Good morning, ladies and gentlemen, and welcome to the 4th Quarter 2018 Welltower Earnings Conference Call. My name is Nicole, 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 the 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 of Finance and Investments. Please go ahead, sir.
Thank you, Nicole. Good morning, everyone, and thank you for joining us today to discuss Welltower's Q4 2018 results. Following the safe harbor, we'll hear prepared remarks from
Tom LaRosa,
CEO Shankh Mitra, CIO and John Goody, CFO. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward looking statements on the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results projected in
any forward looking statements are based on reasonable assumptions, and the company can give no assurance that 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
this morning's press release and from time to time in the
company's filings with the SEC. If you did not receive
a copy of this morning's press release,
you may it via the company's website atwelltower.com. Before I hand the call over to Tom DeRosa,
I want to highlight a few significant points regarding our Q4 results. Welltower achieved 1.6% total same store growth in the quarter. We are particularly encouraged by the 40 basis points year over year occupancy increase in our senior housing operating portfolio And the sequential coverage increases in both our triple net senior housing and long term post acute portfolios. Fundamental performance in the quarter was consistent with our expectations, partially offset by delayed timing of investment activity and equity issued to pre fund announced acquisitions, resulting in $1.01 per share of normalized funds from operations. In the Q4, we issued $552,000,000 of equity at a weighted average share price of $68.41 Since the start of the year, we have raised an additional Tom?
Thanks, Tim. At our Investor Day on December 4, we took a notable step of announcing 2019 guidance. Based on our Q4 results and our confidence in our outlook for 2019, I'm pleased to reaffirm that guidance this morning. Our guidance of $4.10 to $4.25 in normalized FFO per share represents a 4% increase at the midpoint in our guidance range over our 2018 results. As Kim highlighted, our continued strong operating results in Q4 reflected the positive momentum in our seniors housing business that we've talked about throughout the year.
Most notable in the quarter was the fact that we completed $559,000,000 in acquisitions at a blended yield of 5.6%, nearly 90% of which are medical office buildings associated with investment grade health systems. These investments help drive total investment activity to over $4,000,000,000 for the year. Our ability to source accretive investments have continued since 2019 with the announced acquisition of 55 outpatient medical buildings from the T and L Healthcare Properties for $1,250,000,000 further enhancing our ability to deliver growing, high quality and sustainable cash flow growth. Given that CNL and the majority of our announced investments will close by midyear, we expect FFO to accelerate in the second half of the year, setting us up well for 2020 beyond. In the Q4, we raised $552,000,000 of equity, driving down sequential leverage and prefunding late quarter and early 2019 investment activity as we continue to manage our business with a focus well beyond the current quarter.
This included a $300,000,000 direct investment by the This is part of a broader investment partnership that was a long time in the making. We are honored to have entered into this partnership with the QIA, which illustrates their belief in Welltower's unique business model and strategy for driving the future of healthcare real estate. Now I'm delighted to pass the mic to Shankh Mitra, who will give you a closer look at our operating performance and investment activity. Shankh? Thank you, Tom, and good morning, everyone.
I will now review our quarterly operating results and provide additional details on 2 topics: 1, operating results and trends 2, recent investment activities. We are cautiously optimistic about the recent performance of our senior housing portfolio. On last quarter earnings call, I discussed a narrowing occupancy gap in year over year results. It appears that occupancy has reached an inflection point this quarter. Specifically, it shows occupancy increased 40 basis points year over year.
Sequentially, 4th quarter over 3rd quarter, occupancy revenue growth has been the best we have seen since Q4 2015. While 1 quarter does not make a trend, we are particularly encouraged by the 120 basis points of occupancy increase in our assisted living segment as the impact of new supply is starting to wane and the demand is beginning to pick up. We also saw a sequential occupancy increase of 90 basis points in our senior housing triple net portfolio, driving coverage up 1 basis point. Growth rate of 2.2% to show is somewhat masked by lower growth in international markets, whereas core U. S.
Markets experienced 2.7% growth. Expense growth remains elevated driven by labor. We continue to look for greater use of technological and analytical solutions such as OnShift, Arena, Smartwinner, amongst others to drive greater efficiency in the labor model. We are beginning to see results. For example, since implementing Arena, Sunrise has seen a 27% decrease in 90 day employee turnover and 40 day decrease in 20 month employee turnover.
While we're working actively to mitigate labor challenges, the demand side of the equation is starting to look brighter. While it is true that the explosive growth of the 86 plus population is still a handful of years away, median age by definition suggests an equal number of customers are below that age mark and the population will begin to grow significantly starting later this year and into next year. We are also gaining confidence in post acute business. While it is unlikely to see a B shaped recovery, it appears that the industry fundamentals are on the mend. Meanwhile, pricing of the key emerging assets have materially increased due to the slot of capital deployed in that space.
For example, during the Q1 of this year, we sold 22 villages assets that were below market coverage for $252,000,000 at 8.95 percent yield. At market coverage and rent, that represents $40 plus 1,000,000 of value creation. As you will recall, we bought ACR banner share assets only few months ago at significantly cheaper price and in a materially better credit structure. While we keep reading about how skill making facilities should be around 2x in the arms of this, this Tennessee transaction highlights a significant gap between territorial assertion versus how practitioners behave. This is no different from the senior housing triple net corporate rhetoric that described during the last quarter of the earnings call.
While Genesis assets selling Genesis assets to short term earnings releases were enough to the tune of $0.025 per share, we believe our shareholders have achieved significant value and an improved growth profile for the enterprise going forward. Roughly 4% of ROI currently is attributed to Genesis, down 70% from peak, and a significant portion what remains is in PowerVac format. We continue to invest in the model to process their development. Power back to Skatterway, which just opened 30 months ago, is currently 64% occupied, demonstrating the power of that product. As we have consistently told you, our investment philosophy is driven by price and total return, not a desire to call for executive operator or segment exposures.
This brings me to my last point. Since last quarter earnings call, we have announced $2,250,000,000 of acquisitions comprised of $1,500,000,000 in medical office and $725,000,000 in senior housing, bringing our total announced or completed medical office transactions to $2,000,000,000 over last 6 months. This has constant speculation in the research community that Worktower is actively trying to tilt its asset mix towards medical office. As we have consistently said, we like our medical office business, but at a price. We are buyers and sellers of almost any asset at a price and implied IRR.
The cap rate at which MOP portfolios are traded during the frenzy of 2017 did not make any economic sense or worth our shareholders. We passed on every one of these opportunities and would do so again in both economics. As CapEx have expanded, we return to options that have since executed $2,000,000,000 plus of Class A Medical Office and a blended cap rate of 5.7% resulting at 7 plus percent IRR. This diligent approach adds excellent value for our shareholders. While we feel very bullish about our acquisition pipeline, we will not buy any assets unless the total return makes sense, regardless of our current advantages of the capital.
We remain disciplined and look for off market or broken market transactions as sellers increasingly focus on certainty and reputation more than just price in this volatile capital market backdrop. Increasingly, highly reputable developers and operators are joint venturing with Welltower by recapping their current portfolios and forming mutually beneficial growth plans by leveraging our data analytics platform. While we remain very selective on opportunities to count on, we are delighted to announce that we have locked up a $3,000,000,000 plus development and under construction pipeline across 7 separate relationships in both senior housing and rental office over the last 6 months. This pipeline is not an obligation, but our option to deploy capital at an attractive return and basis with first look and last look and will create enormous amount of value for our shareholders. The first project of this pipeline is in the development of 2 class chain 14 medical office buildings in Newtown, Charlotte with campus properties.
These two buildings are 100% leased to Atrium Health for next 15 years and will be an anchor as we build out this Tier six mixed use project with our partner. On the senior housing side, we are delighted to inform you that since our last call, we have committed to roughly $725,000,000 author acquisitions at a blended cap rate of 6.6%. These acquisitions have an average age of 4.5 years and will be managed by 3 different operating partners. Our pipeline remains strong in senior housing across both existing and new relationships. Our data analytics capabilities, India's housing and health inform relationships and our team's creativity, reputation and integrity are the main reasons why more and more highly reputable partners are reaching out to us today.
While historically it was primarily us who reached out to them. We're very proud that we compete on this capability and not on cost of capital. In summary, while the fundamentals of many asset classes and industries are starting to mature, both the internal and external growth prospects of World Tower are extraordinary. We remain disciplined, vigilant and cognizant of the fact that we exist to create value for you, our shareholders, and we feel the prospects have never been better. With that, I'll pass it on to John Guri, our CFO.
John? Thank you, Shyam, and good morning, everyone. It's my pleasure to provide you with the financial highlights of our Q4 versus full year 2018. As you've just heard from my colleagues, Q4 has been a very successful and active quarter for Welltower as has 2018 overall. Before I proceed with mutual commentary, I wanted to highlight 3 points.
1, we are confident in our continued growth in 2019 and reaffirm our 2019 guidance given our Investor Day with growth expected in all our business segments. 2, our strong proactive and efficient raising of equity capital in 2018 and in 2019 to date has enabled us to reduce future leverage and put funds all announced acquisitions. 3, we are prudently investing $2,100,000,000 in 2018, making it one of the most active years in the company's history. Our overall Q4 same store NOI growth for Q4 2018 was 1.2% for the quarter and 1.6% for 2018 overall, this being above the midpoint of our full year guidance. Kenya Housing operating same store NOI grew by 0.6% in the quarter and by 0.4% in 2018 overall.
As Sharon noted earlier, we're encouraged by another quarter of improved occupancy. Senior Housing total net grew by 4.3% in the quarter, about 3.7% for the year, again with improved occupancy. Outpatient medical grew by 1.8% in the quarter and by 2.2% for the year. Finally, long term post acute grew by 1.4% in the quarter and by 2.1% for the year. We continue to focus on MultiHealth's operational efficiency, even with significant investments in technology enablement and data science and the hiring of additional high quality colleagues to our team, our G and A expenses relative to the size of our portfolio we protect.
Overall G and A spend was $31,000,000 per quarter and $126,000,000 for the year. Today, we are reporting a normalized Q4 2018 FFO result of $1.01 per share and $4.20 per share overall for the year. These numbers reflect the increased Q4 2018 equity rate total. And as in the past, we do not include 1 off income items or fees in our normalized numbers. Last year sorry, last quarter 2018 overall, we were very active for Welltower on the balance sheet and capital raising front.
We continue to see efficient and proactive raiser of equity capital to fund the growth of our business. During Q4, including the $300,000,000 strategic investment made by the Qatar Investment Authority, we raised $552,000,000 of rights proceeds from common equity issuance at an average price of $68.41 per share. This included $129,000,000 raised after our investor day in Q4, originally modeled to be in 2019. Overall, for 2018, we raised $795,000,000 of gross proceeds at an average price of $67.61 per share. In addition, due to January 2019, raised $195,000,000 of gross proceeds at an average price of $73.97 per share.
During the year, we issued a total of $1,850,000 of senior unsecured notes at the weighted yield of 4.34 percent with an average maturity of 13.8 years. We also closed on a new $3,700,000,000 unsecured credit facility with improved pricing across both our line of credit and term loan facility. Our Q4 2018 total balance sheet position improved with $215,000,000 of cash and equivalents and $1,900,000,000 of capacity under our primary constituent credit facility. Our net debt to adjusted annualized EBITDA improved from last quarter and stood at 5.8x@yearend. In summary, Welltower continues to enjoy excellent access to a polarity of capital sources.
During the Q4, we completed $559,000,000 of acquisition without a blended yield of 5.6%, the majority being in the outpatient medical segments. This brought us to a yearly total of $3,400,000,000 in asset across all segments as the growth yield was 7.3%. Including development pricing and other activities, total gross investments for the year were $4,100,000,000 making it one of the most active years in the company's history. During the quarter, we completed 349,000,000 of dispositions and achieved $46,000,000 in loan payouts. Overall, for 2018, we completed dispositions totaling $1,600,000,000 with $209,000,000 of loans being repaid.
I would now like to turn to our guidance for the full year 2019. We are reaffirming our normalized FFO range at $4.10 to $4.25 per share. Starting with same store NOI, we expect average blended same store NOI growth of approximately 1.25% to 2.25% in 2019, which is comprised of the following components: senior housing operations, approximately 0.5% to 2.0% senior housing for net, approximately 3.0% to 3.5 percent outpatient medical, approximately 1.75 percent to 2.25 percent health systems approximately 1.375 percent and finally, long term post acute care approximately 2% to 2.5%. As usual, our private equity is only announced acquisitions and includes all disposals anticipated in 2019. On February 28, 2019, Welltower will pay its 191st consecutive cash dividend being $0.87 which represents a current dividend yield of approximately 4.5%.
And with that, I'll hand back to Tom to final comment. Tom?
Before we open the line for questions, it's important that I mention that in 2018, Welltower achieved significant milestones in our environmental, social and governance initiatives. Highlights of the year included being named to the Dow Jones World Sustainability Index, one of only 2 North American REITs in this most prestigious index. Furthering our commitment to climate change, Welltower continues to be recognized the Welltower Foundation and our employees donated over $1,500,000 for 20 18 to organizations engaged in health, wellness, the arts and education. We were also recognized by the National Diversity Council as one of the top 15 companies for diversity in Ohio. With respect to governance, I am pleased to announce the appointment of Catherine Sullivan to our Board of Directors.
Catherine has had a 35 year career in the health insurance industry and was most recently the CEO of UnitedHealthcare's Employer and Individual Local Markets, an operating division of UnitedHealth Group. Catherine joined Doctor. Karen DeSalvo, former acting Assistant Secretary for Health at the U. S. Department For Health and Human Services and Janice Spetho, President of UCLA Health and CEO of UCLA Hospital System, who both joined our Board in December of 2018.
We are delighted to bring these 3 recognized healthcare leaders to the Board of Welltower. At the same time, we are sad to see Judy Pelham and Jeff Myers retire from our Board in May. And on behalf of our shareholders, we thank them for their guidance and stewardship. Welltower seeks to model the most successful American corporations. In order to be counted among the truly excellent companies, we need to be a leader in ESG.
I am pleased by the fact that with our recently announced Board appointments, 60% at 60 of our independent directors are women and minorities. The diversity of our employee base, our leadership team and our Board continues to be a priority of Welltower. This is not only key component of governance, but it is a proven driver of higher returns to shareholders. This is something we should all be proud of. At Welltower, we deploy capital in the most relevant sectors of health care real estate to deliver sustained cash flow growth, all with an eye toward maximizing long term shareholder value.
We were the top performing large cap REIT in 2018, delivering 15.3% total shareholder return. This reflects not only the high quality of our differentiated business model, but the fact that we have articulated our path for growth. As you will see in 2019, we position the company to continue to deliver for our shareholders. Now, Nicole, please open up the line for questions.
Your first question comes from the line of Nick Joseph from Citi. Can you talk down the components in
the 2018 same store NOI guidance for the SHOP portfolio between occupancy rate growth and expense growth expectations?
Nick, we at this point in the year, we would like to see flexibility on how we think those will play out. But obviously, we're very impressed by the occupancy growth. We think that we'll continue to have moderate rent growth and expenses are challenging. So we'll see how the year plays out. And we understand that we're trying to maximize our revenue, not quite confident of the revenue.
We'll see how the year plays out. Too early to comment on specific breakdown. And can you provide an update on Connecticut's integration
of the skilled nursing assets? At the Investor Day, you mentioned that trend so far was better than expected.
You have heard from the leaders of ProMedica and HRMATCHA on our Investor Day. And these are hard from them directly that now the leadership team expects better synergies in the medium short to medium term. We are encouraged overall by what's going on in the post acute sector. I'm not going to make too many comments given the genesis of the public company, but look forward to their release and see how the obviously that sector is playing out, but we're definitely encouraged by the sectors. Remember that about half, 45% to be exact, of that HCR management transaction is attributed to senior housing.
We're seeing occupancy in that senior housing, post triple net, as we mentioned, both triple net and in the SHOP segment is starting to come back. So those are some of the data points I will send out to you as you think about overall ProMedica HR manager construct. Thank
you. Your next question is from the line of Karen Ford with MUFG Securities.
Hi, good morning. I wanted to ask about your senior housing portfolio. Your same store NOI guidance is over 200 basis points higher than your peers on both the SHOP and the triple net portfolio. I didn't think you're seeing superior performance and can you confirm that there's no incremental rent relief or portfolio transitions expected in your Capital Net portfolio?
So, we can it should not be a surprise to you. If you look at the history, you'll see that our portfolio has generated better growth and that sort of the alpha, if you will, has widened as the cycle got tougher and tougher. And the second thing I would mention that if you look at the very granular view of where our portfolio, our assets should be, you have seen on the analyst presentation how we're thinking about asset management, great asset management. And we have seen that we have taken a lot of proactive space to sell assets and not afraid of dilution on a short term basis. So we're very encouraged by the business.
Now it's very hard to comment on this thing on a quarter to quarter basis, but we are encouraged by that population growth is coming and supply is starting to roll over. Karen, let me just add that it's no secret that we've sold a lot of senior housing assets over the years. I think what you're seeing is a planned dedicated critical view of what we own from an asset management standpoint. When we see assets in senior housing that we do not believe have long term viability. We will take those assets.
We'll take the short term dilution as you get from that and all with an eye towards owning the best in class assets for the long term. And as Shankh said, in the right markets, and I think you know, particularly Karen, we take a very granular view of how we define the markets that we want to own senior housing assets in. I think what you're just seeing is a benefit of an active asset management program with a view to the future of business versus trying to manage excess work per share on a quarter by quarter basis.
Okay. And my follow-up is more of a bigger picture question on Senior Housing. You talked about the demand, the demographics and the timing. Do you think technology is allowing for greater autonomy for seniors later in life, things like grocery delivery, wearable monitors, improving focus on wellness, do you think that might sustain the demand for senior housing?
If you look at the demand growth for last 3 years, for example, and then Nick has a lot of his data, he can look at it. You will see that demand has been running, particularly in the assisted living, IL plus AL, AL minus segment, 3x our population growth. So there is no evidence that we have seen that's the case. Do we think that technology will change this business for better and that will be very helpful for seniors in their home environment? Absolutely.
But just recall that a lot of seniors home in our communities as well, right? Those technologies and I mentioned a bunch of them in my prepared remarks will help us drive the margin as well. So we'll see how this plays out. It's very difficult to sit here and predict what might happen, but there is no doubt that in the recent past at least, we have seen that demand has been running 3x of population growth. So senior housing provides an environment for the aging population to live safely.
A lot of historic housing in this country works against a senior's health and wellness. So you could put some new technology in an obsolete residential environment, And I'm not sure, at the end of the day, you're achieving the goals of improving health outcomes at lower costs. As Shankh said, we are very much on the forefront of bringing new technologies into our settings and also thinking really hard about what the settings of the future look like. And that's why we are so focused on the markets that we're in because senior housing is a very expensive product. As I always say, it's a luxury good that no one aspires to own, but it's a necessity.
But it's within that it's actually out of reach for the majority of the population. So, we've been very careful about where to own that real estate because the cost of delivering the care, as you all know, has been growing significantly. So you need to be in places where people can pay. Over time, I am hopeful we will figure out how to deliver a much needed environment, a much needed real estate setting at a cost that is not without reach for the majority of the population. So stay tuned on that, guys.
Thanks, Gus. Thank you.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Shankh, I know you don't want
to give components of the guidance, but is it safe to assume that within the guidance expenses of about 4% are baked in and that you're likely to see the trajectory improve given the expense comps easier through the year?
As you know, as you look at our numbers, you will see that the expense growth has been challenging for the last 5 years. So this is nothing new. I would expect that 2019 will continue to see that. Maybe we'll see some moderation in 2020 because a lot of California markets by then will actually have $15 of which growth, which has driven a lot of those increases. But 2019 will continue to be a challenging year.
And obviously, hopefully, we'll be able to mitigate that like we have using some pricing and some market
conditions. Okay. And then
you are correct about the trajectory given obviously year over year growth is not just a function of what happened this year, but also a function of what happened last year. So you are correct on the strategy. Okay. And then just one follow-up, just your comment on not
really looking at portfolio composition, but sort of looking at what's available and what
the price is. Your reference to skilled nursing
sort of pricing moving up, does that sort of make you more a seller today versus a buyer? And how would you sort of describe
this pricing across the different subgroups?
Yes, I'm not suggesting by any means that a view of what our ideal portfolio should be constructed. I'll also say that view is evolving. So it's not a static deal. But I was trying to drive that, that most importantly, we deploy capital to make money. Even if we assume that we had a long term view of some percentage of assets from some segments or some operators, we are not prepared to get to that deal, to execute that deal, to realize that we were not prepared to pay a price that does not make sense from a strong return perspective.
That's what I was trying to say.
Okay. If I may, just
I can The other thing we are, as you have seen, within 12 months, we have time from an opportunistic buyer to an opportunistic seller, right? Every asset this company owns is for sale at a price and total return. So that's no difference from PL Nursing, no difference from any other buildings we own in any other segment. Okay. So I may just sneak one more in.
I was a
bit surprised or maybe it's also early in the year, but the $2,250,000,000 of acquisitions you've done, obviously,
you've closed Hammes and specifically CNL,
it seems like it's modestly accretive. You talked about the trajectory improving for FFO, but it also suggests that maybe your midpoint could move up, just given the amount of acquisitions you've done for this year.
Yes. Vikram, Tim here. I think the pre funding that we pointed to
at this point, it makes sense for us
to think about that from conservatism on the closing side of these acquisitions. So as John mentioned in his prepared remarks, not only did we have the
issuance from the Q4, but we continue
to issue $195,000,000 of equity into the Q1 and had $270,000,000 of dispositions that have already closed as well. So when you think about kind of where we're at from a funding perspective, our balance sheet is actually in a very good spot to start closing on a lot of the acquisitions that we've spoken to. And the combination of the timing of our closing on the acquisition plus the seasonality of our senior housing, which starts driving
in the Q1 but then
picks up throughout the year, is what is driving that acceleration of earnings from the Q1 to the end of the year. So, I understood on your comments around where we are at midpoint, at this point we're maintaining the range because that makes no sense with the publicly announced information.
Great. Thank you.
Your next question comes from the line of Keyu Okusanya with Jefferies.
Hi, yes. Good morning, everyone. Congrats on the quarter and the outlook. Things definitely looking up. Couple of things, the guidance, I'm just trying to understand kind of what's in and what's out given the large amount of transactions that are being contemplated at this point.
It sounds like the C and L transaction is in the numbers and all the acquisitions announced pre CNL. But I'm trying to understand the $725,000,000 of deals in the first line that Shankh talked about, are those in the numbers? And it also seems like the fiscal guidance went up from $800,000,000 to about $1,400,000,000 Is that increase also to the guidance?
Yes, Tayo, it's Tim again. The answer is yes and yes. So on the acquisition side, we have $1,000,000,000 acquisitions announced on our Investor Day, which about 180 of which had closed in the Q4 and the remaining of which were closed during 2019. And then as you said, we announced CNL on January 2, and that's $1,250,000,000 So between the Investor Day announcements and the CNL announcement, you're getting to your acquisition, your quarterly announced acquisitions. And our disposition of $1,400,000,000 that we revised this morning, as well as kind of into our 2019 number.
Got you. I would just add one more point. If you think about it, we have raised the equity already. But as you know, the risk transaction takes time to close, right? You have a 6 month gap between when you're losing capital and when you're deploying capital, which is a prudent thing to do.
We're not going to conduct on a market hit, so a big balance sheet to maintain. But that's what we're driving the dilution this year. But as you can say, I thought you can refer from Tom's comments that we don't think that impacts our run rate earnings growth. So you're going to see a good chunk of that run rate earnings growth shows up in the second half and then close to 2020 beyond. Yes.
Yes. Yes. Okay. That's helpful. Number 2, again, the $3,000,000,000 of development pipeline that you announced, Shankh, I found that pretty interesting.
Can you just talk a little bit about, again, the timing around when all that could be deployed? Whether again, I know you said that's kind of like a ROFO first look, last look type situation. But of that $3,000,000,000 how much realistically do you actually think you guys could execute on a fixed cost timing? Yes. So we do think that the number I mentioned is the one that we can execute on.
And as I said, we want to do it. We have several different structures, and we don't want to do a roll call just as we mentioned. But we are deploying capital in various ways, actually that different parts of the capital structure. We're not equity. We and we fund a portion of our capital structure mezzanine, second mortgage, participating mortgage.
You can think about any structural provisions that is available that we use, then we get a ROFO and a ROFR and a participation that we fund on the content. We're very careful about our basis. We're very careful about our IRRs that we achieved. But more importantly, as I said, that is our option and not an obligation. So obviously, we would hope when we deploy our capital as a cost of capital.
If not, we wouldn't. So that sort of gives us a sense of how we think about But there's high visibility, Tayo, to that number. Yes. This is a number that we know where those opportunities are. Yes.
Just to make the point, I should have mentioned that, but Tayo, I can sit down with you and walk you through building by building what those opportunities are. Unidentified opportunities. That's a very good point, Tom. Okay. Excellent.
One more if you indulge me. Just I was taking a look at the sub and then in regards to properties under construction on the shelf side for your top 3 markets, LA, New York and Boston, It feels like there are a couple more properties under construction now on a quarter over quarter basis. Just to get, what's your viewpoint in regards to supply? Is that kind of shifting back to primary market? Does it still really involve an issue of secondary market at this point in the cycle?
So, Tayo, we do give you those stats because that's what you guys have asked for and we continue to give those stats. Our view of supply as it relates to our own portfolio is very granular, much granular. We've shown you some of the stats on our Investor Day, which we see supply is an ACU or adjusted competition unit. And our view is competition for our portfolio will be lower in 2019 than in 2018. With that, we'll see obviously things fall off from 2018 to 2019, but also things go from 2019 to 2020.
We are encouraged by what we are seeing. Particularly, as you recall, I mentioned, in our assisted living segment, which is a very large portion of our U. S. Business, we have seen 120 basis points of occupancy increase. That is one of the best uptick we have seen in years.
Hopefully, that's helpful. Thank you.
Your next question comes from Jonathan Hughes with Raymond James.
Hey, good morning. Thanks for the time in earlier remarks. Kind of a higher level question maybe for Tom or Shankh. In the last recession, obviously, we didn't have the SHOP or RIDEA structure, at least not in such a meaningful way today. So how do you expect SHOP to perform in a recessionary environment since you're not protected by the lease payments, what are in Phoenix plus free market supply demand fundamentals?
I'm not saying that broader macro picture is going, but just trying to understand your views there and how that business should perform in a recessionary environment.
Yes. So you are asking for something that we have absolutely no upside, even predicting what might happen. I will just mention it to you that, as you know, our senior housing portfolio, particularly SHARP portfolio, is very too much geared towards assisted living business, which is a need driven business, right? So if you look at the assisted living data over those time frame, you will see the business paid, lost couple of 100 basis points of occupancy, but the rate growth remains resilient and expense growth is obviously helpful in that kind of environment. I'm not going to venture a guess of exactly how things are going to play out.
I will also mention to you that it depends on when you go into such an environment, what is the supply, more importantly, what the demand side looks like. So it's a complicated answer than you would like, but I would like to point out when you think about our portfolio, senior housing is a very broad term. When you think about our portfolio, as you know, it's a very much that particular portfolio in the right year phase is very much a new driven product.
Yes. Okay. That's helpful. And then I'll just chime in with one more. But looking at the capital stack, you have $720,000,000 of preferred sitting on the balance sheet at a 6.5% coupon that
I believe are redeemable. Any
plans to call those
and maybe refi with debt or pay down
with common equity embedded in 2019 guidance?
Thanks, Gavin. On the so the preferreds you're referring to, you're right, they're comfortable and are actually comfortable at our rights above 73, 54. So we've been trading above that for some time and there's a trigger on that, that if the box stays where it's at or above that it will hit in the near future. I think the way you should think about that is that the way we manage our balance sheet is always to continue to position it in a better long term position. And we'll be in a unique position to close our mandatory convertible to not only further exercise the balance sheet, but do it in a cash flow accretive way.
So I don't want to speak to where the stock price may or may not be in the coming weeks, but you should think about making the right long term decision from a balance sheet perspective on this.
Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.
Can you guys offer the granularity on the $1,400,000,000 of sales that are in guidance at a 6.2? I think the Genesis sales are $252,000,000 at a 9 cap. So I'm just kind of if you could help us get to the other residual amount and maybe what that's expected, that could help.
Sorry, Jordan, you're not out of your question, you got cut off.
Sorry, the residual amount there would be helpful, whatever is in that basket. Yes. So, so far to say,
you're confident that the Genesis transaction closed now is $252,000,000 and we had another $16,000,000 of transactions closed year to date. So we closed on $268,000,000 of dispositions at a little less than a 9% cash cap. So the remaining of 1,100,000,000 dollars should be spread out through the remainder of the year.
I'm thinking about it kind
of being in midyear from here as far as timing.
Can you tell us what it is?
Yes. The remaining assets are a mix of micro office buildings and senior housing. And I would think of that being so I think it's a blended cap rate overall, you see the remaining $1,100,000,000 being done at a much lower cap rate than what's been sold. And it's more in the category of what we've talked about in the recent past, which is a lot of opportunistic continued kind of growing in the portfolio from the higher yield perspective. There's not much of that left.
So when we think about capital recycling going forward, it's really lower cap rate non core assets in our business that are higher quality, that there's institutional demand for, but not necessarily part of the company's long term strategy. And that's going to be reflected in the cap rate. But I think it kind of goes
Mathematically, it seems almost sub-five based on what you sold Genesis at.
Yes. Correct. Your math is correct in the 1 cap rate for both of you mentioned.
I think you'll
be from a quality perspective from a sales cap rate perspective, it will fit again in that bucket of higher quality assets just don't fit into our necessarily our long term strategy. Jordan, we're not definitely disputing
your math. We can only tell you in terms of demand for health care assets. Both in senior housing and mental office is extremely robust. Particularly in senior housing, we have seen medical office asset capital cap from the troughs of 2017, but in seniors housing, there is an absolute bidding frenzy from institutional investors. Everybody's people are seeing where the demand for a car is going and there's a huge demand for these assets.
So we obviously like to recycle our portfolio and our balance sheet of working overtime. So that's what we're doing. Would just add to that, Jordan, this is kind of a
different question from earlier, but your and that's on kind of our dispositions throughout the year has been part of that the acceleration of earnings into the year. So you're not just expecting to be seeing
accretive scale in the back half.
And the big difference is that the run rate likely at the
end of the year would be towards the higher end of
what our guidance is out there. But throughout the year, we'll have a lower number at the start and partially due to some of these sales occurring during the year.
Okay. And then just a couple of quick clarifications. So looking at your senior housing triple net rent expired, last quarter there was $44,000,000 ish expiring in the rest of 'nineteen and there was 0 in 'nineteen. And now it looks like I'm curious what happened to that. I don't know if that was Brandywine or something else.
Now it looks like there's about $28,000,000 that's set to mature in 2019 and it's expected to be converted in addition to senior housing operating. So just if you could inform that's branching line? No, Jordan. It's a bookable transition that is still happening. A lot of book deal assets are in California.
A lot of book deal assets are in California and those obviously the licensing transfer takes time. So those are happening right now. There has not been any additional triple net to write the conversion other than brand new wine and hotel that we have talked about through the year. And the other clarification is for the show guidance for 2019. All transition assets are in the guidance, Brandywine and
Brookdale?
Brandywine is because it is not a change of operators. Brookdale assets are not because it is a change of operator. Okay. Thank you.
Your next question is from the line of Michael Carroll with RBC Capital Markets. Thanks. Sean, I wanted to see if
you can provide some additional color
off of the $3,000,000,000 pre development pipeline. Are these with you and your existing relationships? And could you provide a breakout between MOB and senior housing assets?
Yes. I mentioned 7 relationships, 3 are in MOB, 4 are in seniors housing, all but one is a new relationship, one is existing relationships. Okay. And I'm sorry if
I missed this from Tayo's questions. But is it safe to assume that you guys can break ground on these projects over the next 1
to 2 years? Or should we
think about this more of a longer term pipeline?
No. We have broken ground already on the largest project we mentioned, which is with Capitral. I also said these are not yet developed, they are under construction project as well. So obviously, they are coming up. And obviously, at the right point in the life cycle, we'll like to keep on those opportunities.
But they are, as we said, as we can look at, it is very difficult for this company to have this kind of arrangement. That's why we have always executed a relationship investment strategy with our operators. So there is nothing new that I'm telling you. But we're very encouraged that 6 of the 7 new relationships with highly reputable developers and operating partners. And the very interesting part of our client, which is a change, as I mentioned on my script, out of those 7, 4 has reached out to us instead of us reaching out to them.
And so that sort of gives you a sense of how we compete in the market as today is shifting. I had mentioned in an answer to Tayo's question that there is tremendous visibility here. Now anything can happen in the development world, lots of reasons why things will be delayed. But I can't understand underscore more that we know where these opportunities are and the timing of them is not something that we're going to predict for you. But let's just say this is not 10 years out in the future.
These are things that we are actively engaged in right now. Great. I guess last question, and this seems
like a protracted pipeline. Should we assume that the company's focus on developments will increase from this point forward? Are you seeing more opportunities out there? I guess, as highlighted by the $3,000,000,000 of deals you kind of just highlighted.
So I think what Shankh said is that we are engaged with some of the most successful developers in the U. S. Today. And they're presenting us with many attractive opportunities that are very strategic for us because these are opportunities with some of the nation's leading health systems. And I think you've gotten a little flavor for that if you look at what we've done in what was announced in 2018 and some of the projects, for example, with Providence St.
Joseph's health system, the projects that we talked about today with Atrium, a very highly rated system in North Carolina. These should give you an indication of where a significant amount of growth will happen for Welltower. We're not going to give you any more granularity about that other than we've showed you with real examples of what we're doing and we've articulated a $3,000,000,000 pipeline, you should assume a big percentage of this, more of that.
Your next question comes from the line of Lukas Hartwich of Green Street Advisors.
Thanks. Good morning. So for Shah, UK portfolios put up 2 quarters of high single digit NOI growth. Can you provide some color on the drivers there?
It's driven by significant occupancy ramp in U. K.
Okay. And then I think in your comments, Jacques, you mentioned that you're working on something like $600,000,000 senior housing acquisitions. Can you provide more color on the quality market mix versus the current portfolio?
I think, Lucas, you might have a third. I think I said that we have announced $725,000,000 worth of senior housing portfolio across 3 operating partners. And these assets are new assets, young assets, 4.5 years of age. And there's nothing else I have to add to that except that we think that we did these transactions a very attractive return of 6.1% to 10% cap rate. So the question of quality is hard to answer.
Quality to us is what is strategically relevant to our long term plan. We are selling you've seen us sell assets that many people think are, high quality. We talked about how cap rates are in this space. These are high quality assets to some people. They may not be strategic to us.
So it's hard to answer that question. When you see us deploying capital in seniors housing going forward, understand it's between markets and in the types of assets that are relevant to the broader well tower strategy to connect the senior housing more broadly in the health and what is increasingly becoming a wellness continuum. That's what we're driving here. So, that's what we think of as quality. So, we sell something every unit's low quality and we're getting good prices for it because to some buyers, they're great assets.
But this one fits necessarily our long strategic plan. I hope that's helpful. It is. Thank you.
The next question comes from the line of Steven Valiquette with Barclays.
Great. Thanks. Good morning, everyone. Thanks for taking the question here.
So the main question I wanted to ask,
just touched on a couple of minutes ago, but just to kind of ask on the same subject anyway really as a follow-up on the overall pipeline. In the U. S. Market right now, we're actually seeing real time that many hospitals and health systems are actually posting a stronger than expected earnings results exiting 2018 into 2019. And clearly, that should give health systems more confidence to pull the trigger on acquisitions, whether it's in post acute or other types of assets.
So again, you kind of touched on this a little bit, but as we think about your pipeline of opportunities with health systems, I'm curious if you're getting that same sense, the pipeline can actually be accelerating a little bit, pro Medicare, manicure type deals as we think about Welltower's opportunities in health systems Or is the pipeline accelerating in other asset types with health systems just given there seems to be strengthening balance sheets?
Good question, Steve. Let me take some of that and maybe Mark Shaver will have some comments on this because he spends a lot of time with the health systems as to why. One of the comments I'll make is that as health systems start to see a future for their business models that's different from the very focused acute care model that drove so much of their real estate investment in the past, I think that opens up opportunities for partners like Welltower. So, I would say what you see particularly from the non profit also, we give a little bit of a mixed bag in terms of performance because some of them are very well positioned to face a great new world where data, new technologies and an ambulatory focus will have a big impact on profitability. Of those that are attached to an acute care in patient vetted hospital model will struggle.
Not to say that there aren't markets where there's an undersupply of acute care. But on balance, there's a lot of outmoded acute care beds that sit in all of these health systems that are worked after useful life. So when they look at capital going forward, many of them are now seeing that a partnership with Welltower helps them accelerate the transition that they need to undertake. Mark, do you want to make any comments? Yes.
Steve, thanks for the question. It's Mark Shaver. I would maybe add 2 points. I think with health systems, we're going to continue to see 2 very important trends that were positioned well to help us. One is they're going to continue to meet and right size their critical delivery system.
This is a lot of outcomes that continue to move away from the
acute care, maybe some specialty care
environment from the inpatient setting and build out their ambulatory outpatient and other types of care footprint. So we continue to be very active in those dialogues. And I think while their balance sheet is maybe strengthening a bit, the ability for them to fund that kind of growth on their own is going to continue to be challenged. That's a great opportunity for us. And then the second piece, which is really where I think your question was starting, there is going to continue to be vertical integration in with health system partners, just like you see across the health spectrum.
And so that's going to create these ProMedica type transactions where they're looking to grow additional margin businesses. And again, I think we're very well positioned to support that. One last comment. Majority of the pipeline today, if you look at Health System though, it is on what you understand as traditional outpatient, family care and medical office segment.
Okay. Got it. All right. Thanks, everybody.
Thanks, Steve.
Your next question comes from the line of Chad Vanacore with Stifel.
This is Seth Caddo on for Chad. My first question on the increased disposition guidance going from $800,000,000 to 1,400,000,000 dollars What changed since December that led you to increase this so significantly?
Yes, Seth.
It's Tim here. We're always in talks, as Chuck mentioned, as part
of his prepared remarks, and as we're consistently saying, with the interested parties in their assets. And we shouldn't think of discussions between now and December having that something changed, but things come up. And
I think that's important more and more comfortable
putting it into guidance now than what it looks like in December.
All right. And then just looking at the triple net senior housing portfolio, It does look like you have about 2% of your portfolio under 1x coverage. So do we still think about any triple net to write data conversions going forward?
So I think if you look at last quarter earnings call, you will see that I have gone through significant details about how to think about that segment. I'm not going to repeat that. I think I answered that question before that you're not going to see something of material size. But we just have to say it is that we don't think about the triple net settlement right here or right here that has been shown. That's not how we choose to present.
We think about alignment of interest with our operators. If it is the right alignment, we will take RIDEA assets into FISMET. It is the right alignment to do
the other way, we're going
to do that. But just to answer your question very specifically, please go back and read the transcript from last call. You'll see there's a major discussion about that topic. I don't want to waste everybody's time to get into that, but we do not expect anything aside change from complementary idea as of today.
All right. And just on the segment guidance for 2019, the outpatient medical guidance looked like it declined 25 basis points at
the midpoint versus 2018. Can you
just give more color what drove that decrease year over year?
Yes. Absolutely. This is also something we talked about in details in our Investor Day. We have a couple of new projects rolling this year that will have downtime. We underwrite always underwrite downtime.
And that's what we're seeing sort of caught in that calendar side was very, very excited about their business as Key was taking over the business and is making lots of change. So starting towards the end of this year into next year, you will see the fruits of those efforts that TV is putting in and bringing and hiring a lot of really good talent there and also inspiring a lot of our existing talent. So what they cited about our business, what you're seeing, the 25 basis points such as functional TV show that we just presented yesterday.
Great. Thanks for taking my questions.
Thank you.
The next question comes from Michael Mueller with JPMorgan.
Yes. Hi. Two questions. First, what do you see as being your average annual development spend over the next 5 years given how the pipeline is ramping up? And then second, this $1,000,000,000 disposition target, should we think of that as that's what you want to sell this year?
So if you're active on more active on the acquisition side, we should be thinking of equity for incremental funding or could we see disposition number scale up more? Steve, I'm not going to venture a guess on what the average development plan will be. It is safe to assume it will be higher than what it is. It's a question of risk to work. As you know that we for example, in the medical office segment, we only take travel on the ground when it's close to 100% to 100%.
We don't go and build the building if we have, say, half of that as a commission. So that sort of gives you a question to answer to what the question you asked is probably going to be higher, but it is a function of a lot of other factors. The second answer is as we think about the ramp up of the acquisition portfolio, you should also think
that
the securitization of those assets will come from both common equity as well as the assets we own. So I'm talking about how we think about asset disposition. We have lots of very high quality assets that has a significant fit in the marketplace today, and we will continue to recycle capital. The most important point is that you are not going to see the dilutive capital raise that you have seen before. And so whether it's from common equity, it's from the assets we own, we do think that we will very prudently manage the balance sheet.
I do want to make one comment. I think we should expect that development will accelerate in this next cycle because of the fact that they're we're bringing forth new asset class that could exist. I mean, a lot of our urban senior housing models like that we've announced on 56th Street, which, by the way, was capped off just last week, right, Misty? And what we announced on 85th and Broadway, these are this is a product that's never been delivered. I think what healthcare real estate offers investors is the opportunity to invest in a next generation class of real estate that we've not seen before.
We're going to take a lot of capital. That's what we're positioned to do. I don't know how you do that if you're not investing with Welltower. And Sean's comments about all these incoming calls now, a lot of it has to do that. We met with an institution who realized they would be much better off investing with us than trying to compete against us because there are just to you've heard us talk a lot about our data analytics capability.
No one can repeat that. So there you go. Okay. That's helpful. Thank you.
And your final question comes from the line of Eric Fleming with First
Good morning. Just want to ask a question on how are you guys looking at potential Medicare Advantage opportunities? I know Sunrise talked about their MA plan yesterday. You've got the ProMedica relationship. When do you think you can get start getting any contribution?
And what do you think the total market opportunity is for NA plans? Yes. Eric, this is Mark Shaver. I think Medicare Advantage continues to grow as a trend in the country. It's about 35% adoption nationally in MA plans.
The larger plans for straightforward Medicare are really at the earlier younger population in the middle 60s to early 70s in population. A lot of the residents living in our communities are older and more frail. And some of the more specialized programs, institutional programs really, which is what Sunrise and some of the others are playing, We've actually a much smaller percentage of the option of that nationally. We're talking about less than 100,000 individuals across the country in those plans. So we're very active in those conversations with some of the major payers.
And there's Tom says often early days with regards to MA and the adoption, but we're very active and we think there's going to be an important role in partnering with payers in this front. We think they're actually being developed at a product by the payers that will address the needs of the population that will likely enter the assisted living sector. Again, generally a wealthier population. Historically, we don't think of MA as a product that was geared towards somebody paying $8,500 a month to seniors housing. I think that's going to change in the future.
And as Mark said, we have a lot of discussions with the major payers. You just heard that a very senior executive from UnitedHealth Care came on our Board, we just announced it today, as well as Doctor. Karen DiSalo, who was the largest payer in the world, CMS, and is the largest payer in the U. S. CMS.
So you've got a lot of good knowledge and experience both inside the company and putting on our Board.
And with no further questions, we thank you for dialing in to the Bell Tower earnings conference call. We appreciate your participation and ask that you please disconnect.