over year in the Q2. Can you just talk about kind of what's driving that?
And I know as well, I think your guidance for overall company CapEx went up a little bit. Thanks.
So just take a step back and think about CapEx. Obviously, CapEx will change and the portfolio construction is changing, right? So you're seeing that we're selling a lot of the older assets that will help CapEx. We also I want to remind you that you have 2 very non repeating item in our CapEx. 1 is the vintage CapEx we talked about that is finally getting flushed through the system now.
And the other 4 assets we bought from SNH that we discussed is finally those money is being spent right now. So I just want you to think about sort of CapEx, but in relationship with how the portfolio is changing. The 3rd piece, as you still have to think about CapEx is we talked about when we announced the Brookdale transition that we think these properties have significant upside and some of them will need to be refreshed. So that's also flowing through the numbers now. But there is no question, Nick, as we talked about, we are extremely focused on CapEx.
We're focused on total return. CapEx is a big part of that. And some of our portfolio decisions are made because of that. On the other hand, I will tell you that on the medical office side, Keith and his team has done a tremendous job on the CapEx side, and we're starting to see the benefit of that. So stay tuned.
There's a lot to talk about this topic as we get to 2020 beyond.
On the as you mentioned, the full year outlook, Nick, it's we've sold benchmarks, so we have gotten rid of some senior housing operating assets, but we've also added quite a few. And then on the transition side and we moved stuff from triple net to show, the CapEx obviously flows through our numbers then. So that's a cause for some of the incremental pickup in the guidance.
All right. Thanks.
And you are referring to the Blue Bell transactions, right?
Your next question comes from the line of Steve Valiquette with Barclays.
Great. Thanks. Good morning, everybody. Congrats on the various transaction announcements. For the acquisition of the newly developed Sunrise Communities in DC, San Francisco and San Diego, I think in your prepared remarks, I heard you right, you characterized these markets as high barriers to entry.
I'm just wondering if you're able to remind us again or just give us a little more color around the nuances that make these particular markets high barrier to entry from your perspective.
Yes. So thanks, Steve. If you think about some of these markets, I'll give you an example. First, let's talk about Sunrise is a very important example for you to understand how to create value. So in Sunrise development, we fund 34% of all development.
So whatever the yield on cost on the development at Thar stays with us, right? And that 2 thirds that we have rights on that we bought. So from an economics perspective, I gave two numbers. For the 2 thirds, the stabilized yield, as we talked about, is close to 6%. But I also said the overall stabilized yield for the 100% of the portfolio is close to 7%.
What's the difference? It's the 3rd where the yield on cost obviously is very high. Now that goes back to why the yield on cost are so high. If you do the math, you will see there's a big number because these are legacy lands that Sunrise owned for a long time. Some of this goes back 10 years, 11 years.
And it takes that much time, in some of these cases, 5, 6, 7 years to get through zoning, get through permitting to build this asset. So these 2 are very well connected. So obviously, because of our ownership in Sunrise and that's and we talked about in other situations that we own up to 35% of different operators. What comes with it is the investment in those assets at a basis. Now it takes time to build these assets, right, in this high base to entry market because of zoning and permitting.
But what you get to the other end is obviously spectacular assets at a great price, great yield, if that makes sense.
Okay. Got it. Yes, I appreciate the extra color. Thanks.
Thanks, Steve.
Your next question comes from the line of Chad Vanacore with Stifel.
All right. Thanks for fitting me in. I just want to understand the benchmark sales is a little bit better outside of the price aspect.
Can you speak out a little bit? We have difficulty in hearing you.
Sorry about that. Is that better, Shankh?
That's significantly better. Excellent.
All right. So I want to better understand the Benchmark sale outside of price. Maybe you can contrast the difference in terms of asset and operator quality or growth profile between Benchmark and then some of the new acquisitions that you closed year to date?
Yes. So we're not going to get into an operating quality portion. Benchmark is a highly reputed operator, so we're not going to get into that. You know our we give you in place NOI every quarter, so you can look at those numbers and you can decide what the in place NOI and the growth has been. I'll only point out to you that what we're buying is newly built buildings at a very specific micro market.
The decisions that were we got into when we bought these assets were not at a portfolio level. They're asset level, one asset at a time decision. So of course, we think the difference of age and the location, which is not just a question of demographics, but also a question of psychographics and willingness to pay, will have significant better growth. Not just NOI, but also NOI minus CapEx.
All right. Well, thinking going forward, if you're looking at just newly built buildings in specific micro markets, does that limit your growth profile going forward because it's going to
limit the portfolio you can invest in?
No, Chad. We're happy to we're happy buyer of assets if it is in the right market with the right operator with the right alignment and the right price. The point is not that we're only focused on new buildings. The only focus was I was trying to explain the trade of what we bought versus what we sold this quarter. Chad, if
you think about the history of the REITs acquiring senior living assets, there was a period of time and when healthcare REIT bought Benchmark, you were buying a large diverse portfolio of assets created by that operator over time. I think what Shankh is also saying is that as we move forward, we're much more deliberate about which assets we buy. If there are large diverse portfolios and the price is right and most of the assets fit our criteria, we might be a large portfolio buyer, but we're not going to pay up for assets that we really do not believe are critical to our focus going forward. And I think there was a time when there was a lot of asset gathering in between the senior housing historic senior housing operators and the REITs. I think the times have changed, and I think we have a very different approach to acquiring assets today.
But whereas aggressive and finding tremendous opportunities to deploy capital, I think that should be one of the takeaways from today's call and our earnings release is that we are driving a tremendous opportunity to deploy capital in assets we think are sustainable for the long term, not just getting bigger for the sake of getting bigger. I think there was a lot of that historically, and a lot of what Welltower has been doing is working through that. So I think you'll see going forward, I think we think we have a much better construct and a much better asset portfolio going forward than we had 4 years ago. All right. But adjacent to your comments, just thinking about what you invested in this quarter and what you disposed of, Is now the right time to take more risk in lease up in newer assets rather than stabilized assets?
No, Chad. That's what I want to mention that we are more than happy to buy stabilized assets if the price is right, not just from a capital perspective, but from a total return perspective and pricing unit perspective. We're more than happy to do that, right? It is not a question of are we looking to buy stabilized assets. So let's take an example of Valpar.
We bought 6 assets. 5 of them are relatively stabilized assets, one just opened, right? And if you think about what happens when a building just opened, you have negative NOI. That's how the building flow through. That's what brings your cap rate down, but obviously, you lease up the assets to go the other way.
We're not looking to buy just lease up assets. It just happens to be some people have built a lot of senior housing assets in markets who are not senior housing operator. That's not an easy business to be in, right? And many multifamily developers who did not understand there's an operating model behind the building, which they don't necessarily have to think about when they build multifamily buildings, right? So we are finding those opportunities to step in with our operating partners such as exceptional operators such as Discovery.
1 asset at a time, we're not looking to do big portfolios. Now if we find a big portfolio of stabilized assets that we think we have a different view, right? We have to have a different view from the seller. Otherwise, the asset will be priced for perfection, then we're happy to step in and we do that every day. It's just we need to have a different view from the seller either on the revenue side or on the cost side.
How do you know what is the example of that what we have recently done? P and L. Look at what happened in P and L, right? The biggest credit, part of the P and L portfolio was Novant. And that has only 3.5 years left in the lease term and see what we have done since we have taken over.
So we have a different view from the seller or the other potential buyers when we can step in and create significant operational value.
Your next question comes from the line of Lukas Hartwich with Green Street Advisors.
Thanks. You guys have talked a lot about selling assets with high CapEx needs. But once I get factored into pricing or do you think there's an inefficiency here?
Every trade has two sides, a buyer and a seller, right? And everybody has their reasons to buy and their reasons to sell. As I said, we think this particular example this particular transaction is an example of win, win, win. We do think the buyers who have bought these assets will make money. And how do you know we believe that?
Look at our earn off structure. We also think this is very good for the assets. These assets will take reinvestment and then be revitalized as Tom breaks in his comments in our press release. So we are not necessarily predicting there is a significant inefficiency here. We are only telling you that we're extremely happy with the price.
Otherwise, we would not have sold, and we are not looking to sell. We are only looking to sell a very small portion of this portfolio, and we got a price sequence achieved.
Great. Thank you.
Your next question comes from the line of Michael Carroll with RBC Capital Markets.
Yes, thanks. I just want to talk about the dispositions a little bit. And I think you guys did a good job on the first half sales. Can we talk about the second half sales? It seems like you have another $1,000,000,000 And I believe Tim mentioned some of that was the LTACH portfolio.
What else is in there? And did you recently put those in there? And have you identified buyers for those properties?
So the of the incremental addition to guidance, it is primarily the benchmarks. I mentioned that $300,000,000 of this $1,700,000 plus of proceeds and benchmark was already held for sale. So the $1,700,000 increase in dispositions, $1,400,000 plus is benchmark and all of the remaining is that an LTACH portfolio as focus.
Just to make one make sure one thing, Mike, to get to the heart of your question. We don't put something in held for sale or talk about selling a property or change our guidance unless we have a handshake on a transaction, right? So of course, we have identified the buyer. We have negotiated the price. Loosely thinking about should we sell an asset, obviously, we don't see disposition guidance on that.
I just want you to understand the process. So let's for an example, let's take the other side of that. I talked about a 3,000,000 square feet of medical office portfolio not one portfolio, several medical office transactions. That's not what we are that's not the pipeline we're discussing with different sellers. Do you want to sell?
Does it work? That's not the characteristic of a pipeline. We talked about 2,000,000 square feet because we have agreed on the price, we have agreed on the structure. Now we're exchanging documentation, right? We're going through the PSA, going through all the legals, etcetera.
So both acquisition and disposition, when we talk about pipeline and we talk about disposition guidance, you should assume that economics and the structures have been set and hands have been shaken.
Great. Appreciate it.
Thanks, Mike. Thanks, Mike.
Your final question comes from the line of Rich Anderson with SMBC.
Well, sorry for keeping you so long. I was just curious, Tim, I appreciated the color on the makeup of the same store pool. I'm curious what amount of assets are not in there now? I think it was 48 transitioned and then I know the held for sale, I'm fine with those being out of there. But then there was the Brookdale transitions from a while back.
I'm wondering when the same store pool kind of be fully loaded with all the transitioned assets? And at what point do you make the decision to add them back subsequent to these transitions?
Yes. So we did not there are not 48 assets that went to transition. The Tim specifically mentioned 16 were removed for our transition. Rest we obviously we sold benchmark with these 48 assets. To answer your question specifically, only when there's a change of operator is moved from same store, right?
If there's just a change of construct, it does not change the same store, right? So it's very easy to understand. The operating performance of the building doesn't change necessarily because fundamentally behind your systems, you have a triple net construct or a RIDEA construct. When it does, when the management is changing, the flags are changing, it's massively disruptive for those properties. That's what the source of our same store policy.
When do they come back is the question you ask. When we own the properties at least for 5 quarters, so that you are not lapping easy comp. That does not create same store. So we got to own the properties for 5 quarters in the new construct, the operator, with the new operator for it to come back to the same store. That is true for new acquisitions and for development that need to be open for X amount of time or they need to be stabilized for them to get to the same store.
The idea behind all of those is same store is supposed to give you a sense of how an average portfolio on a stabilized basis is doing, right? All these changes, including that if you move the assets out when you are not doing well, then you put the asset back in, obviously, presumably when you stabilize it, that does not give you a sense of same store, hence the 5 quarter. Hopefully, that answers the question.
That's perfect. And then second question for anyone in the room. Ventas put out their 5 year outlook on SHOP. I suspect you look at that and think you can beat it. But maybe a different angle to the question is, is there an implied ceiling on your ability to move rate up simply because you're dealing with the elderly population and to milk every last penny from that perspective is somewhat politically incorrect or something like that.
So I'm just wondering if there is some sort of ceiling to same store growth just because of the nature of the business that you're in? Thanks.
Yes. So I'm going to try to answer that question. We're not going to specifically get into a 5 year outflow by another participant in the overall space. We gave you our own 5 year outlook that explains our view of what we think the portfolio is going to be. You probably have noticed that the demand drivers are very easy to get your head wrapped around, right?
And we think the same presentation we talked about has done a fantastic job of doing that. But you will never hear us talk about a 5 year outlook in a generic basis beyond what we know in our portfolio, right? Tim talked about on the Investor Day of IVR outlook of our portfolio and half the lease up and all the construction in progress and everything flows together for a cash flow contract. Why that is the case despite the fact we have so many people whose sole job at Wells' are is to do creative analytics. Why we don't do that?
Because we don't know the supply response. The demand side is relatively not easy, but it is you can wrap your head around it. I can tell you sitting here what the supply is going to look like 5 years from now. I will point out to you, not talking about any specific company, if you look at the history, you will see that whilst our portfolio has outperformed, in general, that broad industry as well as all other participants in the industry who own diversified portfolios. There is no reason that I would think that the future will be much different in line of especially in line of how we have curated this portfolio in the last 4 years.
Let me just speak to your point about affordability. This is a business that is very high human touch. And that's why I made the comment about the hundreds of thousands of people that work in this industry. It is a very labor intensive business. And that explains the cost side of it and why the prices are high.
I think the only way we're going to reduce the cost of a high labor high-tech, high labor component business is through technology. And that's something we're looking at. We don't think that broadly, you can continue to charge a price that will compensate you for the high cost of delivering this product. You can in certain markets and that comes back to our micro market approach because like there are people who will always want luxury products, there's always going to be a market of people that want, that demand that high service model. That's where we can deliver that.
But I think more broadly, Rich, I think we need to be thinking about how we can lower the cost side of this so the cost of the consumer can be lower because a lot more people are going to need this service in the future.
All right. Great question. Thanks, Tom, everybody.
Thanks.
And your next question comes from the line of Nicholas Joseph with Citi.
Hey, it's Michael Bilerman here at Connect. Tom, I wanted to ask you about the succession planning and how you and the Board are sort of approaching it. And I remember when you stepped in for George at the time you talked about how that was a process that the Board endorsed and that was how things had gone. I'm just curious what is the tenor today about should you I don't know whether you're deciding or not. I recognize you probably still have a long runway, but how is the Board approaching succession planning?
Would it be another Board member? Would it be from an internal? Would you seek to look external? And just how should we think about the framework that you're Great question, Mike. Great question, Mike.
And it's something we talk about at the Board a lot. I think the best answer I have for you is we have, over the last 5 years, brought in a next generation management team at this company. You've seen sometimes we get criticized for changing seats in management roles. I think we're a company and with the support of our Board, we're constantly evaluating what are the skill sets that will be needed to run a business that will be different 5 years from now than it is today. So being able to recruit a very high caliber junior team of professionals all the way up to the NEO level is how you ensure good succession planning in a company.
So we've also you've also seen us move people into different jobs here. And I think that's another key piece. I just talked about this last week at our Board meeting. The idea of that you always when you change a job, you need to get a new title really doesn't work. It works in some cases, but that should not be that should be an exception versus
a rule. And we're really looking
at lateral promotions. You saw someone like a Justin Schuyver, who was a Senior Vice President of Investments, has been moved to London and moved his family to London, and he's had a tremendous experience. He's going to come back to the U. S. But this has really made him a more viable leader in the company because he's had diversity of experience.
And that's something and we're happy to talk to you more in-depth about this because it's something that we're proud of. We're really moving people around the organization and cross training people. And that's the best way I know to create a viable succession plan for a company. So it sounds like number one choice would be use your internal talent, get them the right skills, different skills, move them around so that you have a roster of people that you can choose from internally, that would be choice number 1, choice number 23. Well, it sounds like a Board choice, like when you came on, would probably be lower than we getting someone from the outside.
Is that fair? Yes. I mean, I'd say that we are very focused on having a deep bench here. So when there is a need for succession that there's a deep pool to select from and which is as least disruptive, I think, for shareholders as possible. Understand when I stepped into the role, the Board did not have the confidence that there existed that deep pool inside the company at that time.
If you spoke to our Board today, they have a very different view of the pool that exists inside the company than they did 5 years ago.
Yes. Makes sense. I appreciate the color, Tom.
Thanks for the question, Mike.
Thank you.
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