Good morning, ladies and gentlemen, welcome to the fourth 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 your question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. 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 fourth quarter 2018 results. Following the safe harbor, we will hear prepared remarks from Tom DeRosa, CEO, Shankh Mitra, CIO, and John Burkart, 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 projecting any forward-looking statements are based on reasonable assumptions, the company can give no assurance 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 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 access it via the company's website at welltower.com. Before I hand the call over to Tom DeRosa, I want to highlight a few significant points regarding our fourth quarter 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 seniors 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 $1.1 per share of normalized funds from operations. In the fourth quarter, we issued $552 million of equity at a weighted average share price of $68.41.
Since the start of the year, we have raised an additional acquisition closed during the contract. We have now fully funded all of the announced acquisitions. We looked at a landfill of bonds rated from quarter. Tom?
Thanks, Tim. At our Investor Day on December 4th, we took the notable step of announcing 2019 FFO guidance. Based on our Q4 results and our confidence in our outlook for 2019, I am pleased to reaffirm that guidance this morning. Our guidance of $4.10 - $4.25 in normalized FFO per share represents a 4% increase at the midpoint in our guidance range over our 2018 results. As Tim highlighted, our continued strong operating results in Q4 reflected the positive momentum in our seniors housing business that we have talked about throughout the year. Most notable in the quarter was the fact that we completed $559 million 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 helped drive total investment activity to over $4 billion for the year.
Our ability to source accretive investments have continued into 2019 with the announced acquisition of 55 outpatient medical buildings from the CNL Healthcare Properties for $1.25 billion, 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 mid-year, we expect FFO to accelerate in the second half of the year, setting us up well for 2020 and beyond. In the fourth quarter, we raised $552 million of equity, driving down sequential leverage and pre-funding 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 million direct investment by the Qatar Investment Authority, one of the highest quality and most resilient capital partners in the world.
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 am 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. Good morning, everyone. I will now review our quarterly operating results and provide additional details on two topics.
Operating results and trends to recent investment activities. On last quarter earnings call, I discussed the narrowing of occupancy gap in year-over-year results. It appears this occupancy has reached an inflection point this quarter. Specifically, it shows occupancy increase 40 basis points year-over-year. Sequentially, fourth quarter over third quarter, occupancy and revenue growth has been the best we have seen since Q4 2015. While one 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 one basis point.
Our reported growth rate of 2.2% it shows 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, SmartLinx, 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% decrease in 12-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 our 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 be a V-shaped recovery, it appears that the industry fundamentals are on the mend. Meanwhile, pricing of emerging assets have materially increased due to the flood of capital deployed in that space. For example, during the first quarter of this year, we sold 22 Genesis HealthCare assets that were below market coverage for $252 million at 8.95% yield. At market coverage and rent, that represents $40+ million in value creation.
As you would recall, we bought ManorCare assets only a few months ago at a significantly cheaper price and with a materially better credit structure. While we keep reading about how skilled nursing facilities should be around two times EV/EBITDA, this Genesis HealthCare transaction highlights a significant gap between theoretical assertions versus how practitioners behave. This is no different from the senior housing triple-net coverage rhetoric I described during the last quarter earnings call. While selling Genesis HealthCare assets is short-term earnings negative 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 our NOI currently is attributable to Genesis HealthCare, down 70% from peak, and a significant portion what remains is in payer-backed formats. We continue to invest in the model through partnership development.
PowerBack in Ottawa, which just opened 13 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 solve for specific operator or segment exposures. This brings me to my last point. Since last quarter earnings call, we have announced $2.25 billion of acquisitions, comprised of $1.5 billion in medical office and $725 million in senior housing, bringing our total announced or completed medical office transactions to $2 billion over the last six months. This has prompted speculation in the research community that Welltower is actively trying to tilt its asset mix towards medical office. As we have consistently said, we like the medical office business, but at a price. We are buyers and sellers of almost any asset at a price and implied IRR.
The cap rates at which MOB portfolios were traded during the frenzy of 2017 did not make any economic sense for Welltower shareholders. We passed on every one of these opportunities and would do so again at those economics. As cap rates have expanded, we returned to office and have since executed $2+ billion of Class A medical office at a blended cap rate of 5.7%, resulting in 7%+ 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 maintain discipline and look for off-market or broken marketed 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 pounce on, we are delighted to announce that we have locked up a $3+ billion development and under construction pipeline across seven separate relationships in both senior housing and medical office over the last six months. This pipeline is not an obligation, but our option to deploy capital with 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 two Class A multi-medical office buildings in Midtown Charlotte with Pappas Properties.
These two buildings are 100% leased to Atrium Health for the next 15 years and will be an anchor as we build out this terrific mixed-use project with our partners. On the senior housing side, we're delighted to inform you that since our last fall, we have committed to roughly $725 million of acquisitions at a blended cap rate of 6.6%. These acquisitions have an average age of four and a half years and will be managed by three different operating partners. Our pipeline remains strong in senior housing across both existing and new relationships. Our data analytics platform capabilities, senior housing and health system 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 these capabilities 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 Welltower are accelerating. We remain disciplined, vigilant, and cognizant of the fact that we exist to create value for you, our shareholders. We feel the prospects have never been better. With that, I'll pass it on to John Burkart, our CFO. John?
Thank you, Shankh, and good morning, everyone. It's my pleasure to provide you with the financial highlights of our fourth quarter and for the full-year 2018. As you just heard from my colleagues, Q4 has been a very successful and active quarter for Welltower, as has 2018 overall. Before I proceed with the intro commentary, I wanted to highlight three points. One, we are confident in our continued growth in 2019 and reaffirm our 2019 guidance given to our investor day with growth expected in all our business segments. Two, our strong, proactive, and efficient raising of equity capital in 2018 and in 2019 to date has enabled us to reduce financial leverage and pre-fund all announced acquisitions. Three, we are actively investing $4.1 billion 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 1.6% for the quarter and 1.6% for 2018 overall. This being above the midpoint of our full-year guidance. The seniors housing operating same store NOI growth by 0.6% in the quarter and by 0.4% in 2018 overall. As Shankh stated earlier, we're encouraged by another quarter of improved occupancy. Seniors housing triple-net grew by 4.3% in the quarter and by 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 Welltower's operational efficiency, even with significant investment in technology enablement and data science and the hiring of additional high-quality colleagues to our team, our G&A expenses relative to the size of our portfolio remain protected.
Overall G&A spend was $31 million for the quarter and $126 million for the year. Today, we are reporting a normalized fourth quarter 2018 FFO result of $1.1 per share and $4.2 per share overall for the U.S. These numbers reflect the increased Q4 2018 equity raise total, and as in the past, we do not include one-off income items or fees in our normalized numbers. Last quarter and 2018 overall, we were very active for Welltower on the balance sheet and capital raising front. We continue to be efficient and proactive raisers of equity capital to fund the growth of our business. During Q4, including the $300 million strategic investment made by the Qatar Investment Authority, we raised $552 million of gross proceeds from common equity issuance at an average price of $68.41 per share.
This included $129 million raised after our investment date in Q4, originally modeled to be in 2019. Overall, for 2018, we raised $795 million of gross proceeds at an average price of $67.61 per share. In addition, since on January 2019, we've raised $195 million of gross proceeds at an average price of $73.97 per share. During the year, we issued a total of $1.85 billion of senior unsecured notes at a weighted yield of 4.34% with an average maturity of 13.8 years. We also closed on a new $3.7 billion 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 million of cash equivalents and $1.9 billion of capacity under our primary unsecured credit facility. Our net debt to adjusted annualized EBITDA improved from last quarter and stood at 5.8X at year-end.
In summary, Welltower continues to enjoy excellent access to a plethora of capital sources. During the fourth quarter, we completed $559 million of acquisitions at a blended yield of 5.6%, the majority being in the outpatient medical segment. This brought us to a yearly total of $3.4 billion in asset across all segments at a blended yield of 7.3%. Including development funding and other activities, total gross investments for the year were $4.1 billion, making it one of the most active years in the company's history. During the quarter, we completed $349 million of dispositions and received $47 million in loan payoffs. Overall, for 2018, we completed dispositions totaling $1.6 billion, with $209 million 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-$4.25 per share.
Starting with same store NOI, we expect average blended same-store NOI growth of approximately 1.25%-2.25% in 2019, which is comprised of the following components. Seniors Housing Operating, approximately 0.5%-2.0%. Senior Housing Connect, approximately 3.0%-3.5%. Outpatient Medical, approximately 1.75%-2.25%. Health Systems, approximately 1.375%. Finally, Long-Term Post-Acute Care, approximately 2%-2.5%. As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2019. On February 28th, 2019, Welltower will pay its 191st consecutive cash dividend being $0.87. This represents a current dividend yield of approximately 4.5%. With that, I'll hand back to Tom for final comments. 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 include being named to the Dow Jones Sustainability World Index, one of only two North American REITs in this most prestigious index. Furthering our commitment to climate change, Welltower continues to be recognized for the number of new green building certifications added this quarter and throughout 2018. With respect to social impact, the Welltower Foundation and our employees donated over $1.5 million in 2018 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 Kathryn Sullivan to our Board of Directors.
Kathryn 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. Kathryn joins Dr. Karen DeSalvo, former Acting Assistant Secretary for Health at the U.S. Department of Health and Human Services, and Johnese Spisso, 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 three recognized healthcare leaders to the board of Welltower. At the same time, we are sad to see Judith Pelham and Geoffrey Meyers retire from our board in May. 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, you need to be a leader in ESG.
I am pleased by the fact that with our recently announced board appointments, 60%, that's 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 at Welltower. This is not only a key component of good 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 healthcare 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 a path to growth.
As you will see in 2019, we positioned the company to continue to deliver for our shareholders. Nicole, please open up the line for questions.
Ladies and gentlemen, if you would like to ask a question, please press star then one on your telephone keypad. To withdraw a question, press the pound key. Please limit your questions to one question and a related follow-up so that all callers may ask their questions. You may re-enter the queue by pressing star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nicholas Joseph from Citi.
Thanks. Can you break down the components of the 2019 same-store NOI guidance for the SHOP portfolio between occupancy, rent growth, and expense growth expectations?
Nick, at this point in the year, we would like to keep flexibility on how we think those will play out. Obviously, we're very encouraged by the occupancy growth. We think that we'll continue to have moderate rent growth and expenses are challenging. We'll see how the year plays out. As you understand that we're trying to maximize our revenue, not one component of the revenue. We'll see how the year plays out. Too early to comment on specific breakdown.
Thanks. Can you provide an update on ProMedica's integration of the skilled nursing assets? At the Investor Day, you mentioned that trends so far were better than expected.
You have heard from the leaders of ProMedica and HCR ManorCare on our Investor Day. You heard from them directly that now the leadership team expects better synergies in 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 as a public company, but look for their release and see obviously that sector is playing out, but we're definitely encouraged by the sector. Remember that about half, 45% to be exact, of that HCR ManorCare transaction is attributable to senior housing. We're seeing occupancy in that senior housing, both triple-net, as we mentioned, both triple-net and in the SHOP segment is starting to come back. Those are some of the data points I would point out to you as you think about overall ProMedica HCR ManorCare construct.
Thank you.
Your next question is from the line of Karin Ford with MUFG Securities.
Hi, good morning. I wanted to ask about your seniors 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. Why do you think you're seeing superior performance? Can you confirm that there's no incremental rent re-lease or portfolio transitions expected in your triple-net portfolio?
I think, Karin, 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. The second thing I would mention that if you look at the very granular view of what our portfolio, our assets should be. You have seen our detailed presentation, how we're thinking about asset management, very active asset management. You would have seen that we have taken a lot of proactive steps to sell assets and not afraid of dilution on a short-term basis. 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're encouraged by that population growth is coming and the 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 exit those assets. We will take the short-term dilution that 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. I think you know, particularly Karin, 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 the benefit of an active asset management program with a view to the future of the business versus trying to manage FFO per share on a quarter-by-quarter basis.
Okay, Karin. Thanks. 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 delay the demand for senior housing?
If you look at the demand growth for the last three years, for example, Nick has a lot of the data, you can look at it, you will see that demand has been running, particularly in the assisted living, IL plus, AL, L minus segment, 3x of population growth. There is no evidence that we have seen that's the case. Do we think that technology will change the business for the better, and that will be very helpful for seniors in their home environment? Absolutely. 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. We will 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.
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. 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 cost. As Shankh said, we are very much on the forefront of bringing new technology into our settings and also thinking really hard about what the settings of the future look like. 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 actually out of reach for the majority of the population.
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. 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. Stay tuned on that front.
Good stuff. Thank you.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Thanks for taking the question. 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 get 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 five years. 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 the California markets by then will actually have $15 minimum wage, which has driven a lot of those increases. 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 mixing.
Okay.
You are correct about the trajectory, given obviously year-over-year growth is not just a function of what happened this year, but it's also a function of what happened last year. You are correct about the trajectory.
Okay. Just a 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? How would you sort of describe this pricing across the different subgroups?
Vikram, I'm not suggesting by any means that we don't have a view of what our ideal portfolio should be constructed. I'll also say that view is evolving. It's not a static view.
Right.
What I was trying to drive at, 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 view, to execute that view, to realize that view. We're not prepared to pay a price that does not make sense from a total return perspective. That's what I was trying to drive at.
Okay. If I may.
The other thing is we are, as you have seen, within 12 months, we have gone from an opportunistic buyer to an opportunistic seller, right? Every asset this company owns is for sale at a price and total return. That's no different from skilled nursing, no different from any other buildings we own in any other segment.
Okay. If I may just sneak one more in. I was a bit surprised, or maybe it's also early in the year, but with $2.25 billion of acquisitions you've done, obviously you've closed Hammes, and especially CNL, it seems like it's modestly accretive. You talked about the trajectory improving for SHO, but it also suggests that maybe your midpoint could move up, just given the amount of acquisitions you've done for this year.
Yeah. This is Tim here. I think the prefunding that we pointed to at this point, it makes sense for us to think about that from the conservatism on the closing side of these acquisitions. As Shankh mentioned in his prepared remarks, not only did we have the issuance from the fourth quarter, but we continued to issue $195 million of equity into the first quarter and had $270 million of dispositions that have already closed as well. When you think about 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.
The combination of the timing of our close on the acquisitions, plus the seasonality of our senior housing, which is quite light in the first quarter but then picks up throughout the year, is what is driving that acceleration of earnings from the first quarter through the end of the year. I understand your comments around where we are at midpoint. At this point, we're maintaining the range because that makes the most sense with the publicly announced information.
Great. Thank you.
Your next question comes from the line of Omotayo Okusanya with Jefferies.
Hi. Yes, good morning, everyone. Congrats on the quarter and the outlook. Things definitely looking up. A couple of things. The guidance, I'm just trying to understand what's in and what's out, given the large amount of transactions that are being contemplated at this point. It sounds like the CNL transaction is in the numbers and all the acquisitions announced pre-CNL. I'm trying to understand the $425 million of deals in the pipeline that Shankh talked about. Are those in the numbers? It also seems like the dispo guidance went up from $800 million to about $1.4 billion. Is that increase also in the guidance?
Hi, Tim again. Answer is yes and yes. On the acquisition side, we have the $1 billion of acquisitions we announced on our investor day, $180 million of which had closed in the fourth quarter, and the remaining of which will close during 2019. As you said, we announced CNL on January 2nd, and that's $1.25 billion. Between the investor day announcements and the CNL announcement, you're getting to your acquisition, your publicly announced acquisitions, and our dispositions of $1.4 billion that we revised this morning is all included into our 2019 numbers.
Gotcha.
I would just add one more point. If you think about it, we have raised the equity already. As you know, real estate transaction takes time to close, right? You have a 6-month gap between when you're raising capital and deploying capital, which is a prudent thing to do. We're not going to take that kind of market risk with a big balance sheet to maintain. That's what is driving the dilution this year. As you can refer from Shankh's comment, that we don't think that impacts our run rate earnings growth. 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 and beyond.
Yep. Makes sense. Okay, that's helpful. Number 2, again, the $3 billion 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? Again, I know it's kind of like a ROFO first look, last look type situation. Of that $3 billion, how much realistically do you actually think you guys could execute on, and what timing?
We do think that the number I mentioned is the one that we can execute on. As I said, when we want to do it, we have several different structures, and we don't want to do a ROFO, just as you mentioned. We are deploying capital in various ways, equity, debt, different parts of the capital structure. We fund a portion of our capital stack to mezzanine, second mortgage, participating mortgage. You can think about any structural provisions that is available that we use. We get a ROFO and a ROFR and a participation that we fund on the front end. We're very careful about our basis. We're very careful about our IRRs that we achieve. More importantly, as I said, that it's our option and not an obligation.
Obviously, we would hope when we deploy the capital that it costs a capital. If not, we wouldn't.
Got it.
That sort of gives a sense of how we think about it.
There's high visibility, Omotayo, to that number.
Oh, yeah.
This is a number that we know where those opportunities are.
Yeah. That's a very good point. I should have mentioned that. Omotayo, I can sit down with you and walk you through building by building what those opportunities are. They are not unidentified opportunities. That's a very good point, Tom.
Okay. Excellent. One more if you would indulge me. I was taking a look at the SHOP, and then in regards to properties under construction on the SHOP side for your top three markets, L.A., New York and Boston, it feels like there's a couple more properties under construction now on a quarter-over-quarter basis. Again, what's your viewpoint in regards to supply? Is that kind of shifting back to primary markets? Is this still really more of an issue of secondary markets at this point in the cycle?
Tayo, we do give you those stats because that's what you guys have asked for, and we continue to give those stats with our view of supply as it relates to our own portfolio is very granular. We've shown you some of those stats when I invested it, which we see supply is an ACU or adjusted competition unit. Our view is competition on our portfolio will be lower in 2019 than in 2018. With that we'll see. Obviously, things fall off from 2018 - 2019. Also things go from 2019 - 2020.
Right.
We're 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.
Great. Thank you.
The next question comes from Jonathan Hughes with Raymond James.
Hey, good morning. Thanks for the time and 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 as today. How do you expect SHOP to perform in a recessionary environment since you're not protected by the lease payments? What are in statistics plus free market supply, demand fundamentals? I'm not saying that the broader macro picture's going, but just trying to understand your views here and how you think they should perform in a recessionary environment.
Yes. 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 SHOP portfolio, is very too much geared towards the assisted living business, which is a need-driven business. Right? If you look at the assisted living data over those time frames, you will see the business stayed, lost a couple of 100 basis points of occupancy, but the rate growth remains resilient. 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.
It's a complicated answer than you would like. 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 stage is very much a need-driven product.
Yep. Okay. That's helpful. I'll just chime in with one more. Looking at the capital stack, you have $720 million 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?
The preferreds you're referring to, you're right, they're convertible and are actually convertible at our rights above $73.54. There's a trigger on that if the stock stays where it's at or above, that it'll 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. We'll be in a unique position if those are mandatory convertible to not only fully recognize the balance sheet, but do it in a cash flow accretive way. I don't want to speak to where the stock price may or may not be in coming weeks, but you should think about making the right long-term decisions from a balance sheet perspective on this.
Yep. Okay. That's it for me. I'll jump off. Thanks for the time.
Thanks.
Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.
Thank you. Good morning. Can you guys offer a bit of granularity on the $1.4 billion of sales that are in guidance for the 6/2? I think the Genesis sales are $252 million at a 9 cap. I'm just kind of If you could help us get to the other residual amount and maybe what that's affecting, that would help.
Sorry, Jordan, your last part of your question got cut off.
Sorry. The residual amount there would be helpful, whatever's in that basket.
So far to set your precedent, the Genesis transaction closed and that was $252 million, and we had another $16 million of transactions closed year to date. We've closed on $268 million dispositions at a little less than a 9 cap. The remaining $1.1 billion should be spread out through the remainder of the year. Think about it kind of being a mid-year from here as far as timing.
Can you tell us what it is?
Yeah. The remaining assets are a mix of micro office buildings and senior housing. I would think of that being, so I think it's a blended cap rate overall to the remaining $1.1 billion is being done at a much lower cap rate than what's been sold. It's more in the category of what we've talked about in the recent past, which is, objects of opportunistic continued kind of culling of the portfolio and from the higher yield perspective, there's not much of that left. When we think about capital recycling going forward, it's really lower cap rate non-core assets in our business that they're higher quality, that there's institutional demand for. They're not necessarily part of the company's long-term strategy, and that's going to be reflected in the cap rate. I think this kind of goes-
Mathematically, it seems almost sub five based on what you sold Genesis.
Yeah. Correct. Your math is correct on the blended cap rate of what's remaining. I think you'll be from a quality perspective, from a sales cap rate perspective, it'll 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 that the demand for healthcare assets, both in senior housing and in for office is extremely robust, particularly senior housing. We have seen medical office asset cap rates have come up from the troughs of 2017. In senior housing, there's an absolute bidding frenzy from institutional investors. Everybody, people are seeing where the demand curve is going, and there's a huge demand for these assets. We obviously like to recycle our portfolio and our balance sheet working at a time. That's what we're doing.
I'll just add that, Jordan, looking kind of back to Vikram's question from earlier. Your math on kind of our dispositions throughout the year add a part of that, the acceleration of earnings into the year. Your math is correct in it being accretive sales from that cap. I suppose, I think, Vikram, I'm thinking at the run rate, likely at the end of the year will be towards the higher end of what our guidance is out there. Throughout the year, we'll have a lower number at the start and partially due to some of these sales occurring at the end of the year.
Okay. Just a couple quick clarifications. Looking at your seniors housing triple-net rent expiry, last quarter, there was $43 million-ish expiring in the rest of 2018, and there was zero in 2019. 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 million that's set to mature in 2019, and it's expected to be converted in transition to seniors housing operating. Just could you confirm that's Brandywine?
No, Jordan, it's the Brookdale transition that is still happening.
Oh, okay.
A lot of Brookdale assets are in California. A lot of Brookdale assets are in California, and those, obviously the licensing transfer takes time. Those are happening right now. There has not been any additional single triple-net to right unit conversion other than Brandywine and Brookdale that we have talked about through the year to date.
The other clarification is for the SHO 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.
Yeah, thanks. Shak, I wanted to see if you can provide some additional color off of the $3 billion redevelopment pipeline. Are these with new and/or existing relationships? Can you provide a breakout between MOB and senior housing assets?
Yes. I mentioned seven relationships. Three are in MOB, four are in senior housing. All but one is a new relationship. One is existing relationships.
Okay. I'm sorry if I missed this from Tayo's questions. Is it safe to assume that you guys can break ground on these projects over the next one to two years, or should we think about this more of a longer-term type pipeline?
No, we have broken ground already on the largest project you mentioned, which is with Capital Properties. I also said these are not just development, they're under construction projects as well. Obviously they are coming up and obviously at the right point in the life cycle, we'll execute on those opportunities. As I said, as we can look at, it is very typical for this company to have this kind of arrangement. That's why we have always executed a relationship investment strategy with our operators. That is nothing new that I'm telling you. We're very impressed that six out of seven new relationships with highly reputable developers and operating partners. A very interesting part of the trend, which is a change, as I mentioned on my script, out of those seven, four has reached out to us instead of us reaching out to them.
That sort of gives you a sense of how we compete in the marketplace today. It's shifting.
I had mentioned, in an answer to Omotayo's question, that there is tremendous visibility here. Anything can happen in the development world, lots of reasons why things will be delayed. I can't 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. 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, this seems like a pretty attractive 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 billion of deals you kind of just highlighted?
I think what Shankh said is that we are engaged with some of the most successful developers in the U.S. today. 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. I think you've gotten a little flavor for that if you look at what we've done in what we've announced in 2018 and some of the projects, for example, with Providence St. Joseph Health, the projects that we talked about today with Atrium Health, 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 billion pipeline.
You should assume a big percentage of it is more of that.
Great. Thank you.
Your next question comes from the line of Lukas Hartwich with Green Street Advisors.
Thanks. Good morning. For Shankh, U.K. portfolio's put up two quarters of high single-digit NOI growth. Can you provide some color in the drivers there?
It's driven by significant occupancy ramp in U.K.
Okay. I think in your comments, Shankh, you mentioned that you're working on something like $600 million of senior housing acquisitions. Can you provide more color on the quality market mix versus the current portfolio?
I think, Lukas, you might have a chart. I think I said that we have announced $725 million worth of senior housing portfolio across three operating partners, these are new assets, young assets, four and a half years of age. There's nothing else I have to add to that except that we think that we did these transactions at very attractive returns of 6.6% cap rate.
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 where 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 senior housing going forward, understand it's between markets and in the types of assets that are relevant to the broader Welltower strategy, which is connecting senior housing more broadly in the health and what is increasingly becoming a wellness continuum. That's what we're driving here. That's what we think of as quality.
When we sell something, it doesn't mean it's low quality, and we're getting good prices for it because to some buyers, they're great assets. They just won't fit necessarily our long strategic plan. I hope that's helpful.
It is. Thank you.
Your next question comes from the line of Steven Valiquette with Barclays.
Great. Thanks. Good morning, everyone. Thanks for taking the questions here. The main question I wanted to ask was 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 stronger than expected earnings results exit 2018 and into 2019. Intuitively, that should give health systems more confidence to pull the trigger on acquisitions, whether it's in post-acute or other types of assets.
Again, you kind of touched on this a little bit, as we think about your pipeline of opportunities with health systems, I'm curious if you're getting that same sense the pipeline could actually be accelerating a little bit, ProMedica, ManorCare type deals, as we think about Welltower's opportunities in health systems, or if the pipeline is accelerating in other asset types with health systems, just given their what seems to be strengthening balance sheets. Thanks.
Yeah. Good question, Steve. Rob, 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. I would say what you see, particularly from the nonprofit health systems, is a little bit of a mixed bag in terms of performance. Some of them are very well-positioned to face a brave new world where data meet technologies, and an ambulatory focus will have a big impact on profitability.
Those that are attached to an acute care, inpatient, bedded hospital model will struggle. Not to say that there aren't markets where there's an undersupply of acute care. On balance, there's a lot of outmoded acute care beds that sit in all of these health systems that are well past their useful life. 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 on that?
Yeah. Steve, thanks for the question. Mark Shaver. I would maybe add two points. I think with health systems, we're going to continue to see two very important trends that we're positioned well to help with. One is they're going to continue to need to right-size their critical delivery systems. There's a lot of proms beds. 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. We continue to be very active in those dialogues. I think while their balance sheets may be strengthening a bit, the ability for them to fund that clinical growth on their own is going to continue to be challenged. That's a great opportunity for us.
The second piece, which is really where I think your question was starting, there's going to continue to be vertical integration in with health system partners, just like you see across the health spectrum. That's going to create these ProMedica type transactions where they're looking to grow additional margin businesses. Again, I think we're very well positioned to support that.
Steve, I'll just-
Appreciate the answer.
One last comment. The majority of the pipeline today, if you look at with health systems, though, it is on what you understand as traditional outpatient, ambulatory care, and medical office segments.
Okay, got it. All right. Thanks, everybody.
Thanks, Steve.
Your next question comes from the line of Chad Vanacore with Stifel.
Hey, good morning. This is Chad Vanacore from Stifel. My first question on the increased disposition guidance going from $800 million - $1.4 billion. What changed since December that led you really to increase this so significantly?
Yes, Chad, it's Tim here. We're always in talks, as Shankh mentioned in part of his prepared remarks. As we're consistently saying with interested parties in our assets, you shouldn't think of discussions between now and December having that something changed. Things come up, and it got to the point where we're more comfortable putting it into guidance now than it would have been back in December.
All right, thanks. Then just looking at the triple-net senior housing portfolio, Chad, it does look like you have about 2% of your portfolio under 1 times coverage. Do we still think about any triple-net to RIDEA conversions going forward?
I think if you look at last quarter's earnings call, you'll see that I've 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. We just have to say it, is that we don't think about the triple-net better than RIDEA or RIDEA better than triple-net. That's not how we think of segments. We think about alignment of interest with our operators. If it is the right alignment, we will take RIDEA assets into triple-net. If it is the right alignment to do the other way, we're going to do that. 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 anybody's time to get into that. We do not expect anything besides change from complementary EBITDA as of today.
All right, thanks. 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?
Yeah. Absolutely. This is also something we talked about in detail during our investor day. We have a couple of leases rolling this year that will have downtime. We always underwrite downtime, and that's what you're seeing sort of get caught in that calendar side. We're very, very excited about the business as Keith was taking over the business and is making lots of change. Starting towards the end of this year into next year, you will see the fruits of those efforts that Keith is putting in and bringing and hiring a lot of really good talent there, and also empowering a lot of our existing talent. We're very excited about the business. What you're seeing, the 25 basis points is a functional ratio that we just outlined yesterday.
All right, great. Thanks for taking my questions.
Thank you.
As a reminder, in order to ask an audio question, please press star one on your telephone keypad. The next question comes from Michael Mueller with JPMorgan.
Yeah, hi. Two questions. First, what do you see as being your average annual development spend over the next five years, given how the pipeline's ramping up? Then second, Chris billing forward disposition target. Should we think of that as that's what you want to sell this year? If you're more active on the acquisition side, we should be thinking of equity for incremental funding, could we see that disposition number scale up more?
First is I'm not going to venture a guess on what the average development spend will be. It is safe to assume it will be higher than what it is. It's a question of risk reward. As you know that we, for example, in the medical office segment, we only put shovel in the ground when it's close to 100% leased. We don't go and build a building if we have, say, half of that as a commitment. That sort of gives you a question to answer to what the question you asked is, it's 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 equitization of those assets will come from both common equity as well as the assets we own.
I'm talking about how we think about asset disposition. We have lots of very high-quality assets that has a significant bid in the marketplace today, we will continue to recycle capital. The most important point is that you are not going to see the dilutive capital rates that you have seen before. Whether it's from common equity, it's from the assets we own, we do think that we will very prudently manage our balance sheet.
Mike, I want to make one comment. I think we should expect that development will accelerate in this next cycle because of the fact that we're bringing forth a new asset class that didn't exist. A lot of the urban senior housing models like that we've announced on 56th Street, which, by the way, was capped off just last week, right, Mitra?
Right.
What we announced on 85th and Broadway, 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 they've not seen before. It's 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. Shankh's comment 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 you sort of talk a lot about our data analytics capabilities. No one can compete with that. There you go.
Okay. That's helpful. Thank you.
Your final question comes from the line of Eric Fleming with Suntrust.
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, I know yesterday you got the ProMedica relationship. When do you think you can start getting any contribution, and what do you think the total market opportunity is for MA plans?
Yeah, Eric, this is Mark Shaver. I think Medicare Advantage continues to grow as a trend in the country. It's got 35% adoption nationally in MA plans. The larger plans for straightforward Medicare are really looking at the earlier, younger population, the middle sixties to early seventies in population. A lot of the residents living in our communities are older and more frail. Some of the more specialized programs, institutional programs, really, which is what Sunrise and some of the others are playing, there's actually a much smaller percentage of adoption of that nationally. We're talking about less than 100,000 individuals across the country in those plans. We're very active in those conversations with some of the major payers.
As 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 there actually will be development of products 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 for seniors housing. I think that's going to change in the future. As Mark said, we have a lot of discussions with the major payers. You just heard that a very senior executive from UnitedHealthcare came on our board. We just announced it today, as well as Dr. Karen DeSalvo, who was the largest payer in the world, CMS, and is the largest payer in the U.S., CMS. We've got a lot of good knowledge and experience, both inside the company and sitting on our board.
Thank you.
I do.
With no further questions, we thank you for dialing in to the Welltower Earnings Conference Call. We appreciate your participation and ask that you please disconnect.